Business Context and Reporting Period
Company: Lexington Realty Trust (LXP Industrial Trust)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A self-managed REIT owning a geographically diversified portfolio of approximately 240 consolidated net-leased office, industrial, and retail properties across 42 states and the Netherlands. The Company also provides investment advisory services and manages co-investment programs.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 30, 2008 |
Nine Months Ended Sept 30, 2008 |
Nine Months Ended Sept 30, 2007 |
|---|---|---|---|
| Total Gross Revenues | $105,469 | $340,632 | $304,099 |
| Net Income (Loss) | $(3,717) | $19,820 | $45,617 |
| Net Income Allocable to Common Shareholders | $(10,343) | $5,211 | $25,919 |
| EPS - Basic (Common) | $(0.16) | $0.08 | $0.39 |
| Cash from Operating Activities | N/A | $187,412 | $235,893 |
| Cash from Investing Activities | N/A | $200,751 | $(316,419) |
| Cash from Financing Activities | N/A | $(692,230) | $224,041 |
| Cash and Cash Equivalents (End of Period) | $108,039 | $108,039 | $260,487 |
| Total Debt (Mortgages, Notes, Exchangeable, Trust Pref) | $2,481,575 | $2,481,575 | $2,962,422 |
Note: Debt figures represent the sum of Mortgages and notes payable, Exchangeable notes payable, and Trust preferred securities as of Sept 30, 2008 and Dec 31, 2007.
Material Changes vs. Prior Period
- Revenue: Nine-month total gross revenues increased by $36.5 million (12%) compared to 2007, driven by a $38.6 million increase in rental revenue due to the acquisition of co-investment programs in 2007 and lease termination payments. This was partially offset by an $11.1 million decrease in advisory and incentive fees.
- Profitability: Net income allocable to common shareholders decreased significantly to $5.2 million for the nine months ended Sept 30, 2008, from $25.9 million in the prior year. This decline was primarily due to a $39.8 million decrease in income from discontinued operations and a $23.2 million loss from equity in non-consolidated entities (driven by impairment charges at Concord Debt Holdings).
- Discontinued Operations: The Company sold 23 properties in the first nine months of 2008 for $189.5 million, realizing a gain of $12.0 million. In the same period in 2007, 33 properties were sold for $225.9 million with a gain of $39.8 million.
- Debt Reduction: Total debt decreased by approximately $481 million from year-end 2007. The Company repurchased $150.5 million of Exchangeable Notes and $70.9 million of Trust Preferred Securities at a discount, realizing gains on debt extinguishment of $39.0 million for the nine-month period.
- Liquidity: Cash and cash equivalents declined from $412.1 million at year-end 2007 to $108.0 million at Sept 30, 2008, largely due to significant debt repayments and dividend distributions totaling $213.0 million.
Outlook, Risks, and Management Commentary
- Market Environment: Management notes the global credit and financial crisis has gained momentum, creating uncertainty regarding tenant resources and the duration of the downturn. Leased space occupancy was 93.8% as of Sept 30, 2008, down 2.0% from the prior year.
- Refinancing Needs: A $200 million credit facility expires in June 2009, and a $197.9 million term loan matures in June 2009 (with an extension option to Dec 2009). Management is actively working to extend these maturities but anticipates higher spreads over LIBOR upon refinancing.
- Dividends: The Company intends to maintain regular dividends to qualify as a REIT. Dividends paid to shareholders increased to $213.0 million in the first nine months of 2008, largely due to a $2.10 per share special dividend paid in January 2008.
- Impairment Risks: Significant impairment charges were recognized in non-consolidated entities (Concord Debt Holdings), reflecting the challenging credit market environment for debt investments.
- Subsequent Events: Following the quarter end, the Company repurchased additional Exchangeable Notes, converted significant OP Units to common shares (increasing ownership of the MLP to 91.1%), and entered into a forward equity commitment to purchase 3.5 million shares.
Investor Verification Checklist
- Debt Maturities: Verify the status of refinancing for the $200M credit facility and $197.9M term loan maturing in June 2009, given the tight credit markets.
- Non-Consolidated Entity Performance: Review the specific exposure and ongoing impairment risks related to Concord Debt Holdings and Lex-Win Concord, which contributed significantly to the loss in equity earnings.
- Occupancy Trends: Monitor the 93.8% occupancy rate and potential for further tenant defaults or lease terminations in the current economic climate.
- Capital Structure Changes: Confirm the impact of the recent conversion of OP Units to common shares and the forward equity commitment on future share count and dilution.
- Dividend Sustainability: Assess whether operating cash flows ($187.4M for nine months) remain sufficient to cover the elevated dividend payout ($213.0M for nine months) without further asset sales or debt issuance.