LXP Industrial Trust (then Lexington Realty Trust) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The filing reports unaudited consolidated results. The company was a REIT focused on single-tenant commercial properties and land; it reported interests in approximately 215 consolidated properties across 41 states, with 40.6 million square feet and 98.1% leased.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Gross revenue | $97.9 million | $85.0 million | $292.1 million | $242.9 million |
| Net income (loss) attributable to common shareholders | $3.0 million | $169.0 million | $(5.2) million | $163.6 million |
| Basic earnings (loss) per common share | $0.01 | $1.09 | $(0.03) | $1.06 |
| Operating cash flow | Not presented by quarter | $155.1 million | $120.5 million | |
| Company FFO, as adjusted (non-GAAP) | $56.1 million; $0.25/share | $45.5 million; $0.25/share | $164.4 million; $0.75 basic/share | $132.4 million; $0.73 basic/share |
Rental revenue drove growth, principally from acquisitions, including properties consolidated through NLS. The 2012 comparison includes a $167.9 million NLS acquisition gain, which substantially inflates prior-year reported earnings; 2013 also included $25.4 million of continuing-operations debt-satisfaction charges for the nine-month period. Adjusted FFO rose, but per-share results reflect substantial common-share issuance.
Same-store NOI for the nine months fell 2.7% to $186.1 million from $191.4 million. Same-store occupancy was 98.1%, versus 98.5% a year earlier. Management attributed the NOI decline mainly to lower renewal rents and higher property operating costs. Portfolio occupancy overall was 98.1%.
Balance sheet, debt and liquidity
- At September 30, 2013, cash and cash equivalents were $86.2 million; total assets were $3.45 billion and total equity was $1.45 billion.
- Total reported debt was approximately $1.82 billion, compared with $1.88 billion at December 31, 2012. Mortgages and notes payable declined to $1.03 billion from $1.42 billion; credit-facility borrowings were $67 million, term loans $319 million, senior notes $247.6 million and convertible notes $27.4 million.
- Management reported $325.4 million available under its $400 million unsecured revolving facility and $186 million available under its $250 million unsecured term loan, subject to covenant compliance. The company said it was in compliance with applicable financial covenants.
- Operating cash flow was $155.1 million; investing activities used $182.1 million and financing activities provided $79.2 million during the nine months. Cash increased by $52.2 million to $86.2 million.
- Fixed-rate debt represented 96.3% of long-term indebtedness at quarter-end. A 100-basis-point increase in variable borrowing rates was estimated to raise nine-month interest expense by $488,000.
Material changes, outlook and risks
- The company issued $250 million of 4.25% unsecured senior notes due 2023 and refinanced its revolving facility as unsecured, increasing its capacity to $400 million. It also issued 23 million common shares in a public offering and additional shares through an at-the-market program; net proceeds of approximately $293.9 million were used primarily to repay revolver borrowings and for general purposes, including investments.
- During the nine months, $54.9 million principal amount of 6.00% convertible notes converted into approximately 7.9 million common shares; the company recorded related debt-satisfaction charges. It also redeemed all 6.2 million Series D preferred shares for approximately $155.6 million.
- Management said it had exceeded its 2013 acquisition targets, but some investments closed later than expected, limiting their contribution during the year. It expects operating cash flow, cash, borrowing capacity, asset sales and access to debt and equity markets to fund operations, debt service and REIT distributions. The filing provides no quantified earnings or FFO guidance.
- Management’s longer-term strategy included reducing secured debt and targeting 65%–70% of assets unencumbered, extending lease terms, and recycling capital with a greater emphasis on office dispositions. Weighted-average lease term was approximately 7.5 years, versus 6.6 years one year earlier. Q3 leasing activity comprised 11 new leases or extensions covering 2.7 million square feet.
- At quarter-end, $133.4 million of property-specific mortgage debt was due in 2013–2014 ($50.4 million in 2013 and $83.0 million in 2014); management stated liquidity was sufficient to address these maturities. It also cited interest-rate changes, vacancy, tenant defaults, delayed acquisitions and capital availability as risks. A credit-rating downgrade could raise financing costs or reduce access to capital.
- A Schaumburg, Illinois loan was in default; the company had obtained a foreclosure judgment and subsequently completed foreclosure after quarter-end. It expected to fund about $9 million of tenant improvements. The filing also disclosed tenant-improvement and completion guarantees with approximately $4.6 million of identified unfunded amounts, plus ordinary-course litigation that management did not expect to have a material aggregate adverse effect.
- Subsequent events included a 10% increase in the quarterly common dividend to $0.165 per share; a $302 million purchase of three New York City hotel ground-lease interests; an 11.5 million-share offering; and a $216 million net revolver borrowing. These events affect the post-quarter capital and share-count picture.
Important facts for investors to verify
- Reconcile reported earnings with recurring operating performance, particularly the 2012 NLS gain, debt-satisfaction costs, impairments and discontinued-property gains.
- Assess same-store NOI trends, renewal rents, occupancy, lease expirations and the company’s ability to achieve expected returns on development commitments.
- Review the effect of the share offering, note conversions and subsequent issuance on per-share FFO, dilution, leverage and dividend coverage.
- Verify post-quarter funding and debt levels, including the hotel ground-lease acquisition, revolver borrowing, planned secured financing and near-term maturities.
- Monitor the defaulted Schaumburg loan/foreclosure and tenant-improvement funding, as well as development and other acquisition commitments that the company said were not assured of completion.