Standard & Poor's Ratings Services revised its outlook on Lexington Realty Trust (NYSE: LXP) to positive from stable. At the same time, we affirmed our ratings on Lexington, including the 'BB+' corporate credit rating and 'BBB-' issue-level ratings. The recovery rating on the company's debt remains '2'.

"The positive outlook acknowledges improved key credit measures that we expect will continue to strengthen," said Standard & Poor's credit analyst Jaime Gitler. The company has also lengthened its weighted average lease term and strengthened the quality of the asset base.

Our ratings on Lexington Realty Trust are derived from the company's "fair" business risk profile, characterized by a portfolio of triple-net properties with good geographic, industry, and tenant diversity. The company has been transitioning its portfolio toward longer-term leases and is shifting away from office assets. Core performance has been stable, but we expect that cash flow growth will largely come from investment in acquisitions and development. Key credit measures have generally improved over the last year as Standard & Poor's-adjusted debt to EBITDA remained in the low-7x area and FFC was 2.3x. These factors support an "intermediate" financial risk profile.

New York City-based Lexington is a midsize REIT that owns a portfolio of triple-net properties, in which all operating costs are generally passed through to the tenant. Lexington owns $4.7 billion (41.6 million square feet) of undepreciated real estate assets in 41 states as of March 31, 2014. The company's operating portfolio includes 205 single-tenant net-lease properties and 15 multi-tenant properties that had originally been single-tenant but that the company re-tenanted post-vacancy. We consider the ability to manage lease rollover and re-tenanting vacancy a key factor in the net-lease segment. As of March 31, 2014, 3.9% of base rents expire in 2014 and an additional 5.1% expire in 2015. Lexington favorably increased its portfolio-weighted average lease term significantly over the last year (to 11.1 years from 7.2 years) through long duration acquisitions, build-to-suit deliveries, and capital recycling. Lexington evaluates both the corporate credit risk of the tenant and the underlying real estate in its investment underwriting process. We note that over Lexington's 20-year history, the portfolio has had a low number of tenant defaults.

The positive outlook is based on our expectation that EBITDA growth accompanied by conservatively financed investment will result in improved key credit measures. We also believe that Lexington is attempting to improve the overall quality of the portfolio and reduce residual risk/specialized assets by transitioning to longer-term leases. We expect that the company will be able to sustain debt to EBITDA of about 7.0x and FCC above 2.3x.

We could raise the rating if Lexington continues to strengthen its asset base, cash flows strengthen, and the company were to manage its investment appetite prudently by financing its growth with sufficient equity and/or asset sales such that FCC is above 2.4x and debt to EBITDA is below 7.0x on a sustained basis. This would more firmly position the company within our "intermediate" assessment of the financial risk profile. Under this scenario, we could raise the rating one notch by applying a favorable comparative rating analysis modifier. We note that an upgrade would likely not affect the current 'BBB-' issue-level ratings.

We see limited downside risk to the ratings at this time, given the company's strengthening leverage and coverage measures. However, we could take negative rating action if FCC measures drop below 2.1x due to weaker-than-anticipated operating results, or if the company makes a large debt-financed acquisition.