LXP Industrial Trust (then Lexington Realty Trust) — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The filing is for Lexington Realty Trust and presents unaudited consolidated interim results.
Business context
The REIT owned interests in approximately 185 consolidated properties across 38 states, totaling about 35.6 million square feet; approximately 97.5% was leased. Its portfolio focused on single-tenant office, industrial and retail properties, predominantly under net leases.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Gross revenue | $83.9 million | $78.5 million | $164.5 million | $156.8 million |
| Net income (loss) | $5.6 million | $(57.0) million | $11.1 million | $(73.0) million |
| Net income (loss) attributable to common shareholders | $(3.4) million | $(50.5) million | $(5.6) million | $(74.2) million |
| Loss per common share | $(0.02) | $(0.33) | $(0.04) | $(0.50) |
| Operating cash flow | Not separately presented for the quarter | $80.9 million | $79.4 million | |
| Company FFO, as adjusted (non-GAAP) | $44.1 million; $0.24/share | $41.1 million; $0.24/share | $86.7 million; $0.48/share | $82.8 million; $0.48/share |
At June 30, cash and cash equivalents were $50.2 million; total assets were $3.02 billion and total liabilities were $1.94 billion. Debt carrying value was approximately $1.74 billion. Six-month investing and financing cash flows were $(16.9) million and $(77.5) million, respectively, leaving cash down $13.5 million from year-end 2011.
Approximately 98% of consolidated debt was fixed-rate. The company reported $35 million of variable-rate debt; a 100-basis-point rate increase was estimated to raise six-month interest expense by about $287,000. The company was in compliance with credit-facility covenants.
Changes versus the prior comparable periods
- Revenue increased 7.0% in Q2 and 4.9% in the first half, mainly from acquisitions, improved occupancy at Transamerica Tower and a new Orlando lease. Farmington Hills lease rollover partly offset first-half growth.
- Interest and amortization expense fell by $2.6 million in Q2 and $4.8 million in the first half, reflecting lower average debt and rates, debt retirement and other financing-cost changes.
- Net income improved sharply versus 2011, largely because real estate impairment charges were lower: continuing-operations impairment was $1.3 million versus $30.5 million in the first half; discontinued-operations impairment was $4.3 million versus $58.3 million.
- Adjusted FFO rose 7.4% in Q2 and 4.7% in the first half, while per-share adjusted FFO was flat at $0.24 and $0.48, respectively.
Outlook, risks and unusual items
- Liquidity and outlook: Management expected operating cash flows to fund operating costs, regular debt service and dividends, supplemented by available facilities, property sales, equity and mortgage or other debt financing. It cited $261.3 million of revolving-credit availability and $9.0 million of term-loan availability. Property-specific non-recourse debt maturities were $70.0 million in 2012 and $234.9 million in 2013. No specific earnings or FFO guidance was provided.
- Financing actions: The company obtained a $215 million secured term loan due 2019 and refinanced its $300 million revolver, due 2015 with an option to extend to 2016. It repurchased the remaining $62.2 million of exchangeable notes and redeemed all Series B preferred shares for an aggregate cost of approximately $69.5 million. The quarterly common dividend increased to $0.125 per share from $0.115.
- Portfolio and development: Six-month acquisitions and build-to-suit completions totaled $53.6 million. Six active development arrangements represented up to $149.5 million in commitments, with $60.8 million of costs incurred by June 30. Management noted that future earnings growth depends substantially on acquisitions and leasing; absent these, growth sources are limited.
- Litigation: A $2.8 million reserve was recorded for the Deutsche Bank claims. After quarter-end, the matter was settled for $2.775 million with mutual releases. A separate Kansas lease-related case was dismissed in June.
- Credit and contingencies: Two loans were in default, including a $21.9 million Schaumburg mortgage (net of reserve), on which interest income had stopped, and a $3.0 million loan to a property buyer. The Schaumburg matter also involved a tenant claim concerning up to $12.2 million of tenant improvements. The company disclosed a guarantee for Orlando base-building work and tenant improvements estimated at about $23.1 million, plus development-related guarantees and letters of credit.
- Other transactions: The company agreed with Inland on an October 2012 mechanism to either sell its NLS interest for a $219.8 million note or buy Inland’s interest for $14.4 million, subject to the agreement’s terms. It also sold its Concord and CDH CDO interests for $7.0 million, recognizing a gain. Subsequent to quarter-end, it sold its Pemlex interest for $13.2 million and provided related potential letter-of-credit support.
- Risk factors: The filing added a warning that tenant credit ratings may be lowered or withdrawn, potentially reducing the value of properties leased to those tenants. Management also highlighted exposure to vacancies, tenant defaults, interest rates and uncertain property valuations.
Important facts for investors to verify
- Whether the NLS transaction ultimately resulted in a sale to Inland or a purchase of Inland’s stake, and the resulting cash, debt and earnings effects.
- Collections, collateral values, foreclosure progress and potential additional exposure for the defaulted loans and tenant-improvement claim.
- Liquidity and refinancing plans for the $234.9 million of property-specific debt maturing in 2013, alongside facility availability and covenant compliance.
- Leasing performance and costs: Q2 renewals and new leases covered approximately 0.7 million square feet; average GAAP rent declined, largely due to one renewal at market rates.
- How much reported earnings improvement reflects lower impairments and transaction gains rather than recurring property operations; FFO measures are non-GAAP and company-defined.