Business Context and Reporting Period
Company: Lexington Realty Trust (LXP Industrial Trust)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: A self-managed Maryland statutory REIT owning a geographically diversified portfolio of net-leased office, industrial, and retail properties. As of June 30, 2008, the Company owned or held interests in approximately 255 consolidated properties across 42 states and the Netherlands. The Company operates through a UPREIT structure with significant minority interests.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|
| Total Gross Revenues | $236,032 | $188,719 |
| Net Income | $23,537 | $31,154 |
| Net Income Allocable to Common Shareholders | $15,554 | $18,489 |
| Net Cash Provided by Operating Activities | $133,557 | $152,604 |
| Net Cash Provided by Investing Activities | $218,670 | $(409,707) |
| Net Cash Used in Financing Activities | $(606,484) | $215,550 |
| Cash and Cash Equivalents (Ending) | $157,849 | $75,419 |
| Total Debt (Mortgages, Notes, Exchangeable, Trust Pref) | $2,529,524 | $2,962,422 |
Note: Debt figures exclude minority interests and other liabilities. Figures are in thousands.
Material Changes vs. Prior Period
- Revenue Growth: Total gross revenues increased by $47.3 million (25.1%) year-over-year, driven primarily by a $50.4 million increase in rental revenue and $8.2 million in tenant reimbursements. This was partially offset by an $11.3 million decrease in advisory and incentive fees due to the termination of co-investment programs in the prior year.
- Net Income Decline: Net income decreased by $7.6 million (24.4%). The primary driver was a significant loss in equity earnings from non-consolidated entities, specifically Concord Debt Holdings LLC, which recorded a $58.0 million impairment charge in 2008 compared to gains in 2007.
- Discontinued Operations: Income from discontinued operations decreased by $17.3 million, reflecting fewer property sales and lower gains on sale compared to the prior period.
- Debt Reduction: The Company aggressively reduced debt, repurchasing $125.0 million of Exchangeable Notes and $70.9 million of Trust Preferred Securities, resulting in net debt satisfaction gains of $36.7 million.
- Portfolio Activity: The Company sold eight properties for $167.5 million (gain of $4.6 million) and made no new property acquisitions during the six months ended June 30, 2008.
Guidance, Outlook, and Risks
- Capital Markets: The Company raised $47.2 million through the issuance of 3.45 million common shares in June 2008. Proceeds were used to retire debt.
- Dividends: Dividends paid to shareholders increased to $185.1 million for the six months ended June 30, 2008, compared to $75.4 million in the prior year, largely due to a special dividend paid in January 2008.
- Impairment Risks: Significant volatility in earnings is driven by equity method investments. Concord Debt Holdings LLC recorded a $58.0 million impairment charge on its bond and loan portfolio due to market conditions. Lex-Win also recorded a $3.6 million impairment on its investment in Wells Real Estate Investment Trust.
- Subsequent Events: Following the reporting period, the Company restructured its investment in Concord, bringing in Inland American as a new partner. It also sold its entire interest in Wells for $32.3 million.
- Liquidity: The Company maintains a $200 million revolving credit facility with $198.5 million available as of June 30, 2008. Management believes operating cash flows and available credit are sufficient to fund operations and dividends.
Investor Verification Checklist
- Concord Debt Holdings Impairment: Verify the magnitude and permanence of the $58.0 million impairment charge at Concord and the impact of the subsequent restructuring with Inland American.
- Debt Extinguishment Gains: Confirm the sustainability of earnings given the $36.7 million in one-time gains from debt repurchases, which significantly boosted net income.
- Discontinued Operations: Assess the remaining portfolio of properties held for sale and the likelihood of future gains or losses from these dispositions.
- Dividend Coverage: Analyze the ratio of Funds From Operations (FFO) to dividends paid, noting the high dividend payout driven by the special dividend in early 2008.
- Variable Rate Debt Exposure: Review the Company's interest rate risk management, specifically the new interest rate swap agreements entered into to hedge variable rate term loans.