LXP 2012.9.30 10Q

 
 
 
 
 
 
 
 
 
 
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, 2012.
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
(Exact name of registrant as specified in its charter)

Maryland
13-3717318
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
One Penn Plaza – Suite 4015
New York, NY
10119
(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. Yes x No o

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). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer o Non-accelerated filer (Do not check if a smaller reporting company) o
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 176,591,477 common shares of beneficial interest, par value $0.0001 per share, as of November 6, 2012.
 
 
 
 
 
 
 
 
 
 


TABLE OF CONTENTS

PART 1. — FINANCIAL INFORMATION
 
 
 
 
 
 
PART II — OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 

WHERE YOU CAN FIND MORE INFORMATION:
We file 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 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 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 electronically with the SEC. The address of the SEC's Internet site is http://www.sec.gov. We also maintain a website at http://www.lxp.com through which you can obtain copies of documents that we file with the SEC. The contents of that website 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 with the SEC.


2
Table of Contents


PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
September 30, 2012 (unaudited)
 
December 31, 2011
Assets:
 
 
 
Real estate, at cost
$
3,511,146

 
$
3,172,246

Investments in real estate under construction
41,676

 
34,529

Less: accumulated depreciation and amortization
711,132

 
638,368

 
2,841,690

 
2,568,407

Property held for sale - discontinued operations
8

 
—

Intangible assets, net
278,710

 
178,569

Cash and cash equivalents
72,424

 
63,711

Restricted cash
25,133

 
30,657

Investment in and advances to non-consolidated entities
8,698

 
39,330

Deferred expenses, net
51,587

 
43,966

Loans receivable, net
72,786

 
66,619

Rent receivable
7,661

 
7,271

Other assets
27,835

 
28,290

Total assets
$
3,386,532

 
$
3,026,820

Liabilities and Equity:
 

 
 

Liabilities:
 

 
 

Mortgages and notes payable
$
1,450,457

 
$
1,366,004

Credit facility borrowings
93,000

 
—

Term loan payable
215,000

 
—

Exchangeable notes payable
—

 
62,102

Convertible notes payable
106,602

 
105,149

Trust preferred securities
129,120

 
129,120

Dividends payable
27,956

 
25,273

Liabilities – discontinued operations
397

 
—

Accounts payable and other liabilities
74,003

 
53,058

Accrued interest payable
9,728

 
13,019

Deferred revenue - including below market leases, net
89,805

 
90,349

Prepaid rent
15,309

 
12,543

Total liabilities
2,211,377

 
1,856,617

 
 
 
 
Commitments and contingencies


 


Equity:
 

 
 

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

 
 

Series B Cumulative Redeemable Preferred, liquidation preference $68,522; 2,740,874 shares issued and outstanding in 2011
—

 
66,193

Series C Cumulative Convertible Preferred, liquidation preference $96,770 and $98,510; and 1,935,400 and 1,970,200 shares issued and outstanding in 2012 and 2011, respectively
94,016

 
95,706

Series D Cumulative Redeemable Preferred, liquidation preference $155,000; 6,200,000 shares issued and outstanding
149,774

 
149,774

Common shares, par value $0.0001 per share; authorized 400,000,000 shares, 156,136,051 and 154,938,351 shares issued and outstanding in 2012 and 2011, respectively
16

 
15

Additional paid-in-capital
2,020,858

 
2,010,850

Accumulated distributions in excess of net income
(1,110,166
)
 
(1,212,630
)
Accumulated other comprehensive income (loss)
(6,393
)
 
1,938

Total shareholders’ equity
1,148,105

 
1,111,846

Noncontrolling interests
27,050

 
58,357

Total equity
1,175,155

 
1,170,203

Total liabilities and equity
$
3,386,532

 
$
3,026,820

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

3
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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,
 
2012
 
2011
 
2012
 
2011
Gross revenues:
 
 
 
 
 
 
 
Rental
$
79,915

 
$
71,314

 
$
226,293

 
$
209,898

Advisory and incentive fees
297

 
303

 
1,385

 
1,750

Tenant reimbursements
7,443

 
8,219

 
22,379

 
23,660

Total gross revenues
87,655

 
79,836

 
250,057

 
235,308

Expense applicable to revenues:
 

 
 

 
 

 
 

Depreciation and amortization
(40,220
)
 
(40,380
)
 
(116,333
)
 
(118,035
)
Property operating
(15,446
)
 
(15,215
)
 
(44,415
)
 
(44,554
)
General and administrative
(5,810
)
 
(5,080
)
 
(17,381
)
 
(16,055
)
Non-operating income
1,383

 
3,369

 
5,688

 
9,108

Interest and amortization expense
(24,932
)
 
(26,966
)
 
(73,658
)
 
(80,411
)
Debt satisfaction gains (charges), net
12

 
(6
)
 
(1,639
)
 
3

Change in value of forward equity commitment
—

 
(9,866
)
 
—

 
(4,318
)
Gain on acquisition
167,864

 
—

 
167,864

 
—

Litigation reserve
25

 
—

 
(2,775
)
 
—

Impairment charges
(4,262
)
 
(10,849
)
 
(4,262
)
 
(38,719
)
Income (loss) before benefit (provision) for income taxes, equity in earnings of non-consolidated entities and discontinued operations
166,269

 
(25,157
)
 
163,146

 
(57,673
)
Benefit (provision) for income taxes
(296
)
 
(263
)
 
(803
)
 
1,059

Equity in earnings of non-consolidated entities
3,799

 
9,047

 
21,469

 
20,646

Income (loss) from continuing operations
169,772

 
(16,373
)
 
183,812

 
(35,968
)
Discontinued operations:
 

 
 

 
 

 
 

Income (loss) from discontinued operations
483

 
573

 
(1,152
)
 
3,689

Provision for income taxes
(53
)
 
(15
)
 
(62
)
 
(53
)
Debt satisfaction gains (charges), net
(1,189
)
 
—

 
539

 
(603
)
Gains on sales of properties
6,276

 
182

 
8,946

 
5,251

Impairment charges
—

 
(15,211
)
 
(5,690
)
 
(76,110
)
Total discontinued operations
5,517

 
(14,471
)
 
2,581

 
(67,826
)
Net income (loss)
175,289

 
(30,844
)
 
186,393

 
(103,794
)
Less net (income) loss attributable to noncontrolling interests
(748
)
 
(70
)
 
(3,730
)
 
11,183

Net income (loss) attributable to Lexington Realty Trust shareholders
174,541

 
(30,914
)
 
182,663

 
(92,611
)
Dividends attributable to preferred shares – Series B
—

 
(1,590
)
 
(2,298
)
 
(4,770
)
Dividends attributable to preferred shares – Series C
(1,573
)
 
(1,675
)
 
(4,718
)
 
(5,055
)
Dividends attributable to preferred shares – Series D
(2,926
)
 
(2,926
)
 
(8,777
)
 
(8,777
)
Allocation to participating securities
(1,092
)
 
(72
)
 
(1,174
)
 
(227
)
Deemed dividend – Series B
—

 
—

 
(2,346
)
 
—

Redemption discount – Series C
—

 
129

 
229

 
215

Net income (loss) attributable to common shareholders
$
168,950

 
$
(37,048
)
 
$
163,579

 
$
(111,225
)
Income (loss) per common share – basic:
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
1.05

 
$
(0.14
)
 
$
1.05

 
$
(0.36
)
Income (loss) from discontinued operations
0.04

 
(0.10
)
 
0.01

 
(0.37
)
Net income (loss) attributable to common shareholders
$
1.09

 
$
(0.24
)
 
$
1.06

 
$
(0.73
)
Weighted-average common shares outstanding – basic
154,980,137

 
157,205,530

 
154,564,041

 
151,676,401

Income (loss) per common share – diluted:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.93

 
$
(0.14
)
 
$
0.97

 
$
(0.36
)
Income (loss) from discontinued operations
0.03

 
(0.10
)
 
0.01

 
(0.37
)
Net income (loss) attributable to common shareholders
$
0.96

 
$
(0.24
)
 
$
0.98

 
$
(0.73
)
Weighted-average common shares outstanding – diluted
180,855,164

 
157,205,530

 
180,449,070

 
151,676,401

Amounts attributable to common shareholders:    
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
163,417

 
$
(22,448
)
 
$
162,893

 
$
(54,911
)
Income (loss) from discontinued operations
5,533

 
(14,600
)
 
686

 
(56,314
)
Net income (loss) attributable to common shareholders
$
168,950

 
$
(37,048
)
 
$
163,579

 
$
(111,225
)
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,
 
2012
 
2011
 
2012
 
2011
Net income (loss)
$
175,289

 
$
(30,844
)
 
$
186,393

 
$
(103,794
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

Change in unrealized gain (loss) on interest rate swaps, net
(2,772
)
 
566

 
(8,331
)
 
1,342

Other comprehensive income (loss)
(2,772
)
 
566

 
(8,331
)
 
1,342

Comprehensive income (loss)
172,517

 
(30,278
)
 
178,062

 
(102,452
)
Comprehensive (income) loss attributable to noncontrolling interests
(748
)
 
(70
)
 
(3,730
)
 
11,183

Comprehensive income (loss) attributable to Lexington Realty Trust shareholders
$
171,769

 
$
(30,348
)
 
$
174,332

 
$
(91,269
)
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, 2012
 
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, 2011
$
1,170,203

 
$
311,673

 
$
15

 
$
2,010,850

 
$
(1,212,630
)
 
$
1,938

 
$
58,357

Redemption of noncontrolling OP units for common shares
—

 
—

 
—

 
1,099

 
—

 
—

 
(1,099
)
Repurchase of preferred shares
(70,000
)
 
(67,883
)
 
—

 
—

 
(2,117
)
 
—

 
—

Issuance of common shares and deferred compensation amortization, net
8,910

 
—

 
1

 
8,909

 
—

 
—

 
—

Contributions from noncontrolling interests
1,262

 
—

 
—

 
—

 
—

 
—

 
1,262

Deconsolidation of consolidated joint venture
(782
)
 
—

 
—

 
—

 
—

 
—

 
(782
)
Dividends/distributions
(112,500
)
 
—

 
—

 
—

 
(78,082
)
 
—

 
(34,418
)
Net income
186,393

 
—

 
—

 
—

 
182,663

 
—

 
3,730

Other comprehensive loss
(8,331
)
 
—

 
—

 
—

 
—

 
(8,331
)
 
—

Balance September 30, 2012
$
1,175,155

 
$
243,790

 
$
16

 
$
2,020,858

 
$
(1,110,166
)
 
$
(6,393
)
 
$
27,050



Nine Months ended September 30, 2011
 
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, 2010
$
1,304,901

 
$
327,867

 
$
15

 
$
1,937,942

 
$
(1,036,790
)
 
$
(106
)
 
$
75,973

Redemption of noncontrolling OP units for common shares
—

 
—

 
—

 
1,876

 
—

 
—

 
(1,876
)
Repurchase of preferred shares
(1,431
)
 
(1,646
)
 
—

 
—

 
215

 
—

 
—

Issuance of common shares and deferred compensation amortization, net
99,437

 
—

 
1

 
99,436

 
—

 
—

 
—

Dividends/distributions
(75,695
)
 
—

 
—

 
—

 
(71,789
)
 
—

 
(3,906
)
Net loss
(103,794
)
 
—

 
—

 
—

 
(92,611
)
 
—

 
(11,183
)
Other comprehensive income
1,342

 
—

 
—

 
—

 
—

 
1,342

 
—

Balance September 30, 2011
$
1,224,760

 
$
326,221

 
$
16

 
$
2,039,254

 
$
(1,200,975
)
 
$
1,236

 
$
59,008


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,
 
2012
 
2011
Net cash provided by operating activities:
$
120,453

 
$
118,842

Cash flows from investing activities:
 

 
 

Acquisition of real estate, including intangible assets
(23,000
)
 
(13,533
)
Investment in real estate under construction
(77,931
)
 
(59,726
)
Capital expenditures
(34,693
)
 
(23,924
)
Acquisition of remaining interest in NLS
(9,438
)
 
—

Net proceeds from sale of properties
139,876

 
101,971

Principal payments received on loans receivable
3,206

 
27,003

Investment in loans receivable
(8,001
)
 
(32,553
)
Investments in non-consolidated entities
(1,963
)
 
(19,940
)
Distributions from non-consolidated entities in excess of accumulated earnings
351

 
140

Sale of interest in non-consolidated entity
7,000

 
—

Increase in deferred leasing costs
(8,754
)
 
(10,999
)
Change in escrow deposits and restricted cash
3,892

 
(4,508
)
Real estate deposits
(49
)
 
(410
)
Net cash used in investing activities
(9,504
)
 
(36,479
)
Cash flows from financing activities:
 

 
 

Dividends to common and preferred shareholders
(75,399
)
 
(70,512
)
Repurchase of exchangeable notes
(62,150
)
 
—

Principal amortization payments
(25,540
)
 
(26,146
)
Principal payments on debt, excluding normal amortization
(214,358
)
 
(70,956
)
Change in revolving credit facility borrowings, net
93,000

 
—

Proceeds from term loan
215,000

 
—

Increase in deferred financing costs
(4,683
)
 
(4,214
)
Proceeds of mortgages and notes payable
61,500

 
15,000

Cash distributions to noncontrolling interests
(34,418
)
 
(3,906
)
Contributions from noncontrolling interests
889

 
—

Repurchase of preferred shares
(70,000
)
 
(1,431
)
Receipts on forward equity commitment, net
—

 
1,285

Exercise of employee common share options
44

 
777

Issuance of common shares, net
5,772

 
96,595

Net cash used in financing activities
(110,343
)
 
(63,508
)
Cash acquired in acquisition of remaining interest in NLS
8,107

 
—

Change in cash and cash equivalents
8,713

 
18,855

Cash and cash equivalents, at beginning of period
63,711

 
52,644

Cash and cash equivalents, at end of period
$
72,424

 
$
71,499


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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)


(1)
The Company and Financial Statement Presentation

Lexington Realty Trust (the “Company”) is a self-managed and self-administered Maryland statutory real estate investment trust (“REIT”) that acquires, owns, manages and provides financing for a geographically diversified portfolio of predominately single-tenant office, industrial and retail properties, including build-to-suit transactions. The Company also provides investment advisory and asset management services to investors in the single-tenant area. As of September 30, 2012, the Company had equity interests in approximately 225 consolidated properties in 41 states. The real properties in which the Company has an equity interest are generally subject to net-leases or similar leases where the tenant pays all or substantially all of the cost and/or cost increases for real estate taxes, insurance, utilities and ordinary maintenance of the property. However, certain leases provide that the Company's property owner subsidiary is responsible for certain or all operating expenses.

The Company believes it has qualified 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 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 will be 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, (2) operating partnerships 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 (“OP units”), (3) a wholly-owned TRS, or (4) investments in joint ventures. Property owner subsidiaries are landlords under leases and/or borrowers under loan agreements and lender subsidiaries are lenders under loan agreements, but in all cases are separate and distinct legal entities.

Basis of Presentation and Consolidation. The Company's unaudited condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”). The financial statements reflect the accounts of the Company and its consolidated subsidiaries. The Company consolidates its wholly-owned subsidiaries and its partnerships and joint ventures which it controls (1) through voting rights or similar rights or (2) 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 the primary beneficiary are accounted for under appropriate GAAP.

The financial statements contained herein have been prepared by the Company in accordance with 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. The results of operations for the three and nine months ended September 30, 2012 and 2011, 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 Form 10-K for the year ended December 31, 2011 filed with the SEC on February 28, 2012 as revised by the Company's Current Report on Form 8-K filed with the SEC on August 30, 2012 (as so revised, the "Annual Report").

Use of Estimates. Management has made a number of significant estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses to prepare these unaudited condensed consolidated financial statements in conformity with GAAP. 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, including the current economic environment. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. 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

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)

determination of impairment of long-lived assets, loans receivable and equity method investments, the valuation of derivative financial instruments 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 Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures ("Topic 820"), as amended, to determine the fair value of financial and non-financial instruments. Topic 820 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 - observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 - unobservable inputs, which are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as considering counterparty credit risk. The Company has formally elected to apply the portfolio exception within Topic 820 with respect to measuring counterparty risk for all of its derivative transactions subject to master netting arrangements.

Acquisition, Development and Construction Arrangements. The Company evaluates loans receivable where the Company participates in residual profits through loan provisions or other contracts to ascertain whether the Company has the same risks and rewards as an owner or a joint venture partner. Where the Company concludes that such arrangements are more appropriately treated as an investment in real estate, the Company reflects such loan receivable as an equity investment in real estate under construction in the unaudited condensed consolidated balance sheets. In these cases, no interest income is recorded on the loan receivable and the Company records capitalized 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 2011 unaudited condensed consolidated financial statements have been reclassified to conform to the 2012 presentation.

(2)
Earnings Per Share

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.

9
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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)

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, 2012 and 2011:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
BASIC
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common shareholders
$
163,417

 
$
(22,448
)
 
$
162,893

 
$
(54,911
)
Income (loss) from discontinued operations attributable to common shareholders
5,533

 
(14,600
)
 
686

 
(56,314
)
Net income (loss) attributable to common shareholders
$
168,950

 
$
(37,048
)
 
$
163,579

 
$
(111,225
)
Weighted-average number of common shares outstanding
154,980,137

 
157,205,530

 
154,564,041

 
151,676,401

Income (loss) per common share:
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
1.05

 
$
(0.14
)
 
$
1.05

 
$
(0.36
)
Income (loss) from discontinued operations
0.04

 
(0.10
)
 
0.01

 
(0.37
)
Net income (loss) attributable to common shareholders
$
1.09

 
$
(0.24
)
 
$
1.06

 
$
(0.73
)
 
 
 
 
 
 
 
 
DILUTED
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common shareholders
$
163,417

 
$
(22,448
)
 
$
162,893

 
$
(54,911
)
Impact of assumed conversions:
 
 
 
 
 
 
 
Share Options
—

 
—

 
—

 
—

Operating Partnership Units
475

 
—

 
913

 
—

6% Convertible Guaranteed Notes
2,327

 
—

 
6,980

 
—

Series C Preferred shares
1,573

 
—

 
4,489

 
—

Income (loss) from continuing operations attributable to common shareholders
167,792

 
(22,448
)
 
175,275

 
(54,911
)
Income (loss) from discontinued operations attributable to common shareholders
5,533

 
(14,600
)
 
686

 
(56,314
)
Net income (loss) attributable to common shareholders
$
173,325

 
$
(37,048
)
 
$
175,961

 
$
(111,225
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
154,980,137

 
157,205,530

 
154,564,041

 
151,676,401

Effect of dilutive securities:
 
 
 
 
 
 
 
Share Options
344,721

 
—

 
279,699

 
—

Operating Partnership Units
4,400,389

 
—

 
4,479,451

 
—

6% Convertible Guaranteed Notes
16,419,347

 
—

 
16,412,836

 
—

Series C Preferred shares
4,710,570

 
—

 
4,713,043

 
—

Weighted-average common shares outstanding
180,855,164

 
157,205,530

 
180,449,070

 
151,676,401

 
 
 
 
 
 
 
 
Income (loss) per common share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.93

 
$
(0.14
)
 
$
0.97

 
$
(0.36
)
Income (loss) from discontinued operations
0.03

 
(0.10
)
 
0.01

 
(0.37
)
Net income (loss) attributable to common shareholders
$
0.96

 
$
(0.24
)
 
$
0.98

 
$
(0.73
)

10
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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)

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.

During the nine months ended September 30, 2012, the Company redeemed all outstanding shares of its 8.05% Series B Cumulative Redeemable Preferred Stock at par plus all accrued and unpaid dividends, for an aggregate redemption cost of $69,459. The redemption generated a $2,346 deemed dividend. Accordingly, net income was adjusted for this deemed dividend to arrive at net income attributable to common shareholders.

During the nine months ended September 30, 2012 and 2011, the Company repurchased and retired 34,800 and 33,896 shares, respectively, of its 6.50% Series C Cumulative Convertible Preferred Stock at an aggregate discount of $229 and $215, respectively, to the historical cost basis. These discounts constitute deemed negative dividends, offsetting other dividends, and are accretive to common shareholders. Accordingly, net income (loss) was adjusted for these dividends to arrive at net income (loss) attributable to common shareholders.

(3)
Investments in Real Estate and Real Estate Under Construction

The Company, through property owner subsidiaries, completed the following acquisition and build-to-suit transactions during the nine months ended September 30, 2012:
 
 
 
 
 
 
 
 
 
Lease Intangibles
Property Type
Location
Acquisition/Completion Date
Initial Cost Basis
Lease Expiration
Land and Land Estate
 
Building and Improvements
 
Lease in-place Value
 
Tenant Relationships Value
Office
Huntington, WV
January 2012
$
12,558

11/2026
$
1,368

 
$
9,527

 
$
1,405

 
$
258

Office
Florence, SC
February 2012
$
5,094

02/2024
$
774

 
$
3,629

 
$
505

 
$
186

Industrial
Missouri City, TX
April 2012
$
23,000

04/2032
$
14,555

 
$
5,895

 
$
2,135

 
$
415

Industrial
Shreveport, LA
June 2012
$
12,941

03/2022
$
1,078

 
$
10,134

 
$
1,590

 
$
139

Retail
Valdosta, GA(1)
August 2012
$
8,247

08/2027
$
2,128

 
$
6,119

 
$
—

 
$
—

Office
Jessup, PA
August 2012
$
24,917

08/2027
$
2,520

 
$
17,656

 
$
3,336

 
$
1,405

Office
Saint Joseph, MO
September 2012
$
17,571

06/2027
$
607

 
$
14,004

 
$
2,528

 
$
432

 
 
 
$
104,328

 
$
23,030

 
$
66,964

 
$
11,499

 
$
2,835

(1) Incurred leasing costs of $488.

The Company is engaged in various forms of build-to-suit development activities. The Company, through lender subsidiaries and property owner subsidiaries, may enter into the following acquisition, development and construction arrangements: (1) lend funds to construct build-to-suit projects subject to a single-tenant lease and agree to purchase the properties upon completion of construction and commencement of a single-tenant lease, (2) hire developers to construct built-to-suit projects on owned properties leased to single tenants, (3) fund the construction of build-to-suit projects on owned properties pursuant to the terms in single-tenant lease agreements or (4) enter into purchase and sale agreements with developers to acquire single-tenant build-to-suit properties upon completion.

11
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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)

As of September 30, 2012, the Company had the following development arrangements outstanding:
Location
Property Type
Square Feet
 
Expected Maximum Commitment/Contribution (million)
 
Estimated Purchase Price/Completion Cost (million)
 
Lease Term (Years)
 
Estimated Completion Date
Long Island City, NY(1)
Industrial
143,000

 
$
46.7

 
$
55.5

 
15
 
1Q 13
Eugene, OR
Office
80,000

 
$
17.6

 
$
17.6

 
15
 
1Q 13
Denver, CO
Office
163,000

 
$
37.6

 
$
37.6

 
15
 
2Q 13
Rantoul, IL(2)
Industrial
813,000

 
$
42.6

 
$
42.6

 
20
 
4Q 13
Opelika, AL
Retail
52,000

 
$
8.4

 
$
8.4

 
15
 
4Q 12
 
 
1,251,000

 
$
152.9

 
$
161.7

 
 
 
 
(1) Joint venture investment. The Company has guaranteed completion to the ground owner. The guarantee obligation was valued at $1,500 and is included in accounts payable and other liabilities in the condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011. In addition, the Company may loan a maximum of $4,398 to the joint venture under certain circumstances. The difference between the Company's expected contribution and the estimated completion cost represents the joint venture partner's equity.
(2) Acquisition, development and construction arrangement.

The Company has variable interests in certain developer entities constructing the facilities but is not the primary beneficiary of the entities as the Company does not have a controlling financial interest. As of September 30, 2012, the Company's aggregate investment in development arrangements was $41,676, and is presented as investments in real estate under construction in the accompanying unaudited condensed consolidated balance sheet. The Company capitalized interest of $1,693 and $882 during the nine months ended September 30, 2012 and 2011, respectively, relating to build-to-suit activities.

On September 1, 2012, the Company, together with an operating partnership subsidiary, acquired the remaining common equity interest in Net Lease Strategic Assets Fund L.P. ("NLS") from Inland American (Net Lease) Sub, LLC that the Company did not already own for a cash payment of $9,438 and the assumption of all outstanding liabilities. Immediately prior to the acquisition, the Company owned 15% of NLS's common equity and 100% of NLS's preferred equity and its investment balance in NLS was $40,047. At the date of acquisition, NLS owned 41 properties totaling 5.8 million square feet in 23 states, plus a 40% tenant-in-common interest in an office property.  The Company's investment in NLS had previously been accounted for under the equity method and is now consolidated. The acquisition resulted in a remeasurement of the net assets acquired to fair value. The Company engaged an independent third party to determine the fair value of the assets acquired and liabilities assumed.

The following table summarizes the allocation of the fair value of amounts recognized for each major class of assets and liabilities:
Real estate assets
 
$
325,310

Lease related intangible assets
 
124,330

Cash
 
8,107

Other assets
 
36,179

 
 
 
Total acquired assets
 
493,926

 
 
 
Secured debt
 
252,517

Other liabilities, including below-market leases
 
23,686

 
 
 
Total assumed liabilities
 
276,203

 
 
 
Fair value of acquired net assets (represents 100% interest)
 
$
217,723


12
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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)

The Company recognized a gain on the transaction in the unaudited condensed consolidated statement of operations of $167,864 primarily related to the revaluation of the Company's equity interest in NLS for the difference between its carrying value in NLS and the fair value of its ownership interest at acquisition.The noncontrolling interest share of the fair value of the net assets acquired was $373.

In 2007 and 2008, the Company recognized $19,422 and $31,806, respectively, in gains on sales of properties relating to the transfer of properties to NLS. In 2012, the Company determined that these gains should have been deferred and recognized as a basis adjustment to the Company's equity investment in NLS. Accordingly, the Company has recorded an adjustment to increase accumulated distributions in excess of net income and decrease investment in and advances to non-consolidated entities in the prior period's balance sheet and statements of changes in equity presented in the accompanying condensed consolidated financial statements by $51,228. The Company assessed the materiality of the adjustment and determined the amount was immaterial to previously reported financial statements. The adjustment has no impact on the Company's cash flows or liquidity.

Intangible assets and liabilities recorded in connection with the above acquisition are set forth as follows:
 
 
 
Weighted Average Amortization Period (in Years)
In-place leases
 
$
59,819

6.2
Tenant relations
 
24,828

4.6
Above-market leases
 
39,683

8.4
Total intangible assets acquired
 
$
124,330

 
Below-market leases
 
$
1,529

2.7

The Company recognized gross revenues from continuing operations of $3,739 and a net loss of $(436) from NLS properties since consolidation of NLS properties on September 1, 2012. Prior to consolidation, the Company recognized $12,902 and $15,192 of equity in earnings relating to NLS during the nine months ended September 30, 2012 and 2011, respectively.

The following unaudited condensed consolidated pro forma information is presented as if the Company acquired the remaining equity in NLS on January 1, 2011. The information excludes activity that is non-recurring and not representative of future activity, primarily the gain on acquisition of $167,864 and acquisition costs of $230 for both the three and nine months ended September 30, 2012, respectively. The information presented below is not necessarily indicative of what the actual results of operations would have been had the transaction been completed on January 1, 2011, nor does it purport to represent the Company's future operations:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
Gross revenues
 
$
94,940

 
$
91,090

 
$
279,653

 
$
268,836

Net income (loss) attributable to Lexington Realty Trust shareholders
 
$
3,969

 
$
(39,005
)
 
$
(1,258
)
 
$
(117,454
)
Net loss attributable to common shareholders
 
$
(684
)
 
$
(45,139
)
 
$
(19,612
)
 
$
(136,068
)
Net loss per common share - basic and diluted
 
$
—

 
$
(0.29
)
 
$
(0.13
)
 
$
(0.90
)

The Company recognized aggregate acquisition expenses of $786 and $314 for the nine months ended September 30, 2012 and 2011, respectively, which are included as operating expenses within the Company's unaudited condensed consolidated statements of operations.

13
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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)

(4)
Discontinued Operations and Real Estate Impairment
During the nine months ended September 30, 2012, the Company disposed of its interest in eight properties (excluding its interest in Pemlex – see note 7) and a 6.9-acre land parcel to unrelated third parties for a gross disposition price of $129,715 and recognized an aggregate gain on sales of properties of $8,946 and net debt satisfaction charges of $1,189. In addition, the Company transferred a property to the lender in satisfaction of the $7,119 non-recourse mortgage loan and recognized a net gain on debt satisfaction of $1,728. During the nine months ended September 30, 2011, the Company sold its interests in 14 properties to unrelated third parties for an aggregate gross disposition price of $137,467, which includes the assumption of $28,648 of non-recourse mortgage debt and seller financing of $3,003. The Company recognized aggregate gains on sales of properties of $5,251 and debt satisfaction charges of $603 during the nine months ended September 30, 2011. As of September 30, 2012, the Company had one property classified as held for sale.
The following presents the operating results for the properties sold and properties classified as held for sale for the applicable periods:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
Total gross revenues
$
998

 
$
4,928

 
$
6,993

 
$
17,389

Pre-tax income (loss), including gains on sale
$
5,570

 
$
(14,456
)
 
$
2,643

 
$
(67,773
)

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 reduction in utilization of a property, tenant financial instability and the potential sale 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. During the nine months ended September 30, 2012 and 2011, the Company recognized $5,690 and $76,110, respectively, of impairment charges in discontinued operations, relating to real estate assets that were sold or were anticipated to be sold below their carrying value.

In addition, the Company recognized impairment charges of $4,262 and $38,719 in continuing operations during the nine months ended September 30, 2012 and 2011, respectively. The Company explored the possible disposition of some non-core retail, underperforming and multi-tenant properties and determined that the expected undiscounted cash flows based upon revised estimated holding periods of certain of these properties were below the current carrying values. Accordingly, the Company reduced the carrying value of these properties to their estimated fair values.

(5)
Loans Receivable

As of September 30, 2012 and December 31, 2011, the Company's loans receivable, including accrued interest and net of origination fees, were comprised primarily of first and second mortgage loans and mezzanine loans on real estate aggregating $72,786 and $66,619, respectively. The loans bear interest, including imputed interest, at rates ranging from 4.6% to 20.0% and mature at various dates between 2012 and 2022.
During the second quarter of 2012, the Company contracted to lend up to $8,000 to fund the construction of a charter school in Homestead, Florida. The loan, which had an outstanding principal balance of $7,970 as of September 30, 2012, matures in August 2014 and accrues interest at 7.5% per annum.
During the first quarter of 2011, the Company, through a lender subsidiary, loaned $3,003 to the buyer in connection with the sale for $3,650 of a vacant industrial property. The loan is secured by the property, bears interest at 7.8% and matures in January 2013. The loan, which had an outstanding balance of $3,086 at September 30, 2012, is currently in default and the Company has initiated foreclosure proceedings. The Company believes the industrial property has an estimated fair value in excess of the Company's investment.
During 2011 and 2010, the Company, through a lender subsidiary, made a mortgage loan to an entity that owns an office property in Schaumburg, Illinois. As of September 30, 2012, the loan had an outstanding balance of $21,942, net of a $1,722 reserve allowance, and currently bears interest at 20.0%. This mortgage loan had a maturity date of January 15, 2012 with a borrower option to extend one additional year for a 50 basis point fee, which was not timely exercised. The property is net-leased through December 31, 2022 for an average annual rent of $3,968. The lender subsidiary may be

14
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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)

obligated to lend an additional amount for tenant improvement costs. The borrower defaulted on the loan causing the applicable interest rate to increase from 15.0% to 20.0% per annum. The tenant of the property has brought an action against the borrower and our lender subsidiary claiming the additional tenant improvement cost. The Company believes the office property has an estimated fair value in excess of the Company's investment and the Company has initiated foreclosure proceedings. Interest income is no longer being recorded on the note.

During 2010, the Company, through a lender subsidiary, made a $17,000 mezzanine loan to entities which, collectively, owned five medical facilities. The mezzanine loan (1) was guaranteed by a parent entity and a principal, (2) was principally secured by either ownership pledges for, second mortgage liens or mortgage liens against the medical facilities, (3) matured in December 2011 and (4) required payments of interest only at a rate of 14.0% through February 2011 and 16.0% thereafter. The lender subsidiary received aggregate prepayments of $7,500 in December 2010 and February 2011, and the balance of $9,500 was fully repaid in December 2011.

The Company has two types of financing receivables: loans receivable and a capitalized financing lease. The Company determined that its financing receivables operate within one portfolio segment as they are within the same industry and use the same impairment methodology. The Company's loans receivable are secured by commercial real estate assets and the capitalized financing lease is for a commercial office property located in Greenville, South Carolina. In addition, the Company assesses all financing receivables for impairment, when warranted, based on an individual analysis of each receivable.

The Company's financing receivables operate within one class of financing receivables as these assets are collateralized by commercial real estate and similar metrics are used to monitor the risk and performance of these assets. The Company's management uses credit quality indicators to monitor financing receivables such as quality of collateral, the underlying tenant's credit rating and collection experience. As of September 30, 2012, the financing receivables, other than as previously disclosed, were performing as anticipated and there were no significant delinquent amounts outstanding.

(6)
Fair Value Measurements
The following tables present the Company's assets and liabilities from continuing operations measured at fair value on a recurring and non-recurring basis as of September 30, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall:
 
Balance
 
Fair Value Measurements Using
Description
September 30, 2012
 
(Level 1)
 
(Level 2)
 
(Level 3)
Interest rate swap liability
$
(7,114
)
 
$
—

 
$
(7,114
)
 
$
—

Impaired real estate assets*
$
3,327

 
$
—

 
$
—

 
$
3,327

 
Balance
 
Fair Value Measurements Using
Description
December 31, 2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
Interest rate swap liability
$
(3,236
)
 
$
—

 
$
(3,236
)
 
$
—

Impaired real estate assets*
$
133,220

 
$
—

 
$
—

 
$
133,220

*Represents a non-recurring fair value measurement.

The table below sets forth the carrying amounts and estimated fair values of the Company's financial instruments as of September 30, 2012 and December 31, 2011.
 
As of September 30, 2012
 
As of December 31, 2011
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Assets
 
 
 
 
 
 
 
Loans Receivable
$
72,786

 
$
62,570

 
$
66,619

 
$
54,179

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Debt
$
1,994,179

 
$
1,945,390

 
$
1,662,375

 
$
1,533,205


15
Table of Contents

LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)


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, 2012 and December 31, 2011, the Company determined that the credit valuation adjustment relative to the overall fair value of the interest rate swaps was not significant. As a result, the interest rate swaps have been classified in Level 2 of the fair value hierarchy.
The Company estimates the fair value of its real estate assets by using income and market valuation techniques. The Company may estimate fair values using market information such as broker opinions of value, recent sales data for similar assets 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 Company estimates the fair values of its loans receivable by using an estimated discounted cash flow analysis using Level 3 inputs consisting of scheduled cash flows and discount rate estimates to approximate those that a willing buyer and seller might use and/or the estimated value of the underlying collateral. The fair value of the Company's debt is estimated by using a discounted cash flow analysis using Level 3 inputs, based upon estimates of market interest rates.
Fair values cannot be determined with precision, may not be substantiated by comparison to quoted prices in active markets and may not be realized upon sale. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including discount rates, liquidity risks and estimates of future cash flows, could significantly affect the fair value measurement amounts.
Cash Equivalents, Restricted Cash, Accounts Receivable and Accounts Payable. The 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.
(7)
Investment in and Advances to Non-Consolidated Entities

Pemlex LLC. In April 2011, the Company made a $14,180 noncontrolling, preferred equity investment in a joint venture, Pemlex LLC, formed to acquire an office property in Aurora, Illinois. The property was purchased by a consolidated subsidiary of the joint venture for a gross purchase price of $15,900. The property is net-leased to a single tenant through September 2017. The Company was entitled to a 15.0% internal rate of return, including a 9.6% current annual preferred return, on its investment, subject to available cash proceeds. At acquisition, the Company determined that Pemlex LLC was not a VIE. The Company recorded its investment under the equity method of accounting as it was not the controlling managing member of the entity. In October 2011, the Company became the managing member of Pemlex LLC and accordingly commenced consolidation.

In July 2012, the Company sold its interest in Pemlex LLC for $13,218 in connection with a restructuring of Pemlex LLC. In addition, the Company (1) entered into a management agreement with the purchaser that provides for a backstop guaranty to a third party who delivered a letter of credit in the amount of $2,500 as security for "bad boy" acts under the purchaser's third-party acquisition financing and (2) agreed to deliver a replacement letter of credit, if necessary, in the amount of $2,500 to the purchaser's lender during the term of the management agreement. No gain or loss was recognized in the transaction as the investment was sold at its cost basis.


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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)

Concord Debt Holdings LLC (“Concord”) and CDH CDO LLC ("CDH CDO"). The Company's investments in Concord and CDH CDO were valued at zero and the Company recognized income on the cash basis. During the nine months ended September 30, 2012 and 2011, the Company received aggregate distributions of $885 and $3,170, respectively, which were recorded as equity in earnings of non-consolidated entities. During the second quarter of 2012, the Company sold all of its interest in Concord and CDH CDO for $7,000 in cash, resulting in a $7,000 gain on sale, which is included in equity in earnings of non-consolidated entities.

Other. During the third quarter of 2012, the Company formed a joint venture in which it has a minority interest. The joint venture entered into a contract to acquire a 120,000 square foot retail property in Palm Beach Gardens, Florida for $29,750 which will be net-leased at closing for an approximate 15-year term.

During the second quarter of 2012, the Company formed a joint venture, in which the Company has a 15% interest, which acquired a 100% economic interest in an inpatient rehabilitation hospital in Humble, Texas for $27,750. The acquisition was partially funded by a non-recourse mortgage with an original principal amount of $15,260, which bears interest at a fixed rate of 4.7% and matures in May 2017.

During the first quarter of 2011, the Company recognized an other-than-temporary impairment charge on a non-consolidated joint venture acquired in the merger with Newkirk Realty Trust, Inc. due to a change in the Company's estimate of net proceeds to be received upon liquidation of the joint venture. Accordingly, the Company recognized a $1,559 impairment charge in equity in earnings of non-consolidated entities and reduced the carrying value of the investment to $719.

(8)
Mortgages and Notes Payable
On January 13, 2012, the Company procured a $215,000 secured term loan from Wells Fargo Bank, National Association ("Wells Fargo"), as agent. The term loan is secured by ownership interest pledges by certain subsidiaries that collectively own a borrowing base of properties. The secured term loan matures in January 2019. The secured term loan requires regular payments of interest only at interest rates ranging from LIBOR plus 2.00% to 2.85% dependent on the Company's leverage ratio, as defined therein. Upon the date when the Company obtains an investment grade debt rating from at least two of Standard & Poor's, Moody's and Fitch, Inc., the interest rate under the secured term loan will be dependent on the Company's debt rating. The Company may not prepay any outstanding borrowings under the secured term loan facility through January 12, 2013, but may prepay outstanding borrowings thereafter at a premium through January 12, 2016 and at par thereafter. During the nine months ended September 30, 2012, the Company entered into interest-rate swap agreements to fix LIBOR at a weighted-average rate of 1.49% through January 2019 on the $215,000 of outstanding LIBOR-based borrowings. At September 30, 2012, the Company had $215,000 outstanding under the secured term loan (see note 16).
In addition, on January 13, 2012, the Company refinanced its $300,000 secured revolving credit facility, which was scheduled to expire in January 2014, with a new $300,000 secured revolving credit facility with KeyBank N.A. ("KeyBank"), as agent. The new secured revolving credit facility has the same security as the new secured term loan. The new secured revolving credit facility bears interest at LIBOR plus 1.625% to 2.375% based on the Company's leverage ratio, as defined. Upon the date when the Company obtains an investment grade debt rating from at least two of Standard & Poor's, Moody's and Fitch, Inc., the interest rate under the new secured revolving credit facility will be dependent on the Company's debt rating. The new secured revolving credit facility matures in January 2015 but can be extended until January 2016 at the Company's option. With the consent of the lenders, the Company can increase the size of the secured revolving credit facility by $225,000 for a total secured revolving credit facility size of $525,000 by adding properties to the borrowing base or admitting additional lenders. The borrowing availability of the secured revolving credit facility is based upon the net operating income, as defined, of the properties comprising the borrowing base. At September 30, 2012, the secured revolving credit facility had an outstanding balance of $93,000, outstanding letters of credit of $3,744 and availability of $203,256. The new secured revolving credit facility and the new secured term loan are subject to financial covenants, which the Company was in compliance with at September 30, 2012 (see note 16).
The Company had $25,000 and $35,551 secured term loans with KeyBank, which were satisfied in January 2012 and the Company recognized debt satisfaction charges of $1,578 as a result of the satisfaction.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)


During the first quarter of 2010, the Company issued $115,000 aggregate principal amount of 6.00% Convertible Guaranteed Notes due 2030. The notes pay interest semi-annually in arrears and mature in January 2030. The holders of the notes may require the Company to repurchase their notes in January 2017, January 2020 and January 2025 for cash equal to 100% of the notes to be repurchased, plus any accrued and unpaid interest. The Company may not redeem any notes prior to January 2017, except to preserve its REIT status. The notes have a current conversion rate of 144.2599 common shares per one thousand principal amount of the notes, representing a conversion price of approximately $6.93 per common share. The conversion rate is subject to adjustment under certain circumstances, including increases in the Company's dividend rate above a certain threshold and the issuance of stock dividends. The notes are convertible by the holders under certain circumstances for cash, common shares or a combination of cash and common shares at the Company's election. The notes are convertible prior to the close of business on the second business day immediately preceding the stated maturity date, at any time beginning in January 2029 and also upon the occurrence of specified events (see note 16).
During 2007, the Company issued an aggregate $450,000 of its 5.45% Exchangeable Guaranteed Notes due 2027. The Company prepaid $387,850 of the notes prior to 2012 and the remaining $62,150 of notes were repurchased by the Company and satisfied in January 2012 pursuant to a holder repurchase option. This resulted in debt satisfaction charges of $44.
Below is a summary of additional disclosures related to the 6.00% Convertible Guaranteed Notes and the 5.45% Exchangeable Guaranteed Notes.
 
6.00% Convertible Guaranteed Notes
 
5.45% Exchangeable Guaranteed Notes
Balance Sheets:
September 30,
2012
 
December 31,
2011
 
September 30,
2012
 
December 31,
2011
Principal amount of debt component
$
115,000

 
$
115,000

 
$
—

 
$
62,150

Unamortized discount
(8,398
)
 
(9,851
)
 
—

 
(48
)
Carrying amount of debt component
$
106,602

 
$
105,149

 
$
—

 
$
62,102

Carrying amount of equity component
$
13,134

 
$
13,134

 
$
—

 
$
20,293

Effective interest rate
8.1
%
 
8.1
%
 
—

 
7.0
%
Period through which discount is being amortized, put date
01/2017

 
01/2017

 
—

 
01/2012

Aggregate if-converted value in excess of aggregate principal amount
$
45,258

 
$
7,907

 
$
—

 
$
—

 
Three months ended September 30,
 
Nine months ended September 30,
Statements of Operations:
2012
 
2011
 
2012
 
2011
6.00% Convertible Guaranteed Notes
 
 
 
 
 
 
 
Coupon interest
$
1,725

 
$
1,725

 
$
5,175

 
$
5,175

Discount amortization
484

 
484

 
1,453

 
1,453

 
$
2,209

 
$
2,209

 
$
6,628

 
$
6,628

5.45% Exchangeable Guaranteed Notes
 

 
 

 
 

 
 

Coupon interest
$
—

 
$
847

 
$
188

 
$
2,540

Discount amortization
—

 
166

 
34

 
498

 
$
—

 
$
1,013

 
$
222

 
$
3,038


During the nine months ended September 30, 2012 and 2011, in connection with the satisfaction of mortgage notes other than those disclosed elsewhere in these financial statements, the Company incurred debt satisfaction gains (charges), net of $(17) and $3, respectively.


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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)

(9)
Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives. The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the type, amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company's known or expected cash receipts and its known or expected cash payments principally related to the Company's investments and borrowings.

Cash Flow Hedges of Interest Rate Risk. The Company's objectives in using interest rate derivatives are to add stability to interest expense, to manage its exposure to interest rate movements and therefore manage its cash outflows as it relates to the underlying debt instruments. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy relating to certain of its variable rate debt instruments. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

The Company 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 $215,000 of LIBOR-indexed variable-rate secured 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. In January 2012, the Company settled the 2008 interest-rate swap agreement with KeyBank for $3,539. The Company had a credit balance of $1,837 in accumulated other comprehensive income at the settlement date which is being amortized into earnings on a straight-line basis through February 2013.

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on these secured term loans. During the next 12 months, the Company estimates that an additional $2,044 will be reclassified as an increase to interest expense.

As of September 30, 2012, 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
4
$215,000

Derivatives Not Designated as Hedges. The Company does not use derivatives for trading or speculative purposes. During 2008, the Company entered into a forward purchase equity commitment with a financial institution to finance the repurchase of 3,500,000 common shares of the Company at $5.60 per share under the Company's common share repurchase plan as approved by the Board of Trustees. The Company recognized an expense during the nine months ended September 30, 2011 of $4,318 primarily relating to the change in the fair value of the common shares held as collateral. The Company settled this commitment in October 2011 through a cash payment of $4,024 and retired 3,974,645 common shares.


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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)

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, 2012 and December 31, 2011.

 
As of September 30, 2012
 
As of December 31, 2011
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
Interest Rate Swap Liability
Accounts Payable and Other Liabilities
 
$
7,114

 
Accounts Payable and Other Liabilities
 
$
3,236


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, 2012 and 2011.

Derivatives in Cash Flow
 
 
Amount of Loss Recognized
in OCI on Derivatives
(Effective Portion)
September 30,
 
Location of Loss
Reclassified from
Accumulated OCI into Income (Effective Portion)
 
Amount of Loss Reclassified
from Accumulated OCI into
Income (Effective Portion)
September 30,
Hedging Relationships
 
 
2012
 
2011
 
 
2012
 
2011
Interest Rate Swaps
 
 
$
(8,746
)
 
$
(814
)
 
Interest expense
 
$
415

 
$
2,156


Derivatives Not Designated as
 
Location of Loss Recognized in
 
Amount of Loss Recognized in Income on Derivative
September 30,
Hedging Instruments
 
Income on Derivative
 
2012
 
2011
Forward Purchase Equity Commitment
 
Change in value of forward equity commitment
 
$
—

 
$
(4,318
)

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, 2012, the Company has not posted any collateral related to the agreements.

(10)
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, 2012 and 2011, 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.

(11)
Equity
Shareholders' Equity. During the nine months ended September 30, 2012 and 2011, the Company issued 777,882 and 733,673 common shares, respectively, under its direct share purchase plan, raising net proceeds of approximately $6,079 and $6,090, respectively. During the nine months ended September 30, 2011, the Company issued 10,000,000 common shares in a public offering generating net proceeds of $90,505. The proceeds were used for general working capital; primarily to fund investments and retire indebtedness.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)

Accumulated other comprehensive income (loss) as of September 30, 2012 and December 31, 2011 represented $(6,393) and $1,938, respectively, of unrealized gain (loss) on interest rate swaps, net.
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 for approximately 1.13 common shares, subject to future adjustments.
During the nine months ended September 30, 2012 and 2011, 211,138 and 340,550 common shares, respectively, were issued by the Company, in connection with OP unit redemptions, for an aggregate value of $1,099 and $1,876, respectively.
As of September 30, 2012, there were approximately 3,839,000 OP units outstanding other than OP units owned by the Company. All OP units receive distributions in accordance with their respective partnership agreements. To the extent that the Company's dividend per common share is less than the stated distribution per OP unit per the applicable 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.

The following discloses the effects of changes in the Company's ownership interests in its noncontrolling interests:
 
Net Income (Loss) Attributable to Shareholders and Transfers from Noncontrolling Interests
 
Nine Months ended September 30,
 
2012
 
2011
Net income (loss) attributable to Lexington Realty Trust shareholders
$
182,663

 
$
(92,611
)
Transfers from noncontrolling interests:
 

 
 
Increase in additional paid-in-capital for redemption of noncontrolling OP units
1,099

 
1,876

Change from net income (loss) attributable to shareholders and transfers from noncontrolling interests
$
183,762

 
$
(90,735
)

(12)
Related Party Transactions

In addition to the related party transactions previously disclosed, including in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 and the audited consolidated financial statements in the Annual Report, the Company has an indemnity obligation to one of its significant shareholders with respect to actions by the Company that affect the significant shareholder's status as a REIT.

(13)
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 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. As of September 30, 2012, the Company had one outstanding guaranty for (1) the completion of the base building improvements for an office property in Orlando, Florida, which, as of September 30, 2012, were estimated to be $8,133 and (2) the payment of a related tenant improvement allowance of $7,572.

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.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
(Unaudited and dollars in thousands, except share/unit data)


Deutsche Bank Securities, Inc. and SPCP Group LLC v. Lexington Drake, L.P., et al. (Supreme Court of the State of New York-Index No. 603051/08). As previously disclosed, following a successful motion for summary judgment by the plaintiff and an unsuccessful motion for summary judgment by the Company and its applicable subsidiaries and the determination of damages by a special referee, the Company settled this litigation during the three months ended September 30, 2012 for a cash payment of $2,775 and mutual releases.

(14)
Benefit Plans

The Company recognizes compensation expense relating to options issued under the Company's equity award plan over an average of 5.0 years for the options issued in 2010 and 3.6 years for the options issued in 2008. The Company recognized $937 and $1,038 in compensation expense during each of the nine months ended September 30, 2012 and 2011, respectively, and has unrecognized compensation costs of $2,818 relating to the outstanding options as of September 30, 2012.

During the nine months ended September 30, 2012 and 2011, the Company recognized $2,270 and $1,569, respectively, in compensation expense relating to scheduled vesting and issuance of common share grants.

(15)
Supplemental Disclosure of Statement of Cash Flow Information

In addition to disclosures discussed elsewhere, during the nine months ended September 30, 2012 and 2011, the Company paid $78,042 and $82,600, respectively, for interest and $977 and $1,352, respectively, for income taxes.

(16)
Subsequent Events

Subsequent to September 30, 2012 and in addition to disclosures elsewhere in the financial statements, the Company:

•
issued 17,250,000 common shares in a public offering raising net proceeds of approximately $156,292. The net proceeds were primarily used to satisfy $93,000 of outstanding debt on the Company's secured credit facility and $57,450 to satisfy a portion of the debt assumed in the NLS acquisition;
•
exercised a $40,000 accordion feature within the Company's secured term loan;
•
converted $20,354 original principal amount of 6.00% Convertible Guaranteed Notes to 2,936,266 common shares for a cash payment of $1,676 plus accrued and unpaid interest on the notes; and
•sold a vacant retail property in Fort Worth, Texas for $2,500.



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

When we use the terms “the Company,” “we,” “us” and “our,” we mean Lexington Realty Trust and all entities owned by us, including non-consolidated entities, except where it is clear that the term means only the parent company. References herein to ‘‘this Quarterly Report” are to this Quarterly Report on Form 10-Q for the quarter ended September 30, 2012. The result of operations for the three and nine months ended September 30, 2012 and 2011 are not necessarily indicative of the results that may be expected for the full year.

Forward-Looking Statements. The following is a discussion and analysis of our unaudited condensed consolidated financial condition and results of operations for the three and nine months ended September 30, 2012 and 2011, and significant factors that could affect our prospective financial condition and results of operations. This discussion should be read together with the accompanying unaudited condensed consolidated financial statements and notes thereto and with our consolidated financial statements and notes thereto included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 28, 2012, as revised by our Current Report on Form 8-K filed with the SEC on August 30, 2012, which we refer to as so revised as our Annual Report. Historical results may not be indicative of future performance.

This Quarterly Report, together with other statements and information publicly disseminated by us, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “estimates,” “projects,” “may,” “plans,” “predicts,” “will,” “will likely result” or similar expressions. Readers should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. In particular, among the factors that could cause actual results, performances or achievements to differ materially from current expectations, strategies or plans include, among others, those risks discussed below in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and under the headings “Risk Factors” in this Quarterly Report and “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 filed with the SEC on August 8, 2012 and other periodic reports filed with the SEC. Except as required by law, we undertake no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Accordingly, there is no assurance that our expectations will be realized.

Overview

General. We are a self-managed and self-administered real estate investment trust, or REIT, formed under the laws of the State of Maryland. We operate primarily in one segment, and our primary business is the investment in and the acquisition, ownership, financing and management of a geographically diverse portfolio of single-tenant office, industrial and retail properties. We conduct all of our property operations through property owner subsidiaries and lending operations through lender subsidiaries. A majority of our properties are subject to net-leases or similar leases, where the tenant bears all or substantially all of the costs and/or cost increases for real estate taxes, utilities, insurance and ordinary repairs and maintenance.

As of September 30, 2012, we had equity ownership interests in approximately 225 consolidated real estate properties, located in 41 states and encompassing approximately 41.1 million square feet, approximately 97.5% of which was leased. Our historical same-store occupancy was 97.3% as of September 30, 2012, compared to 96.5% as of September 30, 2011. The properties in which we have an equity interest are leased to tenants in various industries, including finance/insurance, technology, energy, automotive and consumer products.

Our revenues and cash flows are generated predominantly from property rent receipts. As a result, growth in revenues and cash flows is directly correlated to our ability to (1) acquire income producing real estate investments, (2) re-lease properties that are vacant, or may become vacant at favorable rental rates and (3) earn fee income.

Business Strategy. We continue to implement strategies which we believe will provide shareholders with dividend growth and capital appreciation. We believe that having a strong balance sheet supports these objectives. Since 2008, we have strengthened our balance sheet primarily by (1) repurchasing and retiring our debt and senior securities or by extending their maturity date, (2)

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financing properties at what we believe are favorable rates and using the proceeds to retire higher rate or shorter term debt, (3) issuing equity when market conditions are favorable and (4) selling non-core and underperforming assets. We have used proceeds from non-core and underperforming asset sales and issuances of common shares primarily to repurchase or retire our debt and acquire core single-tenant commercial properties.

Our core assets consist of general purpose, net-leased commercial assets, in well-located and growing markets or which are critical to the tenant's business, but may also include other asset types subject to long-term net-leases, such as schools and medical facilities. Education and health care are growing sectors of the U.S. economy and we have seen demand for build-to-suit transactions involving charter schools, private schools and medical facilities. A component of our business strategy includes exploring these other asset types when they are subject to long-term leases that will extend the weighted-average lease term of our portfolio. We intend to mitigate residual value risk associated with such assets by acquiring such assets through joint ventures or disposing of such assets when there is sufficient remaining lease term to generate favorable sale prices.

When opportunities arise, we make investments in single-tenant commercial assets, which we believe will generate favorable returns. We grow our portfolio primarily by (1) engaging in, or providing funds to developers who are engaged in, build-to-suit projects for corporate users, (2) providing capital to corporations by buying properties and leasing them back to the sellers under net-leases, (3) acquiring properties already subject to net-leases and (4) making mortgage and mezzanine loans generally secured by single tenant buildings.

Portfolio diversification is central to our investment strategy as we seek to create and maintain an asset base that provides steady growth while being insulated against rising property operating expenses, regional recessions, industry-specific downturns and fluctuations in property values and market rent levels. Regardless of capital market and economic conditions, we endeavor to stay focused on enhancing operating results, improving portfolio quality, mitigating risks relating to interest rates and the real estate cycle and implementing strategies where our management's skills and real estate expertise can add value. We believe that our business strategy will continue to improve our liquidity, strengthen our overall balance sheet and generate cash flow.

Leasing Activity. Re-leasing properties that are currently vacant or as leases expire at favorable effective rates is one of our primary asset management focuses. We stay in close contact with our tenants during the lease term in order to assess their current and future occupancy needs and we maintain relationships with local brokers to determine the depth of the rental market. In addition, we monitor the credit of tenants of properties to stay abreast of any material changes in quality. We monitor tenant credit quality by (1) subscribing to Standard & Poor's and Moody's Investor Services, so that we can monitor changes in the ratings of our rated tenants, (2) reviewing financial statements that are publicly available or that are required to be delivered to us under the applicable lease, (3) monitoring news reports regarding our tenants and their respective businesses, and (4) monitoring the timeliness of rent collections.

During the third quarter of 2012, we entered into 17 new leases and lease extensions encompassing approximately 1.4 million square feet. The average U.S. generally accepted accounting principles, or GAAP, base rent on these extended leases was approximately $11.65 per square foot compared to the average GAAP base rent on these leases before extension of $8.99 per square foot. The weighted-average cost of tenant improvements and lease commissions was approximately $16.77 per square foot for new leases and $5.60 per square foot for extended leases.

Third Quarter 2012 Transaction Summary

The following summarizes our significant transactions during the three months ended September 30, 2012.

Investments.
•
Acquired Inland American (Net Lease) Sub, LLC’s interest in Net Lease Strategic Assets Fund L.P., which we refer to as NLS, for $9.4 million.  As a result, we now control, including through one of our operating partnership subsidiaries, 100% of NLS.   At acquisition, NLS had cash balances of $8.1 million and approximately $258.0 million of consolidated debt. As of September 30, 2012, NLS had 40 properties totaling 5.5 million square feet in 23 states, plus a 40% tenant-in-common interest in an office property. 
•
Entered into a build-to-suit arrangement with an $8.4 million commitment to construct a 52,000 square foot retail property in Opelika, Alabama, which will be net-leased upon completion for a 15-year term.  
•
Completed a 150,000 square foot build-to-suit office property in Jessup, Pennsylvania for a project cost of $24.9 million.  The property is net-leased for a 15-year term.
•
Closed on the acquisition of a 99,000 square foot build-to-suit office property in St. Joseph, Missouri for a capitalized cost of $17.6 million.  The property is net-leased for a 15-year term.

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•
Entered into a build-to-suit arrangement with a $42.6 million commitment to construct a 813,000 square foot industrial property in Rantoul, Illinois, which will be net-leased upon completion for a 20-year term.
•
Formed a joint venture in which we have a minority ownership interest. The joint venture entered into a contract to acquire a 120,000 square foot retail property in Palm Beach Gardens, Florida for $29.8 million, which will be net-leased at closing for an approximately 15-year term.
•
Completed a 52,000 square foot build-to-suit retail property in Valdosta, Georgia for a project cost of approximately $8.7 million. The property is net-leased for a 15-year term.
We can give no assurances that any acquisitions under contract or build-to-suit transactions will be consummated.

Dispositions.
•
Sold our interest in Pemlex LLC for $13.2 million in connection with a restructuring of Pemlex LLC.  In addition, we (1) entered into a management agreement with the purchaser that provides for a backstop guaranty to a third party who delivered a letter of credit in the amount of $2.5 million as security for “bad boy” acts under the purchaser’s third-party acquisition financing and (2) agreed to deliver a replacement letter of credit, if necessary, in the amount of $2.5 million to the purchaser’s lender during the term of the management agreement.
•
Disposed of our interest in three properties to unaffiliated third parties for an aggregate gross sales price of $54.9 million.
Debt.
•
Satisfied $75.1 million of non-recourse mortgage debt on five properties which had a weighted-average interest rate of 6.4%.
•
Borrowed $9.0 million on our secured term loan that expires in 2019 and swapped the LIBOR component of the rate for an all-in fixed rate of 3.4% on such borrowing.

Subsequent to Quarter End Highlights
•
See note 16 to our unaudited condensed consolidated financial statements contained in this Quarterly Report, which is incorporated by reference herein.

Acquisition and Development Activity
Our acquisition and development activity for 2012 has consisted primarily of build-to-suit transactions whereby we (1) engage in build-to-suit transactions by hiring a developer, or providing funding to a tenant, to develop a property, or (2) provide capital to developers who are engaged in build-to-suit transactions and commit to purchase the property upon completion.
During the nine months ended September 30, 2012, we completed the following acquisitions and build-to-suit transactions:
Location
 
Property Type
 
Square Feet (000's)
 
Capitalized Cost (millions)
 
Date Acquired
 
Approximate Lease Term (Years)
 
Capitalized Cost per Square Foot(4)
Huntington, WV(1)
 
Office
 
69

 
$
12.6

 
1Q 2012
 
15
 
$
182.81

Florence, SC(2)
 
Office
 
32

 
$
5.1

 
1Q 2012
 
12
 
$
159.18

Missouri City, TX(3)
 
Industrial
 
—

 
$
23.0

 
2Q 2012
 
20
 
$
—

Shreveport, LA(1)
 
Industrial
 
258

 
$
12.9

 
2Q 2012
 
10
 
$
50.19

Valdosta, GA(5)
 
Retail
 
52

 
$
8.7

 
3Q 2012
 
15
 
$
167.98

Jessup, PA(2)
 
Office
 
150

 
$
24.9

 
3Q 2012
 
15
 
$
136.12

Saint Joseph, MO(1)
 
Office
 
99

 
$
17.6

 
3Q 2012
 
15
 
$
177.76

 
 
 
 
660

 
$
104.8

 
 
 
 
 
 
(1) We provided capital to the developer and committed to purchase upon completion.
(2) We hired a developer to develop this property. For Jessup, PA, we received $4.5 million from the tenant to construct the property.
(3) We acquired 152 acres from an unaffiliated third party.
(4) No leasing costs were incurred other than $0.5 million on Valdosta.
(5) We provided the tenant with funds to develop the property.

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The following is a summary of our on-going build-to-suit transactions as of September 30, 2012:
Location
 
Property Type
 
Square Feet (000's)
Capitalized Cost/Maximum Commitment (millions)
 
Estimated Completion Date
Costs Incurred as of 9/30/12(1) (millions)
Long Island City, NY(2)
 
Industrial
 
143

 
$
46.7

 
1Q 2013
$
22.5

Eugene, OR(3)
 
Office
 
80

 
$
17.6

 
1Q 2013
$
1.7

Denver, CO(4)
 
Office
 
163

 
$
37.6

 
2Q 2013
$
11.7

Rantoul, IL(5)
 
Industrial
 
813

 
$
42.6

 
4Q 2013
$
6.5

Opelika, AL(6)
 
Retail
 
52

 
$
8.4

 
4Q 2012
$
2.6

 
 
 
 
1,251

 
$
152.9

 
 
$
45.0

(1) Balance includes equity credits received.
(2) Joint venture investment with a developer. We are providing the capital to the developer.
(3) We deposited $1.7 million and a $1.6 million letter of credit with the developer and have committed to purchase upon completion.
(4) We hired a developer to develop this property.
(5) We are providing the capital to the developer and have committed to purchase upon completion.
(6) We are providing the tenant with the funds to develop the property.

Critical Accounting Policies
Management's discussion and analysis of financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. In preparing our unaudited condensed consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. Our accounting policies are discussed under (1) Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, (2) note 2 to our consolidated financial statements contained in our Annual Report and (3) note 1 to our unaudited condensed consolidated financial statements contained in this Quarterly Report. We believe there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report.

Liquidity and Capital Resources
Cash Flows. We believe that cash flows from operations will continue to provide adequate capital to fund our operating and administrative expenses, regular debt service obligations and all dividend payments in accordance with REIT requirements in both the short-term and long-term. In addition, we anticipate that cash on hand, borrowings under our secured credit facility, capital recycling proceeds, issuances of equity, mortgage proceeds and other debt, as well as other alternatives, will provide the necessary capital required by our business.
We generally seek to finance our balance sheet with property specific non-recourse mortgage debt, corporate level debt and equity. At September 30, 2012, we had $33.9 million and $238.0 million of property specific non-recourse mortgage debt maturing in 2012 and 2013, respectively. We believe we have sufficient sources of liquidity at September 30, 2012 to meet these obligations through cash on hand ($72.4 million), borrowing capacity on our revolving credit facility ($203.3 million), which expires in 2015, but can be extended by us to 2016, and future cash flows from operations.
The mortgages encumbering the properties in which we have an interest are generally non-recourse to us, such that in situations where we believe it is beneficial to satisfy a mortgage obligation by transferring title of the property to the lender, including through a foreclosure, we may do so. In January 2012, the lender to one of our property owner subsidiaries foreclosed on a vacant office property in Tulsa, Oklahoma in satisfaction of the $7.1 million outstanding non-recourse mortgage loan.
Cash flows from operations as reported in the unaudited condensed consolidated statements of cash flows increased to $120.5 million for the nine months ended September 30, 2012 from $118.8 million for the nine months ended September 30, 2011. The increase is primarily related to operating results resulting from acquisitions and a decrease in interest payments due to deleveraging, offset in part by the sales of properties. The underlying drivers that impact working capital, and therefore cash flows from operations, are the timing of collection of rents, including reimbursements from tenants, the collection of advisory fees, payment of interest on mortgage debt and payment of operating and general and administrative costs. We believe the net-lease structure of the majority of our tenants' leases enhances cash flows from operations since the payment and timing of operating costs related to the properties

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are generally borne directly by the tenant. Collection and timing of tenant rents is closely monitored by management as part of our cash management program.
Net cash used in investing activities totaled $9.5 million and $36.5 million during the nine months ended September 30, 2012 and 2011, respectively. Cash used in investing activities related primarily to acquisitions of real estate, the acquisition of the remaining interest in NLS, investments in non-consolidated investments, investments in real estate under construction and loans receivable, capital expenditures, increases in leasing costs, escrow deposits and restricted cash. Cash provided by investing activities related primarily to proceeds from the sale of properties and investments, distributions from non-consolidated entities in excess of accumulated earnings, release of escrow deposits and restricted cash and principal receipts on loans receivable.
Net cash used in financing activities totaled $110.3 million and $63.5 million during the nine months ended September 30, 2012 and 2011, respectively. Cash provided by financing activities related primarily to proceeds from our secured term loan and revolving credit facility advances, proceeds of mortgages and notes payable, contributions from noncontrolling interests and the issuance of common shares, net. Cash used in financing activities was primarily attributable to dividend and distribution payments, repurchases of debt instruments and preferred shares, principal payments on debt and increases in deferred financing costs.
Dividends. Dividends paid to our common and preferred shareholders increased to $75.4 million in the nine months ended September 30, 2012, compared to $70.5 million in the nine months ended September 30, 2011. This increase resulted from an increase in our quarterly common share dividend paid in the first nine months of 2012 to $0.125 per common share compared to $0.115 per common share per quarter paid in 2011. In addition, we increased our quarterly common share dividend paid in October 2012 to $0.15 per common share.
UPREIT Structure. As of September 30, 2012, there were approximately 3.8 million units of limited partner interest, or OP units, in our operating partnerships outstanding other than OP units held by us. Assuming all outstanding OP units not held by us were redeemed on such date, the estimated fair value of the OP units was $41.8 million based on the closing price of $9.66 per common share on September 28, 2012 and a redemption factor of approximately 1.13.
Financings. On January 13, 2012, we procured a $215.0 million secured term loan from Wells Fargo Bank, National Association, as agent.  The term loan is secured by ownership interest pledges by certain subsidiaries that collectively own a borrowing base of properties.  The secured term loan matures in January 2019. The secured term loan requires regular payments of interest only at interest rates ranging from LIBOR plus 2.00% to 2.85% dependent on our leverage ratio, as defined therein. Upon the date when we obtain an investment grade debt rating from at least two of Standard & Poor's, Moody's and Fitch, Inc., the interest rate under the secured term loan will be dependent on our debt rating. We may not prepay any outstanding borrowings under the secured term loan through January 12, 2013, but may prepay outstanding borrowings thereafter at a premium through January 12, 2016 and at par thereafter.
Also on January 13, 2012, we refinanced our $300.0 million secured revolving credit facility procured in January 2011, which was scheduled to expire in January 2014, with a new $300.0 million secured revolving credit facility with KeyBank National Association, which we refer to as KeyBank, as agent. The new secured revolving credit facility has the same security as the new secured term loan. The new secured revolving credit facility bears interest at LIBOR plus 1.625% to 2.375% based on our leverage ratio, as defined therein. Upon the date when we obtain an investment grade credit rating from at least two of Standard & Poor's, Moody's and Fitch, Inc., the interest rate under the secured revolving credit facility will be dependent on our debt rating. The new secured revolving credit facility matures in January 2015 but can be extended until January 2016 at our option. With the consent of the lenders, we can increase the size of the secured revolving credit facility by $225.0 million for a total secured revolving credit facility size of $525.0 million by adding properties to the borrowing base and admitting additional lenders. The borrowing availability of the secured revolving credit facility is based upon the net operating income, as defined therein, of the properties comprising the borrowing base.
We used the new secured term loan to fund build-to-suit construction projects, acquire properties and refinance certain indebtedness, the majority of which was maturing in 2012. During the nine months ended September 30, 2012, we borrowed $215.0 million under the secured term loan and $93.0 million, net, under the secured revolving credit facility in the aggregate to primarily repay (1) $60.6 million of term loans, which were procured from KeyBank in March 2008, (2) $62.2 million outstanding principal amount of our 5.45% Exchangeable Guaranteed Notes pursuant to a holder repurchase option in January 2012 and (3) $128.1 million in non-recourse property specific mortgages. We entered into interest-rate swap agreements to fix LIBOR at a weighted-average rate of 1.49% on the $215.0 million of secured term loan LIBOR-based debt through January 2019. Accordingly, the amount outstanding under the secured new term loan bears interest at a weighted-average rate of 3.74% as of September 30, 2012. As of September 30, 2012, we were in compliance with the financial covenants contained in the secured term loan and secured revolving credit facility agreements. Subsequent to September 30, 2012, we exercised an accordion feature within the term loan facility to increase the principal amount under the secured term loan to $255.0 million, all of which is currently outstanding.

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During the second quarter of 2012, we financed the Transamerica Tower in Baltimore, Maryland, together with the adjacent parking garage, with a non-recourse mortgage loan in the original principal amount of $55.0 million which bears interest at a fixed rate of 4.32% and matures in 2023.
Common Offering
In October 2012, we issued 17.25 million common shares in a public offering generating net proceeds of approximately $156.3 million. We used a portion of the net proceeds to satisfy the $93.0 million outstanding balance on our secured revolving credit facility and $57.5 million of indebtedness assumed in the NLS acquisition.
Results of Operations
Three months ended September 30, 2012 compared with three months ended September 30, 2011. The increase in total gross revenues in 2012 of $7.8 million was primarily attributable to an increase in rental revenue of $8.6 million offset in part by a decrease in tenant reimbursements of $0.8 million. Rental revenue increased primarily due to (1) new property acquisition revenue of $5.9 million, including $3.7 million from NLS properties acquired on September 1, 2012, (2) increased occupancy revenue from Transamerica Tower in Baltimore, Maryland of $2.2 million and (3) $1.2 million of revenue recognized on our office property in Orlando, Florida due to the commencement of a new lease and offset in part by lower renewal rents and lease expirations, primarily $1.2 million at our Farmington Hills, Michigan property.
The decrease in interest and amortization expense of $2.0 million was primarily due to (1) a reduction in the weighted-average interest rate on outstanding indebtedness, (2) retirement of debt which had corresponding debt discount amortization and (3) greater interest capitalized.
The increase in general and administrative expense of $0.7 million was primarily due to a $1.1 million increase in personnel costs offset in part by a $0.3 million reduction in professional fees.
The decrease in non-operating income of $2.0 million was primarily the result of reduced interest income recognized due to loan receivables repayments in 2011 and 2012 coupled with a reduction in interest income recognized on a loan receivable secured by an office property in Schaumburg, Illinois, which is currently in default. We have brought a foreclosure action against the borrower and believe that the property value is in excess of the mortgage balance and any future funding requirements.
The change in value of forward equity commitment of $9.9 million was primarily due to the settlement of the commitment in October 2011.
The gain on acquisition of $167.9 million primarily represents the gain recognized due to the increase in fair value of our investment in NLS at the date of acquisition of the remaining interest in NLS.
Impairment charges decreased by $6.6 million due to the timing of triggering events on properties held and used in operations.
The decrease in equity in earnings of non-consolidated entities of $5.2 million was primarily due to (1) a $1.7 million decrease in earnings from NLS primarily due to the consolidation of NLS on September 1, 2012, (2) $2.5 million recognized on our investment in Concord Debt Holdings LLC, or Concord, in 2011, which was sold in 2012, (3) a $0.7 million reduction due to the consolidation in 2012 of a previously non-consolidated property and (4) a reduction in earnings from various joint ventures of $0.3 million.
Discontinued operations represent properties sold or held for sale. The increase in net income from discontinued operations of $20.0 million was primarily due to a decrease in impairment charges of $15.2 million and an increase in gains on sales of properties of $6.1 million offset in part by a $1.2 million debt satisfaction charge, net, incurred in relation to a sale of a property.
The increase in net income attributable to noncontrolling interests of $0.7 million was primarily due to a decrease in impairment charges incurred by non-wholly owned entities.
The increase in net income attributable to common shareholders of $206.0 million was primarily due to the items discussed above.
The increase in net income in future periods will be closely tied to the level of acquisitions made by us and leasing activity. Without acquisitions and favorable leasing activity, the sources of growth in net income are limited to index-adjusted rents (such as the consumer price index), reduced interest expense on amortizing mortgages and by controlling other variable overhead costs. However, there are many factors beyond management's control that could offset these items including, without limitation, increased interest rates, decreased occupancy rates, and tenant monetary defaults and the other risks described in our periodic reports filed with the SEC.

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Nine months ended September 30, 2012 compared with nine months ended September 30, 2011. The increase in total gross revenues in 2012 of $14.7 million was primarily attributable to an increase in rental revenue of $16.4 million offset in part by a decrease in tenant reimbursements and advisory and incentive fees of $1.3 million and $0.4 million, respectively. The increase in rental revenue was primarily due to (1) new property acquisition revenue of $12.7 million, including $3.7 million from NLS properties acquired on September 1, 2012, (2) increased occupancy revenue from Transmerica Tower in Baltimore, Maryland of $6.1 million and (3) $2.1 million of revenue recognized on our office property in Orlando, Florida due to commencement of a new lease. These increases were partially offset by a decrease in revenue of $3.5 million in our office property in Farmington Hills, Michigan due to lease rollover.
The decrease in interest and amortization expense of $6.8 million was primarily due to (1) a reduction in the weighted-average interest rate on outstanding indebtedness, (2) retirement of debt which had corresponding debt discount amortization, (3) lower deferred financing cost amortization and (4) greater interest capitalized.
Depreciation and amortization decreased $1.7 million primarily due to assets being fully amortized in 2011 and reduced basis for impaired assets.
The increase in general and administrative expense of $1.3 million was primarily due to a $1.6 million increase in personnel costs offset in part by a $0.2 million reduction in professional fees.
Non-operating income decreased $3.4 million primarily due to the satisfaction of notes receivable resulting in less interest earned and reduced interest income earned on a note receivable currently in default secured by an office property in Schaumburg, Illinois.
The change in the value of our forward equity commitment of $4.3 million was primarily due to the settlement of the commitment in October 2011.
The litigation reserve of $2.8 million as of September 30, 2012 relates to a litigation that has been settled with a payment by us of $2.8 million.
The increase in debt satisfaction charges, net of $1.6 million was primarily due to the write-off of deferred financing costs relating to the satisfaction of the $60.6 million term loans during the first quarter of 2012.
The gain on acquisition of $167.9 million primarily represents the gain recognized due to the increase in fair value of our investment in NLS at the date of acquisition of the remaining interest in NLS.
Impairment charges decreased by $34.5 million due to the timing of triggering events on properties held and used in operations.
The increase in the provision for income taxes of $1.9 million was primarily the result of the write-off of a deferred tax liability relating to the transfer of certain assets from our wholly-owned taxable REIT subsidiary to the REIT itself during the first quarter of 2011.
The increase in equity in earnings of non-consolidated entities of $0.8 million was primarily due to a $4.5 million increase in earnings recognized on our interests in Concord and CDH CDO LLC and a $1.6 million impairment charge recognized in 2011 on an investment in a non-consolidated entity, offset in part by (1) a $2.7 million decrease in earnings from NLS primarily due to an amendment of the partnership agreement and the consolidation of NLS on September 1, 2012, (2) a $1.4 million reduction due to the consolidation in 2012 of a previously non-consolidated property and (3) a reduction in earnings from various joint ventures of $1.2 million.
Discontinued operations represent properties sold or held for sale. The increase in net income from discontinued operations of $70.4 million was primarily due to a decrease in impairment charges of $70.4 million, an increase in gains on sales of properties of $3.7 million and an increase in debt satisfaction gains, net of $1.1 million, offset in part by a $4.8 million increase in loss from discontinued operations.
The increase in net income attributable to noncontrolling interests of $14.9 million was primarily due to a decrease in impairment charges incurred by non-wholly owned entities.
The increase in net income attributable to common shareholders of $274.8 million was primarily due to the items discussed above.

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Funds From Operations
We believe that Funds from Operations, or FFO, which is a non-GAAP measure, is a widely recognized and appropriate measure of the performance of an equity REIT. We believe FFO is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. As a result, FFO provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, interest costs and other matters without the inclusion of depreciation and amortization, providing perspective that may not necessarily be apparent from net income.
The National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as “net income (or loss) computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.” NAREIT recently clarified its computation of FFO to exclude impairment charges on depreciable real estate owned directly or indirectly. FFO does not represent cash generated from operating activities in accordance with GAAP and is not indicative of cash available to fund cash needs.
We present Reported Company FFO, which differs from FFO because it includes our operating partnership units, our 6.50% Series C Cumulative Convertible Preferred Stock, and our 6.00% Convertible Guaranteed Notes because these securities are convertible, at the holder's option, into our common shares. Management believes this is appropriate and relevant to securities analysts, investors and other interested parties because we present Reported Company FFO on a company-wide basis as if all securities that are convertible, at the holder's option, into our common shares, were converted. We also present Company FFO, as adjusted, which adjusts Reported Company FFO for certain items which we believe are nonrecurring and not indicative of the operating results of our real estate portfolio. We believe this is an appropriate presentation as it is frequently requested by security analysts, investors and other interested parties. Since others do not calculate funds from operations in a similar fashion, Reported Company FFO and Company FFO, as adjusted, may not be comparable to similarly titled measures as reported by others. Reported Company FFO and Company FFO, as adjusted, should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity.

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The following presents a reconciliation of net income (loss) attributable to Lexington Realty Trust to Reported Company FFO and Company FFO, as adjusted, for the three and nine months ended September 30, 2012 and 2011 (unaudited and dollars in thousands, except per share amounts):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2012
 
2011
 
2012
 
2011
FUNDS FROM OPERATIONS:
 
 
 
 
 
 
Basic and Diluted:
 
 
 
 
 
 
 
 
Net income (loss) attributable to Lexington Realty Trust shareholders
 
$
174,541

 
$
(30,914
)
 
$
182,663

 
$
(92,611
)
Adjustments:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
39,190

 
41,279

 
118,809

 
120,797

 
Impairment charges - real estate
 
4,262

 
26,060

 
9,952

 
114,829

 
Impairment charges - joint venture
 
—

 
3,252

 
—

 
4,811

 
Noncontrolling interests - OP units
 
475

 
643

 
913

 
(315
)
 
Amortization of leasing commissions
 
1,212

 
975

 
3,509

 
2,848

 
Joint venture and noncontrolling interest adjustment
 
(911
)
 
(6,289
)
 
15

 
(20,270
)
 
Preferred dividends - Series B & D
 
(2,926
)
 
(4,516
)
 
(11,075
)
 
(13,547
)
 
Gains on sales of properties
 
(6,276
)
 
(182
)
 
(8,946
)
 
(5,251
)
 
Gain on sale - joint venture investment
 
—

 
—

 
(7,000
)
 
—

 
Gain on acquisition
 
(167,864
)
 
—

 
(167,864
)
 
—

 
Interest and amortization on 6.00% Convertible Guaranteed Notes
 
2,327

 
2,327

 
6,980

 
6,980

Reported Company FFO
 
44,030

 
32,635

 
127,956

 
118,271

 
Debt satisfaction charges, net
 
1,177

 
6

 
1,100

 
600

 
Forward equity commitment
 
—

 
9,866

 
—

 
4,318

 
Litigation reserve
 
(25
)
 
—

 
2,775

 
—

 
Gains on loan sales - joint venture
 
—

 
(1,927
)
 
—

 
(1,927
)
 
Other
 
276

 
860

 
598

 
3,110

Company FFO, as adjusted
 
$
45,458

 
$
41,440

 
$
132,429

 
$
124,372

Per Share Amounts
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Reported Company FFO
 
$
0.24

 
$
0.18

 
$
0.71

 
$
0.66

Company FFO, as adjusted
 
$
0.25

 
$
0.23

 
$
0.73

 
$
0.71

 
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
 
Reported Company FFO
 
$
0.24

 
$
0.18

 
$
0.71

 
$
0.66

Company FFO, as adjusted
 
$
0.25

 
$
0.23

 
$
0.73

 
$
0.71

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Basic:
2012
 
2011
 
2012
 
2011
Weighted-average common shares outstanding - EPS basic
154,980,137

 
157,205,530

 
154,564,041

 
151,676,401

6.00% Convertible Guaranteed Notes
16,419,347

 
16,230,905

 
16,412,836

 
16,230,905

Non-vested share-based payment awards
245,166

 
112,473

 
200,741

 
118,572

Operating Partnership Units
4,400,389

 
4,618,948

 
4,479,451

 
4,779,896

Preferred Shares - Series C
4,710,570

 
5,044,564

 
4,713,043

 
5,066,264

Weighted-average common shares outstanding - Reported Company FFO basic
180,755,609

 
183,212,420

 
180,370,112

 
177,872,038

Adjustments:
 
 
 
 
 
 
 
 
Forward equity commitment settlement
—

 
(3,533,848
)
 
—

 
(3,468,421
)
Weighted-average common shares outstanding - Company FFO, as adjusted
180,755,609

 
179,678,572

 
180,370,112

 
174,403,617

 
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Weighted-average common shares outstanding - Reported Company FFO basic
180,755,609

 
183,212,420

 
180,370,112

 
177,872,038

Options - Incremental shares
344,721

 
116,970

 
279,699

 
269,396

Weighted-average common shares outstanding - Reported Company FFO diluted
181,100,330

 
183,329,390

 
180,649,811

 
178,141,434

Adjustments:
 
 
 
 
 
 
 
 
Forward equity commitment settlement
—

 
(3,533,848
)
 
—

 
(3,468,421
)
Weighted-average common shares outstanding - Company FFO, as adjusted
181,100,330

 
179,795,542

 
180,649,811

 
174,673,013


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Off-Balance Sheet Arrangements

Non-Consolidated Entities. As of September 30, 2012, we had investments in various non-consolidated entities with varying structures including our investments in real estate limited partnerships. Some of the non-consolidated real estate investments owned by these entities are financed with non-recourse debt. Non-recourse debt is generally defined as debt whereby the lender's sole recourse with respect to borrower defaults is limited to the value of the asset collateralized by the debt. The lender generally does not have recourse against any other assets owned by the borrower or any of the members of the borrower, except for certain specified "bad boy" exceptions listed in the particular loan documents. These exceptions generally relate to limited circumstances including fraud and breaches of material representations.

In addition, we had $3.7 million in outstanding letters of credit at September 30, 2012.

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ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk relates primarily to our variable-rate debt not subject to interest rate swaps and our fixed-rate debt. Our consolidated variable-rate indebtedness was $150.5 million as of September 30, 2012, which represented 7.5% of total long-term indebtedness. There was no variable-rate indebtedness outstanding during the three months ended September 30, 2011. During the three months ended September 30, 2012, our variable-rate indebtedness had a weighted-average interest rate of 2.2%. Had the weighted-average interest rate been 100 basis points higher, our interest expense for the three months ended September 30, 2012 would have been increased by approximately $186 thousand. During the nine months ended September 30, 2012 and 2011, our variable interest rate indebtedness had a weighted-average interest rate of 2.5% and 3.3%, respectively. Had the weighted-average interest rate been 100 basis points higher, our interest expense for the nine months ended September 30, 2012 and 2011 would have been increased by approximately $473 thousand and $17 thousand, respectively. As of September 30, 2012 and 2011, our consolidated fixed-rate debt was approximately $1.9 billion and $1.7 billion, respectively, which represented 92.5% and 100.0%, respectively, of total long-term indebtedness.

For certain of our financial instruments, fair values are not readily available since there are no active trading markets as characterized by current exchanges between willing parties. Accordingly, we derive or estimate fair values using various valuation techniques, such as computing the present value of estimated future cash flows using discount rates commensurate with the risks involved. However, the determination of estimated cash flows is subjective and may be imprecise. Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. The following fair value was determined using the interest rates that we believe our outstanding fixed-rate debt would warrant as of September 30, 2012 and are indicative of the interest rate environment as of September 30, 2012, and do not take into consideration the effects of subsequent interest rate fluctuations. Accordingly, we estimate that the fair value of our fixed-rate debt was $1.8 billion as of September 30, 2012.

Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates through the use of fixed-rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. We may enter into derivative financial instruments such as interest rate swaps or caps to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of our variable-rate debt. As of the date of filing this Quarterly Report, we have four interest rate swap agreements (see note 9 to our unaudited condensed consolidated financial statements contained in this Quarterly Report).

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting. There have been no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.


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PART II - OTHER INFORMATION

ITEM 1.
Legal Proceedings.
 
From time to time we are directly and indirectly involved in legal proceedings arising in the ordinary course of our business. We believe, 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 our business, financial condition and results of operations.

See note 13 to our unaudited condensed consolidated financial statements for a description of material legal proceedings, which are incorporated herein by reference.

ITEM 1A.
Risk Factors.
 
There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K filed with the SEC on February 28, 2012 and our Quarterly Report on Form 10-Q filed with the SEC on August 8, 2012, which are incorporated herein by reference.
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
The following table summarizes repurchases of our common shares/operating partnership units during the three months ended September 30, 2012 pursuant to publicly announced repurchase plans:

Issuer Purchases of Equity Securities
Period
 
(a)
Total number of Shares/ Units Purchased
 
(b)
Average Price Paid Per Share/ Units
 
(c)
Total Number of Shares/Units Purchased as Part of Publicly Announced Plans or Programs(1)
 
(d)
Maximum Number of Shares/Units That May Yet Be Purchased Under the Plans or Programs(1)
July 1 - 31, 2012
 
—

 
$
—

 
—

 
1,056,731

August 1 - 31, 2012
 
—

 
$
—

 
—

 
1,056,731

September 1 -30, 2012
 
—

 
$
—

 
—

 
1,056,731

Third quarter 2012
 
—

 
$
—

 
—

 
1,056,731

(1)
Share repurchase plan most recently announced on December 17, 2007 in the original amount of 5.9 million common shares/operating partnership units.

See (i) note 2 to the unaudited condensed consolidated financial statements for a description of repurchases of shares of our 8.05% Series B Cumulative Redeemable Stock and 6.50% Series C Cumulative Convertible Preferred Stock and (ii) note 8 to the unaudited condensed consolidated financial statements for a description of the repurchase of all our outstanding 5.45% Exchangeable Guaranteed Notes.

Subsequent to September 30, 2012, we issued 2.9 million common shares upon conversion of $20.4 million original principal amount of our 6.00% Convertible Guaranteed Notes due 2030, at the stated current conversion rate of 144.2599 common shares per $1,000 principal amount of the notes. The conversion was pursuant to (1) a conversion agreement and (2) an exemption from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended. In connection with the conversion, we made a cash payment to the converting holder in the amount of approximately $1.7 million, plus accrued and unpaid interest with respect to the notes being converted.

ITEM 3.
Defaults Upon Senior Securities - not applicable.
ITEM 4.
Mine Safety Disclosures - not applicable.
ITEM 5.
Other Information - not applicable.


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ITEM 6.
Exhibits.

Exhibit No.
 
 
 
Description
 
 
 
 
 
3.1
 
—
 
Articles of Merger and Amended and Restated Declaration of Trust of the Company, dated December 31, 2006 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed January 8, 2007 (the “01/08/07 8-K”))(1)
3.2
 
—
 
Articles Supplementary Relating to the 7.55% Series D Cumulative Redeemable Preferred Stock, par value $.0001 per share (filed as Exhibit 3.3 to the Company’s Registration Statement on Form 8A filed February 14, 2007 (the “02/14/07 Registration Statement”))(1)
3.3
 
—
 
Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to the 01/08/07 8-K)(1)
3.4
 
—
 
First Amendment to Amended and Restated By–laws of the Company (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 20, 2009)(1)
3.5
 
—
 
Fifth Amended and Restated Agreement of Limited Partnership of Lepercq Corporate Income Fund L.P. (“LCIF”), dated as of December 31, 1996, as supplemented (the “LCIF Partnership Agreement”) (filed as Exhibit 3.3 to the Company’s Registration Statement on Form S-3/A filed September 10, 1999 (the “09/10/99 Registration Statement”))(1)
3.6
 
—
 
Amendment No. 1 to the LCIF Partnership Agreement dated as of December 31, 2000 (filed as Exhibit 3.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed February 26, 2004 (the “2003 10-K”))(1)
3.7
 
—
 
First Amendment to the LCIF Partnership Agreement effective as of June 19, 2003 (filed as Exhibit 3.12 to the 2003 10-K)(1)
3.8
 
—
 
Second Amendment to the LCIF Partnership Agreement effective as of June 30, 2003 (filed as Exhibit 3.13 to the 2003 10-K)(1)
3.9
 
—
 
Third Amendment to the LCIF Partnership Agreement effective as of December 31, 2003 (filed as Exhibit 3.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed on March 16, 2005 (the “2004 10-K”))(1)
3.10
 
—
 
Fourth Amendment to the LCIF Partnership Agreement effective as of October 28, 2004 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 4, 2004)(1)
3.11
 
—
 
Fifth Amendment to the LCIF Partnership Agreement effective as of December 8, 2004 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 14, 2004 (the “12/14/04 8-K”))(1)
3.12
 
—
 
Sixth Amendment to the LCIF Partnership Agreement effective as of June 30, 2003 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 3, 2005 (the “01/03/05 8-K”))(1)
3.13
 
—
 
Seventh Amendment to the LCIF Partnership Agreement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 3, 2005)(1)
3.14
 
—
 
Eighth Amendment to the LCIF Partnership Agreement effective as of March 26, 2009 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 27, 2009 (the “4/27/09 8-K”)(1)
3.15
 
—
 
Second Amended and Restated Agreement of Limited Partnership of Lepercq Corporate Income Fund II L.P. (“LCIF II”), dated as of August 27, 1998 the (“LCIF II Partnership Agreement”) (filed as Exhibit 3.4 to the 9/10/99 Registration Statement)(1)
3.16
 
—
 
First Amendment to the LCIF II Partnership Agreement effective as of June 19, 2003 (filed as Exhibit 3.14 to the 2003 10-K)(1)
3.17
 
—
 
Second Amendment to the LCIF II Partnership Agreement effective as of June 30, 2003 (filed as Exhibit 3.15 to the 2003 10-K)(1)
3.18
 
—
 
Third Amendment to the LCIF II Partnership Agreement effective as of December 8, 2004 (filed as Exhibit 10.2 to 12/14/04 8-K)(1)
3.19
 
—
 
Fourth Amendment to the LCIF II Partnership Agreement effective as of January 3, 2005 (filed as Exhibit 10.2 to 01/03/05 8-K)(1)
3.20
 
—
 
Fifth Amendment to the LCIF II Partnership Agreement effective as of July 23, 2006 (filed as Exhibit 99.5 to the Company’s Current Report on Form 8-K filed July 24, 2006)(1)
3.21
 
—
 
Sixth Amendment to the LCIF II Partnership Agreement effective as of December 20, 2006 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 22, 2006)(1)
3.22
 
—
 
Seventh Amendment to the LCIF II Partnership Agreement effective as of March 26, 2009 (filed as Exhibit 10.2 to the 4/27/09 8-K)(1)
4.1
 
—
 
Specimen of Common Shares Certificate of the Company (filed as Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006)(1)

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4.2
 
—
 
Form of 8.05% Series B Cumulative Redeemable Preferred Stock certificate (filed as Exhibit 4.1 to the Company’s Registration Statement on Form 8A filed June 17, 2003)(1)
4.3
 
—
 
Form of 6.50% Series C Cumulative Convertible Preferred Stock certificate (filed as Exhibit 4.1 to the Company’s Registration Statement on Form 8A filed December 8, 2004)(1)
4.4
 
—
 
Form of 7.55% Series D Cumulative Redeemable Preferred Stock certificate (filed as Exhibit 4.1 to the 02/14/07 Registration Statement)(1)
4.5
 
—
 
Indenture, dated as of January 29, 2007, among the Company (as successor by merger), the other guarantors named therein and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 29, 2007 (the “01/29/07 8-K”))(1)
4.6
 
—
 
Amended and Restated Trust Agreement, dated March 21, 2007, among the Company, The Bank of New York Trust Company, National Association, The Bank of New York (Delaware), the Administrative Trustees (as named therein) and the several holders of the Preferred Securities from time to time (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 27, 2007 (the “03/27/2007 8-K”))(1)
4.7
 
—
 
Junior Subordinated Indenture, dated as of March 21, 2007, between Lexington Realty Trust and The Bank of New York Trust Company, National Association (filed as Exhibit 4.2 to the 03/27/07 8-K)(1)
4.8
 
—
 
Fourth Supplemental Indenture, dated as of December 31, 2008, among the Company, the other guarantors named therein and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 2, 2009 (the “01/02/09 8-K”))(1)
4.9
 
—
 
Fifth Supplemental Indenture, dated as of June 9, 2009, among the Company (as successor to the MLP), the other guarantors named therein and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 15, 2009)(1)
4.10
 
—
 
Sixth Supplemental Indenture, dated as of January 26, 2010 among the Company, the guarantors named therein and U.S. Bank National Association, as trustee, including the Form of 6.00% Convertible Guaranteed Notes due 2030 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 26, 2010)(1)
4.11
 
 
 
Seventh Supplemental Indenture, dated as of September 28, 2012, among the Company, certain subsidiaries of the Company signatories thereto, and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on October 3, 2012)(1)
10.1
 
—
 
1994 Employee Stock Purchase Plan (filed as Exhibit D to the Company’s Definitive Proxy Statement dated April 12, 1994)(1, 4)
10.2
 
—
 
The Company’s 2011 Equity-Based Award Plan (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K/A filed June 22, 2011)(1, 4)
10.3
 
—
 
Form of Compensation Agreement (Long-Term Compensation) between the Company and each of the following officers: Richard J. Rouse and Patrick Carroll (filed as Exhibit 10.15 to the 2004 10-K)(1, 4)
10.4
 
—
 
Form of Compensation Agreement (Bonus and Long-Term Compensation) between the Company and each of the following officers: E. Robert Roskind and T. Wilson Eglin (filed as Exhibit 10.16 to the 2004 10-K)(1, 4)
10.5
 
—
 
Form of Share Option Award Agreement (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K/A filed on November 24, 2010)(1, 4)
10.6
 
—
 
Form of 2010 Share Option Award Agreement (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed November 24, 2010)(1, 4)
10.7
 
—
 
Form of December 2010 Share Option Award Agreement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 6, 2011(1,4)
10.8
 
—
 
Amended and Restated Rabbi Trust Agreement, originally dated January 26, 1999 (filed as Exhibit 10.2 to the 01/02/09 8-K)(1, 4)
10.9
 
—
 
Form of 2011 Nonvested Share Agreement (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 6, 2012 (the "01/06/12 8-K")(1,4)
10.10
 
—
 
Employment Agreement, dated as of January 15, 2012, between the Company and E. Robert Roskind (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 10-K")) (4)
10.11
 
—
 
Employment Agreement, dated as of January 15, 2012, between the Company and T. Wilson Eglin (filed as Exhibit 10.11 to the 2011 10-K) (4)
10.12
 
—
 
Employment Agreement, dated as of January 15, 2012, between the Company and Richard J. Rouse (filed as Exhibit 10.12 to the 2011 10-K) (4)
10.13
 
—
 
Employment Agreement, dated as of January 15, 2012, between the Company and Patrick Carroll (filed as Exhibit 10.13 to the 2011 10-K) (4)

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10.14
 
—
 
Long-Term Nonvested Share Agreement dated as of January 12, 2012, between the Company and T. Wilson Eglin (filed as Exhibit 10.14 to the 2011 10-K) (4)
10.15
 
—
 
Form of Amended and Restated Indemnification Agreement between the Company and certain officers and trustees (filed as Exhibit 10.20 to the Company’s Quarterly Report Form 10-Q for the quarter ended September 30, 2008)(1)
10.16
 
—
 
Amended and Restated Credit Agreement, dated as of January 13, 2012 among the Company, LCIF and LCIF II as borrowers, certain subsidiaries of the Company, as guarantors, KeyBank National Association, as agent, and each of the financial institutions initially a signatory thereto (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 17, 2012 (the "01/17/12 8-K"))(1)
10.17
 
—
 
First Amendment to Amended and Restated Agreement, dated as of June 22, 2012, by and among the Company, LCIF and LCIF II, each of the lenders party thereto, and KeyBank National Association, as administrative agent. (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 22, 2012)(1)
10.18
 
 
 
Second Amendment to Amended and Restated Credit Agreement, dated as of October 9, 2012, by and among the Company, LCIF and LCIF II, each of the lenders party thereto, and KeyBank National Association as administrative agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 9, 2012 (the "10/9/12 8-K"))(1)
10.19
 
—
 
Term Loan Agreement, dated as of January 13, 2012 among the Company, LCIF and LCIF II, as borrowers, certain subsidiaries of the Company, as guarantors, Wells Fargo Bank, National Association, as agent, and each of the financial institutions initially a signatory thereto (filed as Exhibit 10.2 to the 01/17/12 8-K)(1)
10.20
 
—
 
First Amendment to Term Loan Agreement, dated as of June 22, 2012, by and among the Company, LCIF and LCIF II, each of the lenders party thereto, and Wells Fargo Bank, National Association, as administrative agent. (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed June 22, 2011)(1)
10.21
 
 
 
Second Amendment to Term Loan Agreement, dated as of October 9, 2012, by and among the Company, LCIF, LCIF II, each of the lenders party thereto, and Wells Fargo Bank, National Association, as administrative agent (filed as Exhibit 10.2 to the 10/9/12 8-K)(1)
10.22
 
—
 
Intercreditor Agreement, dated as of January 13, 2012, among the Company, LCIF, LCIF II, the other grantors party thereto, KeyBank, National Association, and Wells Fargo Bank, National Association (filed as Exhibit 10.3 to the 01/17/12 8-K)(1)
10.23
 
—
 
Funding Agreement, dated as of July 23, 2006, by and among LCIF, LCIF II and the Company (filed as Exhibit 99.4 to the Company's Current Report on Form 8-K filed on July 24, 2006)(1)
10.24
 
—
 
Letter Agreement among the Company (as successor by merger), Apollo Real Estate Investment Fund III, L.P., NKT Advisors LLC, Vornado Realty Trust, VNK Corp., Vornado Newkirk LLC, Vornado MLP GP LLC and WEM-Brynmawr Associates LLC (filed as Exhibit 10.15 to Amendment No. 5 to Newkirk Registration Statement on Form S-11/A filed October 28, 2005 (“Amendment No. 5 to NKT’s S-11”))(1)
10.25
 
—
 
Amendment to the Letter Agreement among the Company (as successor by merger), Apollo Real Estate Investment Fund III, L.P., NKT Advisors LLC, Vornado Realty Trust, Vornado Realty L.P., VNK Corp., Vornado Newkirk LLC, Vornado MLP GP LLC, and WEM-Brynmawr Associates LLC (filed as Exhibit 10.25 to Amendment No. 5 to Newkirk’s S-11)(1)
10.26
 
—
 
Second Amended and Restated Ownership Limit Waiver Agreement (Vornado), dated as of December 6, 2010, between the Company and Vornado Realty, L.P. (together with certain affiliates) (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 6, 2010)(1)
10.27
 
—
 
Ownership Limitation Waiver Agreement (BlackRock), dated as of November 18, 2010 (filed as of Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 24, 2010 (the “11/24/10 8-K”)(1)
10.28
 
—
 
Ownership Limitation Waiver Agreement (Cohen & Steers), dated as of November 18, 2010 (filed as Exhibit 10.2 to the 11/24/10 8-K)(1)
10.29
 
—
 
First Amendment to Ownership Limitation Waiver Agreement (Cohen & Steers), dated as of April 19, 2011 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 25, 2011)(1)
10.30
 
—
 
Amended and Restated Registration Rights Agreement, dated as of November 3, 2008, between the Company and Vornado Realty, L.P. and Vornado LXP LLC (filed as Exhibit 10.3 to the 11/06/08 8-K)(1)
10.31
 
 
 
Agreement Regarding Disposition of Property and Other Matters, dated April 27, 2012, among the Company, LMLP GP LLC, Inland American (Net Lease) Sub, LLC and NLSAF (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 30, 2012)(1)
10.32
 
 
 
Interest Purchase and Sale Agreement, dated as of August 31, 2012, among the Company, LCIF and Inland American (Net Lease) Sub, LLC, LMLP GP LLC and Net Lease Strategic Assets Fund L.P. (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 6, 2012)(1)

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31.1
 
—
 
Certification of Chief Executive Officer pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)
31.2
 
—
 
Certification of Chief Financial Officer pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)
32.1
 
—
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(3)
32.2
 
—
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(3)
101.INS
 
—
 
XBRL Instance Document (2, 5)
101.SCH
 
—
 
XBRL Taxonomy Extension Schema (2, 5)
101.CAL
 
—
 
XBRL Taxonomy Extension Calculation Linkbase (2, 5)
101.DEF
 
—
 
XBRL Taxonomy Extension Definition Linkbase Document (2, 5)
101.LAB
 
—
 
XBRL Taxonomy Extension Label Linkbase Document (2, 5)
101.PRE
 
—
 
XBRL Taxonomy Extension Presentation Linkbase Document (2, 5)

(1)
Incorporated by reference.
(2)
Filed herewith.
(3)
This exhibit shall not be deemed "filed" for purposes of Section 11 or 12 of the Securities Act of 1933, as amended (the "Securities Act"), or Section 18 of the Securities Exchanges Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of those sections, and shall not be part of any registration statement to which it may relate, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act or the Exchange Act, except as set forth by specific reference in such filing or document.
(4)
Management contract or compensatory plan or arrangement.
(5)
Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011; (ii) the Unaudited Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2012 and 2011; (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months and nine months ended September 30, 2012 and 2011; (iv) the Unaudited Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2012 and 2011; (v) the Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements tagged as blocks of text. The XBRL related information shall not be deemed "filed" for purposes of Section 11 or 12 of the Securities Act of 1933, as amended (the "Securities Act"), or Section 18 of the Securities Exchanges Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of those sections, and shall not be part of any registration statement to which it may relate, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act or the Exchange Act, except as set forth by specific reference in such filing or document.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Lexington Realty Trust
 
 
 
 
 
 
 
 
Date:
November 7, 2012
By:
/s/ T. Wilson Eglin
 
 
 
T. Wilson Eglin
 
 
 
Chief Executive Officer and President
 
 
 
(principal executive officer)
 
 
 
 
Date:
November 7, 2012
By:
/s/ Patrick Carroll
 
 
 
Patrick Carroll
 
 
 
Chief Financial Officer, Executive Vice President
and Treasurer
 
 
 
(principal financial officer and principal accounting officer)

39