Business Context and Reporting Period
Company: Lexington Realty Trust (LXP)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2007
Business Overview: LXP is a self-managed REIT owning a diversified portfolio of net-leased office, industrial, and retail properties. As of September 30, 2007, the Company owned or held interests in approximately 325 consolidated properties across 44 states and the Netherlands. The reporting period is significantly impacted by the December 31, 2006 merger with Newkirk Realty Trust and a strategic restructuring plan announced in June 2007, which involved acquiring full ownership of several co-investment programs and marketing non-core assets for sale.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2006 |
|---|---|---|---|
| Total Gross Revenues | $124.4 million | $327.9 million | $141.6 million |
| Net Income (Loss) | $14.5 million | $45.6 million | $14.0 million |
| Net Income Allocable to Common Shareholders | $7.4 million | $25.9 million | $1.7 million |
| Diluted EPS (Common) | $0.12 | $0.39 | $0.03 |
| Cash Flow from Operations | N/A | $235.9 million | $85.1 million |
| Cash and Cash Equivalents (End of Period) | $260.5 million | $260.5 million | $62.8 million |
| Total Debt (Mortgages & Notes Payable) | $2.63 billion | $2.63 billion | $2.13 billion |
| Weighted Avg. Interest Rate (Total Debt) | ~5.9% | ~5.9% | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total gross revenues increased by $186.2 million (131%) for the nine months ended September 30, 2007, compared to the prior year. This was driven primarily by a $167.5 million increase in rental revenue due to the Newkirk Merger and the acquisition of co-investment program interests.
- Profitability: Net income allocable to common shareholders increased to $25.9 million from $1.7 million in the prior year period. This improvement was largely due to gains on the sale of properties ($39.8 million) and increased rental income, partially offset by higher interest expense ($71.4 million increase) and preferred dividends ($7.4 million increase).
- Discontinued Operations: The Company sold 33 properties during the nine months ended September 30, 2007, generating $225.9 million in proceeds and a gain of $39.8 million. This contrasts with the prior year, which included a significant impairment charge of $28.2 million on discontinued operations.
- Debt Structure: Total debt increased by approximately $500 million. The Company issued $450 million in Exchangeable Guaranteed Notes and $200 million in Trust Preferred Notes to repay borrowings under the MLP facility and fund acquisitions.
Guidance, Outlook, and Risks
- Strategic Restructuring: The Company is executing a plan to restructure into a portfolio of core office and warehouse assets, a 50% interest in a debt joint venture (Concord), and a minority interest in a new specialty asset joint venture (NLS) with Inland American Real Estate Trust. The NLS joint venture is subject to closing conditions and a March 1, 2008 deadline to acquire at least 35 of 53 targeted assets.
- Dividends: The Company declared a common dividend of $0.375 per share for the quarter ended September 30, 2007 (annualized rate of $1.50). Preferred dividends were also declared for Series B, C, and D shares.
- Share Repurchases: The Company repurchased approximately 7.1 million common shares/OP units during the first nine months of 2007 for approximately $147.3 million. As of September 30, 2007, approximately 3.4 million shares remained available under the repurchase authorization.
- Risks and Contingencies:
- Concord Debt Holdings: The Company's 50% joint venture in real estate debt (Concord) faces challenges in the subprime market, impacting its ability to issue Collateralized Debt Obligations (CDOs). Concord has received margin calls totaling $11.8 million and has one loan in technical default (waived through March 2008).
- Market Risk: The Company has $225 million in variable-rate debt. A 100 basis point increase in interest rates would increase interest expense by approximately $972,000 for the nine-month period.
- Disposition Program: The Company is marketing approximately 140 non-core assets for sale; there is no assurance these sales will be completed.
Investor Verification Checklist
- Concord Liquidity: Verify the status of Concord's margin calls and its ability to refinance or extend its $41.9 million in borrowings maturing in 2007.
- Restructuring Milestones: Monitor the progress of the Net Lease Strategic Assets Fund (NLS) joint venture and the deadline to acquire 35 of the 53 targeted assets by March 1, 2008.
- Disposition Progress: Track the volume and pricing of the 140 non-core assets currently under marketing for sale.
- Debt Maturities: Review the schedule of balloon payments, specifically the $304 million due in 2009 and $118.2 million due in 2010.
- Preferred Dividend Coverage: Assess the Company's ability to maintain dividend coverage ratios given the increased preferred dividend obligations from the Series D issuance.