Business Context and Reporting Period
Company: Lexington Realty Trust (LXP Industrial Trust)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: A self-managed REIT owning and managing a geographically diversified portfolio of approximately 195 consolidated net-leased office, industrial, and retail properties across 40 states. The company also provides investment advisory services and engages in build-to-suit projects.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Gross Revenues | $87.8 million | $260.5 million |
| Net Income (Loss) | $7.3 million | $(51.7) million |
| Net Income (Loss) Attributable to Common Shareholders | $0.058 million | $(63.4) million |
| EPS (Basic & Diluted) - Common | $0.00 | $(0.49) |
| Cash Flow from Operating Activities | N/A | $112.9 million |
| Total Assets | $3.39 billion | N/A |
| Total Debt (Mortgages, Notes, Convertibles, etc.) | $1.93 billion (Carrying Amount) | N/A |
| Cash and Cash Equivalents | $59.3 million | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Total gross revenues decreased by $4.1 million (3 months) and $15.5 million (9 months) compared to the prior year periods, primarily due to increased tenant vacancies and lower renewal rents.
- Profitability Improvement: Net income attributable to common shareholders improved significantly from a loss of $28.5 million in Q3 2009 to a profit of $0.058 million in Q3 2010. For the nine-month period, the loss narrowed from $190.6 million in 2009 to $63.4 million in 2010.
- Impairment Charges: The company recognized $12.4 million in impairment charges on four real estate assets in continuing operations during the nine months ended September 30, 2010. Additionally, $38.7 million in impairments were recorded on assets in discontinued operations.
- Debt Reduction: The company actively deleveraged, retiring $80.0 million of debt under its secured term credit facility and $47.2 million of non-recourse balloon mortgages in Q3 2010 alone.
- Equity Issuance: Issued $115.0 million of 6.00% Convertible Guaranteed Notes in Q1 2010 and raised approximately $75.7 million through common share offerings during the nine-month period.
Guidance, Outlook, and Risks
- Dividend Increase: Subsequent to the quarter end, the company increased its quarterly common share dividend to $0.115 per share, a 15% increase from the previous $0.10.
- Strategic Focus: Management continues to focus on strengthening the balance sheet by repurchasing debt, extending maturities, and recycling capital from non-core property sales to acquire core single-tenant assets.
- Liquidity: As of September 30, 2010, the company had approximately $201.2 million of borrowing capacity available under its revolving credit facility (less letters of credit) and $59.3 million in cash on hand.
- Legal Proceedings:
- Deutsche Bank v. Lexington Drake: Ongoing litigation regarding the sale of bankruptcy damage claims; plaintiffs seek approximately $1.2 million plus interest.
- Experian v. Lexington Allen: Lawsuit alleging failure to fund tenant improvements up to $5.9 million; mediation scheduled for November 2010.
- Risk Factors: Significant exposure to risks associated with returning properties to lenders due to non-recourse mortgage defaults. The company faces potential impairment charges if market conditions deteriorate further.
Investor Verification Checklist
- Debt Maturities: Verify the schedule for the $74.4 million of property-specific non-recourse mortgage debt maturing in late 2010 and 2011.
- Impairment Triggers: Review the specific operational considerations and market valuations that triggered the $12.4 million impairment charge on continuing operations assets.
- Legal Exposure: Assess the potential financial impact of the Experian lawsuit regarding the $5.9 million tenant improvement funding dispute.
- Convertible Notes: Monitor the conversion price ($7.09) and market price of common shares to evaluate the likelihood of conversion or repurchase of the $115 million Convertible Guaranteed Notes.
- Vacancy Rates: Confirm current occupancy levels and the impact of the Farmington Hills, Michigan tenant termination on future rental revenue.