Michelle Napoli is editor of Net Lease forum, from which this article is excerpted.

New York City—One of the most established net lease REITs and one of the newest plan to merge into a more diversified company with what the two pin down as a business enterprise value of $4.6 billion. When Lexington Corporate Properties Trust of New York City and Newkirk Realty Trust Inc. of Boston and Jericho, NY, combine, the newly created Lexington Realty Trust will be second among public net lease REITs by that same business enterprise value measure. Only American Financial Realty Trust of Jenkintown, PA edges it out at $4.7 billion. Realty Income Corp. of Escondido, CA is in third place with a value of $2.9 billion.

The deal appears to have originated on the LXP side of the table. In response to a question, Newkirk chairman and CEO Michael L. Ashner told analysts and others participating in a July 24 conference call that the transaction was not contemplated before Newkirk went public just last November.

"I don't think they were necessarily looking," T. Wilson Eglin, Lexington Corporate's CEO, tells NET LEASE forum. "But we've been a public company for a long time and what you do constantly is try to figure out where you want to be in three to five years, and continue to build your business in a way where you have that view of becoming a bigger and better company. In the single-tenant business, size can be a really important factor in terms of success, because let's face it--these are single-tenant buildings, they're either full or empty. If you're a small public company and you have a tenant go bankrupt or they move out, everybody knows and it can have quite a volatile impact on your share price. That was a factor about our thinking about getting bigger and becoming more diversified."

Both LXP and Newkirk executives say bigger and better is exactly what the new Lexington will be. In addition to a larger portfolio--more than 350 properties in 44 states--with an even broader base of tenants, the new Lexington will gain increased presence in coastal markets such as California, Florida, Maryland and New Jersey. The old Lexington brings to the table its institutional joint venture relationships, among other factors.

For Lexington, adding Newkirk's existing debt platform is a big positive, says Eglin. "The acquisition market has been very competitive for a long time, and anytime we lose an acquisition opportunity, that can also be viewed as an opportunity for us to perhaps provide mezzanine financing to the other buyer. That can be a very attractive investment for us."

The companies' formal announcement of the merger also says the combination will create a company that will be in a good position to pursue "opportunistic single-tenant related lines of business." Says Eglin, "We'll continue to look at other single-tenant asset classes with a view towards perhaps over time developing specific joint ventures that are tailored that way. But there's nothing specific that we have in mind right now."

"We believe the combined company, with its richly diversified asset base and improved financial metrics, will provide our shareholders with a platform for long-term sustained growth," Ashner said during a conference call.

Questions and comments from analysts during the conference call brought up what some could argue are negatives to the merger. One point is that the Newkirk portfolio will lower the average lease length of Lexington's portfolio, though it could also be countered that the addition of the Newkirk properties will raise the percentage of Lexington properties leased to investment grade tenants. In addition, many Newkirk leases are currently at above-market rents but step down upon renewal. "That lease structure was taken into account when we were looking at the company, both from a net asset value standpoint and from the standpoint of what we think the assets are likely to generate over time," Eglin tells NET LEASE forum. He adds that while some assets will renew, others won't, giving the company opportunity to re-tenant and raise rents accordingly.

Newkirk's shares are being purchased at a discount to the price they were trading at prior to the merger announcement, which might be considered unusual in a year that has been characterized by a number of REIT buyouts at premiums to stock prices. Newkirk was advised in the deal by Bear, Stearns & Co. and Lexington was advised by Wachovia Capital Markets LLC.

The merger is expected to close in November. Executive leadership of the new New York City-based LXP will include Eglin as president, CEO and COO; LXP's current CFO Patrick Carroll, who will serve as EVP and CFO; John B. Vander Zwaag, currently EVP at Lexington, will serve as EVP of portfolio management; and Lara S. Johnson, currently EVP at Newkirk, will serve as EVP of strategic transactions. An 11-member board of trustees will include Ashner as executive chairman and E. Robert Roskind and Richard J. Rouse, currently chairman and vice chairman, respectively, of Lexington will serve as co-vice chairmen. Rouse will also maintain his role as chief investment officer.

In other news, Newkirk closed on its $160 million sale of a portfolio of 50 Albertson's stores to Kimco Realty Corp. of New Hyde Park, NY and Schottenstein Stores Corp. of Columbus, OH. Ashner indicates that the Albertson's sale was not connected with the Lexington merger. The properties total 2.3 million sf and have current lease terms that expire over the next 4.5 years. Newkirk says it plans to defer taxes on the proceeds via 1031 exchanges, including reverse exchanges with two properties already acquired in Glenwillow, OH and Rochester, NY.

Instant Insights /

Merger Creates $5B Net Lease REIT

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