LXP Industrial Trust (Lexington Realty Trust) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing combines Lexington Realty Trust and its approximately 96%-owned operating partnership, Lepercq Corporate Income Fund L.P. (LCIF); figures below primarily reflect Lexington consolidated results. Dollar amounts are in millions unless stated otherwise.
Business context
Lexington owned interests in approximately 170 consolidated properties across 37 states, with about 50.7 million square feet and 97.3% leased. Its portfolio was primarily single-tenant net-leased commercial real estate. Management continued to recycle capital from non-core, often non-industrial assets into industrial properties, citing industrial demand and generally lower maintenance and re-leasing costs.
Key financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Gross revenue | $105.5 | $95.7 | $208.1 | $191.8 |
| Net income (loss) attributable to common shareholders | $(3.3) | $5.5 | $(19.3) | $45.9 |
| Basic EPS | $(0.01) | $0.02 | $(0.08) | $0.19 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $110.9 | $106.0 |
| Adjusted Company FFO per diluted share/unit | $0.25 | $0.23 | $0.50 | $0.47 |
| Same-store NOI | Not stated for quarter | Not stated for quarter | $147.6 | $146.7 |
- Six-month investing cash flow was $(22.0) million, including $136.8 million of property acquisitions and $127.0 million of net property-sale proceeds. Financing cash flow was $(54.1) million, including $88.5 million of dividends paid and $7.4 million of share repurchases.
- At June 30, total debt carrying value was approximately $2.117 billion, versus $2.069 billion at year-end 2017. Cash and cash equivalents were $75.4 million; restricted cash was $71.6 million. Revolver borrowings were $195 million, with $310 million of availability, subject to covenant compliance.
- Management reported compliance with corporate debt covenants. The unsecured revolver matures August 2019, with an option to extend to August 2020; the two $300 million term loans mature in 2020 and 2021. Property-specific mortgage balloon debt of $6.6 million was due in 2018 and $83.8 million in 2019.
Changes versus comparable periods
- Revenue increased 10% in Q2 and 9% for the first half, mainly from acquired properties; dispositions and lower lease-termination income partly offset growth.
- Common-shareholder results moved from profit to loss in both comparisons, primarily because impairment charges rose to $35.3 million in Q2 and $88.3 million for the first half, versus $13.6 million and $21.6 million, respectively, in 2017. Management linked impairments to potential sales, vacancies, limited leasing prospects and a shorter expected holding period for some non-industrial assets.
- Six-month same-store NOI rose 0.6%, while same-store leased area declined to 96.4% from 98.7% a year earlier. Adjusted FFO per diluted share/unit increased to $0.50 from $0.47 for the half-year.
- Interest and amortization expense increased to $42.1 million for the first half from $38.9 million, reflecting higher debt outstanding. Variable-rate principal debt rose to $669.1 million, or 31.4% of consolidated principal debt, from $129.1 million a year earlier; a 100-basis-point rate increase would have raised first-half interest expense by an estimated $2.9 million.
Outlook, risks and notable items
- No specific earnings or FFO guidance was provided. Management said operating cash flow, cash on hand, revolving capacity, property-sale proceeds, mortgage financing and other financing alternatives were expected to fund needs. It cautioned that results depend on acquisitions, dispositions and leasing; it also identified interest rates, occupancy, tenant defaults and delayed acquisitions as risks.
- Management’s strategy emphasized increasing industrial exposure and reducing office and other non-core assets. It noted that asset recycling could dilute near-term earnings even if it benefits long-term shareholder value. The weighted-average lease term was 8.8 years, compared with 9.0 years a year earlier.
- During the first half, Lexington acquired three industrial properties for $136.8 million and obtained $25.9 million of fixed-rate mortgage financing at 5.4%. It reported $37.2 million of property-sale gains and $88.3 million of impairment charges. Three held-for-sale non-industrial properties were sold after quarter-end for $46.6 million; LCIF also sold a held-for-sale specialty asset for $20.2 million.
- Impairments included office properties in Overland Park, Kansas and Kansas City, Missouri secured by $47.9 million of non-recourse mortgages, which exceeded the properties’ estimated fair value by $25.3 million. The filing also disclosed ordinary-course legal proceedings, including lender claims under non-recourse carve-out guarantees; management did not expect them, in aggregate, to have a material adverse effect.
- LCIF separately reported a first-half net loss of $1.9 million, versus a $0.5 million loss a year earlier, and operating cash flow of $19.2 million, down from $21.2 million. Management stated LCIF cannot fund mortgage balloon payments or new investments without a capital event, and may depend on Lexington’s liquidity to refinance or satisfy maturing debt. One tenant represented 16.5% of LCIF rental revenue.
Important facts for investors to verify
- Review the assumptions, asset-level valuations and sale prospects underlying the $88.3 million of first-half impairment charges, particularly the office assets and related non-recourse debt.
- Track leasing and occupancy, including the decline in same-store leased area, lease rollover, and the cost of tenant improvements and commissions.
- Confirm refinancing or repayment plans for 2018–2019 mortgage maturities, revolver extension and covenant headroom; monitor the larger variable-rate debt exposure.
- Assess whether asset-sale proceeds and industrial acquisitions can support recurring cash flow and dividends, rather than relying on gains or other non-recurring items.
- Monitor LCIF’s dependence on Lexington for liquidity and financing, its concentrated tenant exposure, and the effect of restricted 1031-exchange cash on immediately available liquidity.