Q3 2019 Earnings Call
Good morning, and welcome to the Lexington Realty Trust's third quarter 2019 earnings conference call. The webcast all participants will be in listen only mode should you need assistance. Please ignore conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask us.
Question You May Press Star then one other touchtone phone to withdraw from the question Q. Please press Star then too. Please note. This event is being recorded.
Now I'd like to turn the conference over to Heather Gentry Investor Relations. Please go ahead.
Thank you operator, welcome to Lexington Realty Trust third quarter, 2019 conference call and webcast.
Earnings release was distributed this morning, and both the released in quarterly supplemental are available on our website at Www Dot Alex P. Dot com and the Investor section and well be furnished to the FCC on a form 8-K.
Certain statements made during this conference call regarding future events unexpected results may constitute forward looking statements, but then the meaning of the private Securities Litigation Reform Act of 1995.
Lexington believes that these statements are based on reasonable assumptions, however, certain factors and risks, including those included in todays earnings press release, and those described or reports that Lexington files with the FCC from time to time could cause lexingtons actual results to differ materially from those expressed or implied.
Such statements.
Except as required by law Lexington does not undertake no duty to update any forward looking statements.
In the earnings press release, and quarterly supplemental disclosure package Lexington has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure.
Any references and these documents to adjusted company FFO refer to adjusted company funds from operations available to all equity holders and unit holders on a fully diluted basis operating performance measures on an individual investment or not intended to be viewed as presenting a numerical measure of lexingtons historical or.
Future financial performance financial position or cashless.
On today's call will Eglin, chairman and CEO , that's Volaris CFL, an executive Vice President run Nemo Onex large Johnson and James Dudley will provide commentary focused on third quarter results I will now I'll turn the call over to well.
Thanks, Heather and good morning, everyone third quarter results were strong and we had solid execution in all areas of our business with investments dispositions and leasing contributing to a successful quarter.
I would like to highlight four key themes that are not only important to our current business plan, but also to the future growth Lexington.
First we remain committed to becoming a single tenant net leased industrial read focus primarily on high quality warehouse and distribution centers.
Substantial progress has been made over the last few years on improving our investment profile and at quarter end, our industrial portfolio exposure represented 78% of our gross book value.
We expect this number two increased to a range of 80% to 85% by year end with the swing factor being the timing of the potential sale of our Dow chemical office property and fourth quarter acquisitions I.
I'd also like to highlight that effective October 31st M.S.C.I. reclassified Lexington within their suite of indices from a diversified read to industrial read as the majority of our revenue is being derived from industrial assets.
Second.
Robust investment and disposition activity has been and we'll continue to be a primary focus as we execute on our business plan.
Investment activity today, including closing subsequent to the quarter totals nearly $500 million with approximately another $165 million under contract to close by yearend.
During the quarter, we issued approximately 13 million common shares through an equity offering and our ATM program for net proceeds of $132 million.
Proceeds of these capital transactions were primarily used to fund new investments.
Including the $180 million three property E Commerce industrial portfolio, we've closed on in mid September .
We have exceeded the initial low end range of our 2019 disposition plan with sales of $463 million to date, which includes the successful closing of our preferred freezer facility at the very ended the quarter.
As a refresher we acquired the property in 2015 for $152 million and sold it for $244 million. This sale provided us with substantial well priced capital for reinvestment into warehouse and distribution facilities at modestly higher cap rates.
We're in discussions with a potential purchaser for Idera chemical facility, although we cannot be certain if or when this sale will close if Dow does end up closing this year, we may approach where exceeded the high end of our 2019 disposition plan range of $750 million [laughter] over the next few.
Two years, we will continue to dispose of our remaining office and other non core assets inclusive of doubt we are targeting approximately $400 million to $550 million of sales for the remainder of 2019 through year end 2020.
We believe next year sales, along with acquisitions will likely increase our industrial exposure to over 90% of gross book value by year end 2020.
Third we intend to maintain a strong balance sheet with low to moderate leverage net debt to adjusted EBITDA at quarter end. It was 4.8 times well leverage will fluctuate quarterly due to timing of sales and purchases we haven't ongoing interest in maintaining balance sheet flexibility. We still expect the majority of act.
Positions to be funded by disposition proceeds through 2020.
That said our capital markets activities are evidence that we will take the opportunity to raise modest amounts of equity for industrial property investments from time to time, depending on our share price.
Finally, we're building our industrial portfolio to provide for both capital appreciation and income growth supported by consistent cash flows and lower operating costs.
With these objectives in mind, we continue to make significant improvements each quarter that we believe are beginning to be reflected in our overall financial and operational performance as well as an improved share valuation.
These initiatives as a whole have positioned the company to begin to grow the dividend as evidenced by this morning's announcement that we're increasing our annualized dividend to 42 cents per share up a penny from 41 cents per share commencing with the fourth quarter 2019 dividends paid in January 2020.
Subject to board approval shareholder should expect annual modest dividend growth going forward consistent with today's announcement.
We also announced this morning that we're increasing the low end of our 2019 guidance range by a penny to revised range of 77 cents to 80 cents per share.
With that I'll turn the call over to Brendan to talk more specifically about investments.
Thanks, well, we continued to have strong momentum on the acquisition front during the third quarter.
Closing on another $180 million of new warehouse product at average GAAP and cash cap rate of 5.7% and 5.0% respectively.
This activity consisted of a 2.4 million square foot three property e-commerce portfolio located within established logistics market of Cincinnati.
This is a new market for us, but Cincinnati is a market we've considered for some time because it works so well for e-commerce users.
All three class a properties were recently constructed and feature modern specs typical of newer generation warehouse and distribution facilities.
The tenants and guarantors represent recognized brands, including Amazon Hayneedle, Walmarts subsidiary and Blue Buffalo Division of General Mills.
The portfolio has a weighted average lease term of 9.3 years.
Annual Escalations for all three properties ranged from 2% to 2.3%.
As we've added more general purpose class a warehouse distribution assets with good credit tenants to our portfolio, our industrial portfolio investment grade tenancy has reached nearly 46%.
Subsequent to quarter end, we closed on three additional cost say industrial warehouse facilities for an aggregate of $53 million.
Two other properties were acquired as a portfolio and our both located within an established industrial park in a Greenville, Spartanburg Submarket close to I 85, and the Grier inland port.
Annual rental Escalations on these properties are very attractive at approximately 2.6%.
The third facility, which is located in Phoenix is most active submarket is part of it you property portfolio with the second property to close during first quarter 2020.
This is a market we continued to be excited about due to its growth prospects. The strong labor pool and its position has a lower costs alternative to some of the higher price West coast markets.
This property is annual rental escalations a 2.5%.
Today, 2019 investment volume totals $493 million at weighted average estimated GAAP and cash cap rates of 5.7% and 5.4% respectively.
We have accepted offers on approximately $219 million from industrial properties of which approximately 165 million dollar is expected to close this year with the remaining scheduled to close in the first or second quarter of 2020.
We're also reviewing over $400 million other industrial investments in the market and as discussed last quarter, we continue to selectively explore some speculative development opportunities.
I'll now turn the call over to Laura to discuss disposition.
Thanks, Brendan strong disposition activity during the quarter contributed to the substantial progress we've made and disposing of assets included in our 2019 disposition plan.
During the quarter, we sold approximately $329 million of consolidated properties of which $244 million was attributable to the preferred freezer cold storage facility.
The remaining five noncore asset sales included three office properties into retail property.
Pricing on these sales was extremely attractive at weighted average GAAP and cash cap rates of 6% and 4.8% respectively.
Annualized in a lie on the assets sold during the quarter was $15.7 million.
During the quarter. We also sold three Nonconsolidated office properties for gross proceeds of $108 million and satisfied approximately $72 million of non recourse debt.
Today, we have disposed of $463 million of consolidated properties at weighted average GAAP and cash cap rates, a 6% and 5% respectively.
At approximately 177 million joint venture properties.
We currently have approximately $120 million of consolidated assets, either under contract or with an accepted offer although not all of these sales are expected to close this year.
In addition, we continue to actively market several other assets for sale.
Our 2019 disposition plan currently contemplates the sale of our Dow Chemical office building.
We have received an off market expression of interest that we're considering however should a sale pursuant to the centrist not materialize, we intend to market. The property later this year or more likely in the first quarter of 2020.
Looking ahead, we will remain active on the disposition front in 2020, although we expect activity and pricing to moderate in comparison to this year.
As well indicated based on what's left to sell and our office portfolio, we expect to dispose of approximately $400 million to $550 million of noncore properties between now and year end 2020 [noise].
These sales will move us even closer to our target of being a 100% single tenant net leased industrial me.
With that I'll turn the call over to James who will provide an update on leasing.
Thanks, Laura we executed several lease extensions during the quarter, which made up the majority of the 1.6 million square feet at least our overall lease portfolio stayed fairly consistent at 97.4% when compared to last quarter at 97.7%.
A slight decrease is primarily due to the small industrial vacancy we haven't Thompson, Georgia.
Our industrial these portfolio is very healthy at 99% or office portfolio is 84% leased.
The total leasing volume year to date is 4.3 million square feet and we have done a great deal of work around the remaining lease expirations, we have coming due over the next couple of years.
Same store NOI was down 1.8% for the nine months ended September Thirtyth 2019, and when stripping out vacancy. It was a positive 0.2% as indicated on our last earnings call continued negative same store NOI as largely a function of marking office rental rates to market following lease extensions or vacancy or same.
Mr into why growth profile should improve as we continue to reduce our office exposure as of September Thirtyth 2019, 82% of our cash base rent and our industrial portfolio is generated from leases with rent escalations.
On the industrial side, we executed to lease renewals during the quarter and our 1.2 million square foot Michelin facility and Lauren South Carolina. The lease was extended for two months and then extended subsequent to quarter for another six months to now expire at the end of September 2020.
This resulted in a 3% increase to the current base rental rate.
We view this is a very positive development as we had anticipated Michelin would be moving out in January 2020.
We are currently pursuing a number of prospects to backfill the space. We also executed a five year extension with a tenant that has occupied 50000 square feet at our multi tenant facility and Antioch, Tennessee.
On the office side, we extended T mobile and mission, Texas for five years at the same rental rate with no T.I. costs, and we will now prepare to market the property for sale. Additionally, we extended our lease with Morgan Lewis through January 2024, if you recall Morgan Lewis announced that is building a new office property and we'll be moving out of her.
Office building after their three year extended lease term.
The rental increase next year, and then decreased modestly during the extended lease term, which was achieved without any ti allowances are abatements. They extended lease term provides us time to explore all potential options to maximize the value of the central business District property.
Our three remaining 2019 office expirations have our are being addressed through expected sale or lease we closed on our sale of our Indianapolis, Indiana property formally occupied by John Wiley and our Midlothian, Virginia property currently occupied but also some power is anticipated to close later this year, we also executed a director.
Lease with a former sub tenant and our lenexa, Kansas property for just under 11 years subsequent to quarter end I will now look to market the property for sale as the extended terms supports the value over the nonrecourse debt balance.
Looking ahead to 2020, we have one remaining office lease expiration, Oh say USA holdings in Boca Raton, Florida will be moving out at the end of the lease term and February 2020, and then the worst case scenario. This property would be conveyed to the lender unless we can achieve value over the debt balance in the sale.
On the industrial side, we have one remaining 2019 lease expiration and our Moody, Alabama facility, which is currently being marketed for sale or lease. We currently have a perspective buyer, but we're also pursuing several leasing prospects moving on to 2020 industrial expirations lease renewal discussions are active in many cases, although warehouse.
Distribution tenants tend to renew their leases much closer to the actual lease expiration as compared to office users.
On a positive note we're not in a defensive mode as we often our with office renewals and have in many cases been able to push rents higher as leases are extended as evidenced in the third quarter industrial leasing spreads on the 1.2 million square feet of leases extended increased approximately 5% on both base and cash base rents.
Looking at the seven remaining 2020 expirations a little more specifically we have good visibility on some well others are a bit too early to tell.
We're currently negotiating with Mars and Atlanta for a five year renewal and we expect rent will go up in that case.
Preliminary discussions for renewal have begun with OTI W. logistics in Columbus, Ohio, and our Tampa, Florida facility time will not be renewing poster June 2020 lease expiration, but this is a high demand market and we anticipate releasing the facility fairly quickly.
We are negotiating a sale them Emil who currently occupies our Memphis, Tennessee facility through September 2020 for both Unilever, and Owensboro, Kentucky, and Geos and state spills, North Carolina, whose leases don't expire until December 2020, we don't have clear visibility quite yet, but believe both are likely renewals.
Quickly touching on vacancies, we believe we have a very promising user buyer prospect at EUR 197000 square foot industrial facility and Henderson North Carolina. We're also currently marking our recently vacated Thompson, Georgia industrial facility for sale or lease initial market feedback has been positive and we're hopeful that this vacancy will be resolved quickly.
With that I will now turn the call over to Beth who will discuss financial results.
Thanks, James for the third quarter net income attributable to common shareholders was $142 million or 59 cents per diluted common share and adjusted company FFO was $49 million or 20 cents per diluted common share.
Our adjusted company FFO payout ratio was 51.3% at quarter end, allowing us to retain ample capital to reinvest and growth opportunities.
Gross revenues in the third quarter, where $82 million compared to gross revenues of $100 million in the third quarter of 2018.
This reduction is primarily a result of changes to our portfolio and balance sheet from our transition to becoming a 100% single tenant net lease industrial right.
Property operating expenses were $10.6 million for the quarter.
And third quarter tenant reimbursements were $7.7 million and represented approximately 70% of our property operating expenses.
DNA expenses were $7.8 million in the quarter, we expect 2019 DNA to be within a range of $31 million to $32 million.
Leasing costs and tenant improvements were approximately $7 million in the third quarter and we anticipate additional costs within a range of four and $6 million for the remainder of the year.
This is always subject to change due to a variety of factors, including the timing of the completion of the improvements.
Our balance sheet remains in excellent shape at quarter end, we had approximately $134 million of cash including restricted cash.
During the quarter, we fully repaid our revolver balance and currently have $600 million under our revolver available for you.
As discussed on last quarter's call. We also recently extended our 300 million dollar term loan to 2025.
So we have no meaningful debt due until 2023.
Leverage at quarter end was 4.8 times net debt to adjusted EBITDA quite a bit lower compared to the previous quarter at 5.7 times.
Attractive sales proceeds and our capital markets transactions contributed to this lower figure and our conservative balance sheet posture.
We anticipate fluctuations in leverage depending on borrowings needed to funding acquisitions, given the timing of asset sales.
Our consolidated debt outstanding at quarter end was approximately 1.3 billion with a weighted average interest rate of approximately 4% and a weighted average term of 7.6 years.
Unencumbered NOI represented more than 83% of our overall portfolio at quarter end.
As will mentioned previously during the quarter, we executed on to capital markets transactions.
This included a 10 million common share equity offering which generated net proceeds of $100.7 million. We also issued 3 million common shares under our ATM program, which raised net proceeds of $31.1 million as a result of these transactions our current diluted weighted.
Average share count is now estimated to be 254 million common shares with that I'll turn the call back over to well.
Thanks, Beth I will now turn the call over to the operator, who will conduct a question and answer portion of the call.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before Prosigna keys.
Hey, Tom Your question has been addressing you would like to withdraw from the question Q. Please press Star then too.
Our first question comes from Sheila Mcgrath of Evercore ISI. Please go ahead.
I guess good morning that acquisitions in the quarter. We're all in Cincinnati I was wondering if that was a portfolio that was negotiated together and if you could talk about.
Confidence in the one tenant.
Hi, which expires in 2023 of remaining.
In the assets.
Sure I feel it's Brian and that is cracked it wasn't signal of transactional portfolio transaction.
That was marketed poly.
In terms of the.
The shorter lease term Oh, we do feel good about the the likelihood of renewal in that case.
The Blue Buffalo building.
Services, the distribution requirements and part we Buffalo occupies a couple other buildings in the market, but it but they service a manufacturing facility for Blue Buffalo, That's about 50 miles away in Indiana.
Okay, Great and then on the office to physicians on the sales added the JV the yield was seem very strong at 6.1%.
And Atlantic Health look like a 5% cap rate did you extend leases on those assets and how should we think about asset sales added that venture going forward.
Okay, Hi, Sheila, Florida Johnson.
You're you're absolutely right that those were sold at very attractive cap rates by design. We selected the properties that we thought had the strongest market power for sale immediately after the formation of the venture.
So those assets are among the strongest in that joint venture portfolio, three Denver assets as well as the sale of Atlantic health to the tenant.
So going forward, we are managing to achieve some lease extensions on joint venture assets, which will enhance the.
Salability on pricing on those.
But as I said those that have been sold thus far we're primed for the market.
Okay, Great and then just on capital expenditures.
That you gave us a your outlook for.
Fourth quarter at four to 6 million can you just remind us what does that put the total for the year at and how should we think about.
That same lying idle in 2020, just didn't magnitude of just to show us how.
Shifting to industrial will improve the capex profile the company.
Sure Sheila for the year that the tenant improvements in lease cost will come in somewhere to 20 to 22 million for 2019, but as we look ahead, you're right as we get out of the office and into the industrial the figure will come down you know as of now we're projecting somewhere between 10 and.
15 million for T.I.s, only and lease costs for for 2020, and then in the future that number should even come down further.
Okay. Thank you.
The next question is from John Gotti of Stifel. Please go ahead.
Hello Hello.
Good morning warning.
Hello, John Guinee Your line is open.
Can you hear me.
Hello, Yes.
Oh great.
Sheila did a great job.
Our off from up all my questions. So just a curiosity to curiosity question.
30 light.
I didn't notice before.
Why is that still on your books.
In the Baltimore.
We own a Atlanta and interest and a ground lease below the parking structure across the street from 100 Light Street.
Okay and is that the.
The reason you would continue to own a ground lease position.
Its yeah, we view it as a very secure investment in that case, it's actually a joint venture we don't own 100% of the asset.
Okay, Okay, and then second Morgan Lewis.
A slight.
Even though you know there.
Three years.
Roll down just out of curiosity as opposed to.
Really squeezing them and doubling.
I really can't go anywhere.
Yeah. It was the language in the renewal option. So there's an arbitration clauses in the renewal option that that frankly confined to a very small portion of the downtown market and as we ran the comps you know, it's kind of scary situation to potentially how to go down even further so there were some comps that also worked against Morgan Lewis.
Just kind of they thought there was risk we thought there was risk and we kind of settled on a number that didnt expose the risk you either party as opposed to going through the arbitration process.
Right, Okay and then.
Just based on some of your Oh.
Capex guidance for 2020, it looks like your.
Dividends should be fairly well covered one correct.
And then too.
2.4% dividend increase versus maybe more or like a four or 5%.
Please.
Well, you're right John that the dividend is extremely well covered.
And when we reach sized it earlier this year, we did that with the bias toward happening extremely strong coverage.
And a lot of retained cash flow going forward to reinvest in in the business and improve the growth profile going forward. So.
A penny a 2.4% is above the rate of inflation, we think that's certainly sustainable in perpetuity and.
Yeah. There were there may be a point in the future, where we revisit that them with a view toward.
Faster growth, but for now I think the.
The twin objectives of having a red sustainable dividend growth combined with very strong coverage and lots of retained cash flow or I think I think that's a desirable.
Characteristic.
Excellent answer thank you very much have good day again.
The next question is from John Peterson of Jefferies. Please go ahead.
Great.
Maybe just the kind of stick on the dividend I'm curious if you could kind of talk about maybe how much capital gains will be in this year's dividends or maybe more specifically, there's obviously a lot of gains on the preferred freezer sale, where are you able to offset all of that with a you know with some of the other acquisitions or losses from the other dispositions I guess.
Yeah, we've been fully fully able to defer all our order gains we had 10 31 exchange so not expecting that there's any any capital gain distribution in this years there.
Yeah.
And then acquisition this quarter you know despite a decent on a disposition seem to be pretty self funded through through the equity that you've issued through the offering plus the additional ATM issuance I guess, how it as we think into next year and think about maybe where your stock prices at I think.
Our Navy and consensus is somewhere around $10 a share thinking at a premium to that if that holds do you think about funding your business going forward the acquisitions with incremental equity because you can.
Or should we still expect.
Acquisitions to be mostly funded with from proceeds from dispositions.
Well, we'll have to see with the opportunity set is next year.
I mean, having a having a higher share price in relation to NPV makes growth easier so, but as we said it's been a competitive marketplace, John where where if anything the trend has been cap rate compression no. So so we'll have to wait and see.
But.
You know we're not.
I'm not not averse to utilizing equity one now that it's trading better than it has.
There is certainly an argument if you look at some of the premiums that other net lease companies trade that there's certainly an argument that we could trade at a bigger premium.
And were sympathetic to that point of view and have the balance sheet capacity to lead that proposition play out if we want to.
All right. That's helpful. And then I just one more are you talking about the competitive market I was curious maybe for Brendan.
If you could talk about the gap between seller and buyer expectations.
Today versus what it's been in recent years in terms of a cap rate expectation.
Yeah.
I don't know that there is a gap I mean it.
It's a very competitive market, it's a good market to be at dollar it so.
In a competitive process, that's really what.
They take.
Pricing so.
You do you have the same view on the gap as they get you guys are obviously, a seller and an acquirer in the market.
Do you find that.
Yeah, I think people tend to pretty much agree on valuation.
Yeah, and the disposition, Brian we're obviously selling a different type of asset them. We're acquiring so I think it is a different set of circumstances I'm on the disposition side and I think it really is dependent on the nature of the asset the market the duration of the lease credit quality of the tenancy. So it's not easily.
Easily generalized on the disposition side given the nature of the assets were selling there there is a strong demand for longer term leases even in the office space with reasonably good credit there seems to be more and more capital available for those assets, but when you get into the shorter terms are more remote markets.
Its tougher needless to say a seller.
Okay. All right. Thank you for the color I appreciate it.
John .
The next question is from Todd Stender of Wells Fargo. Please go ahead.
Thanks, and then maybe going back to Brendan.
The cash cap rate.
For the industrial buildings in Cincinnati was that a blended really was portfolio.
Five four.
Hey, Dave cash cap rate was approximately 5%.
Got it okay.
And those assets. So you get three different leases are they all triple net.
They are all Nat correct.
And then just looking at the Michelin building.
Comments, so there's a lease extension now well into 2020.
But your comments from last quarter sounds like they were kind of consolidating into a new facility any color I wouldn't Michelin is going to do and then how does the current.
Do you think compared to maybe with the market is.
Yeah sure. So I think the plan is still the consolidated agree or the big it's just been delayed the logistics of getting that many tires out of facility and moving them into a new facility. It's just taking some time, we're hopeful that baby. It takes more time and they need they need to stay in the facility longer but we're planning for them to ultimately move out now in September .
The rate is pretty comparable to what we should see with a replacement tenant if it were a single tenant if we end up multi tenant in the building, we maybe able to push rate there you know into the threes.
That's helpful. And then when you look at where industrial is gonna be I guess it by year end 2020.
We had been kind of tracking you guys on a revenue basis, but I think your comments were.
Book value basis, where do you think you'll be on a revenue.
2020.
There's.
[noise], plus or minus 85% it trails book value, a little bit and we'll continue to do so.
Oh, just finally on it you know there's been a natural de leveraging a with your disposition proceeds certainly you're meeting your secured debt paying off that piece and then you're getting away from office. So these are all good things according to a rating agency.
Where do you where would you like to be are you planning on a maybe lobbying for a better rating next year.
Is your cost of debt ultimately shakeout.
I think you know we're happy overall with with the ratings I would think that.
Getting further right at further out of office and more into industrial will help from an asset quality standpoint size will be.
An important consideration if we're going to lobby for.
Better ratings.
That said I would I would think there's an opportunity to revisit the rating with with S&P for [noise].
And then we'll work on that in 2020.
Great. Thank you.
The next question is from John Misaka of Ladenburg Thalmann. Please go ahead.
Good morning.
Hey, John <unk>.
Outside of the Dow chemical office, which kind of sounds like a fairly opportunistic disposition given the kind of remaining lease term what kind of cap rate are you expecting on the remaining let's say around $300 million of dispositions that you kind of a planning for between now and the into 2020, especially given a good chunk that NOI is coming due.
You know what's there on last five years.
Brian Hi, John This is Larry Johnson, It obviously will depend on the timing and composition of the ultimate set of dispositions, but we're hoping to be than eight cap.
Okay.
Very helpful. And then understanding that you might be somewhat limited in what you can say on this given litigation around the Cummins lease what kind of range of outcomes can we expect there will be any impacts.
From that as it gets kind of resolved.
Hi, This is bad you know.
As we are in and litigation a with that with when we are limited to what we can say regarding it we are not recording rent on the asset currently the court is collecting rent on on behalf of into a court administrative.
Account and given the inherent uncertainty in litigation and the fact that it's in the early stage of the litigation and I were not going to a record any revenue at this time.
Okay. That's it for me thank you very much.
Thanks.
The next question is from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.
Great. Thanks, I know you had talked about kind of staying within certain leverage levels, but can you remind us what you're at the high end of your leverage target would be.
As you go through this plan.
Yeah, we'd sort of thought that the upper end of the band would be around six times.
Oh no and.
Obviously were quite low in relation to.
To that.
Okay, and then as you think about the assets or <unk> and target to sell next year. I think you said somewhere between 450 in 550 any thoughts on what the target yield might be or cap rate might be on those assets.
Yes.
This is Laura as I mentioned before it will ultimately depend on the timing and composition of that that pool, but we're hoping to beat and eight cap.
To be below any cap.
Yes.
Okay.
Alright, great. Thank you.
Thanks, Jamie.
Again, if you have a question. Please press Star then one next question as a follow up from Sheila Mcgrath of Evercore ISI. Please go ahead.
I guess on the Morgan Lewis building or do you plan to reposition that even though it's an office asset to add a invest more capital or what's the long term plan there.
Hi, Sheila it's Lora again, so James and I are working together on this and we're in the early stages of exploring strategy for the asset obviously, we have some time with the Morgan Lewis extension.
We have invested a substantial amount of capital as you know when the asset so where we're really exploring all the different possibilities, including a an investor sale user sale, even leasing possibility. So there's thus far and a significant amount of inbound.
Interest on the asset as as we expected and so we'll be spending the next quarter. So formulating a strategy for the asset to a.
Implement.
Okay, and then on Dow chemical can you remind us oh loan to value on that disposition by selling that that also will be a de leveraging event and am I correct on that.
Yes, you know the debt is a around $184 million or so.
And Brook recall that that the construction costs in that facility was 165 and.
Leveraged it out Oh with $197 million proceeds before construction was finished.
So that essentially monetize almost all of the cash flow from from the lease.
So.
No we as a as we've mentioned.
We do have an inbound expression of interest, but that that asset is probably roughly 990% leveraged.
So to the extent the sale gets done a lot of debt would come off the balance sheet and.
Honestly the after debt service cash flow is only about $250000 a year to us so.
It would be a very good outcome.
Okay and last question I apologize if you already touched on this on the Thompson, Georgia asset that's a new vacancy you know what are your plans there and tenant prospects.
Yeah sure. We're open for all options there, it's a it's a very functional building.
In between Augusta in Atlanta, and we've just gotten started bargaining it because of the the chapter 11 bankruptcy kind of tie things up for bid, but the initial reception has been positive and we're hopeful that lease it we'd also be open to a potential user sale. If a user comes along first at wants purchase it but we're very high.
Where are the in place cash rents and that you disclosed in the supplemental where they about market or.
How do you think.
So.
But I guess market rent there is a little bit of.
A mixed bag because it depends on if we Atlanta manufacturing tenant or if we were land a warehouse tenant. So it can fluctuate by several dollars per square foot, depending on what the ultimate uses.
Okay. Thank you.
Next the follow up from John Misaka of Ladenburg Thalmann. Please go ahead.
Hi, guys just a quick balance sheet question did because it's been a lot of refinancing of kind of the debt <unk>, but some of your peers I mean, how do you look at maybe the trust preferred as potential it's kind of take out with some long term fixed that means that something just thinking about on the balance sheet side.
No it at LIBOR plus one seven day, we think that the trust preferred given its duration is a pretty attractive piece of paper for us and we would be an unlikely to take it out.
Very helpful. Thank you.
This concludes our question and answer session I would like to turn the conference back over to well Eglin for closing remarks.
Well, we appreciate everyone joining us a this morning.
Please visit our website or contact Heather gentry, if you would like to receive our quarterly material and in addition, as always you may contact me or the other members of our senior management team with any questions. Thanks again for joining us.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.