Business Context and Reporting Period
Company: Lexington Realty Trust (formerly Lexington Corporate Properties Trust, merged with Newkirk Realty Trust on Dec 31, 2006).
Reporting Period: Quarterly Report (Form 10-Q) for the period ended June 30, 2007.
Business Overview: A self-managed REIT owning a geographically diversified portfolio of net-leased office, industrial, and retail properties. As of June 30, 2007, the Company owned or had interests in approximately 350 consolidated properties in 44 states and the Netherlands.
Key Event: On June 4, 2007, the Company announced a strategic restructuring plan to consolidate co-investment programs, dispose of non-core assets, and focus on core office and warehouse/distribution assets.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2007 |
Six Months Ended June 30, 2006 |
|---|---|---|
| Total Gross Revenues | $213,550 | $100,375 |
| Net Income | $31,154 | $31,598 |
| Net Income Allocable to Common Shareholders | $18,489 | $23,380 |
| Diluted EPS (Common) | $0.28 | $0.45 |
| Cash Flow from Operating Activities | $152,604 | $53,784 |
| Cash Flow from Investing Activities | ($409,707) | ($22,092) |
| Cash Flow from Financing Activities | $215,550 | ($30,889) |
| Total Debt (Mortgages & Notes Payable) | $2,598,230 | $2,126,810 |
| Cash and Cash Equivalents | $75,419 | $97,547 |
Note: Debt figures exclude Exchangeable Notes ($450M) and Trust Notes ($200M) which are listed separately on the balance sheet.
Material Changes vs. Prior Period
- Revenue Growth: Total gross revenues increased by $113.2 million (113%) year-over-year. This was driven primarily by the inclusion of Newkirk Realty Trust assets (effective Jan 1, 2007) and the acquisition of full interests in co-investment programs (TNI, LAC, LAC II). Rental revenue specifically increased by $99.5 million.
- Net Income Decline: While total Net Income remained relatively flat ($31.2M vs $31.6M), Net Income allocable to common shareholders decreased by $4.9 million. This decrease was primarily due to increased preferred dividends ($4.4M) resulting from the issuance of Series D Preferred Shares and a reduction in income from discontinued operations.
- Investing Activity: Net cash used in investing activities surged to $409.7 million (from $22.1M) due to the acquisition of co-investment program interests ($366.6M cash paid) and real estate acquisitions ($133.7M), partially offset by property sales ($108.5M).
- Debt Structure: The Company issued $450M in Exchangeable Guaranteed Notes and $200M in Trust Preferred Notes. Proceeds were used to repay $547.2M in borrowings under the MLP's secured facility and to fund acquisitions.
Guidance, Outlook, and Risks
- Strategic Restructuring: The Company is executing a plan to become a company consisting primarily of wholly owned core office and warehouse assets. This involves acquiring remaining interests in co-investment programs (completed for TNI, LAC, LAC II) and marketing approximately 140 non-core assets for sale.
- Dividends: The Company declared a common dividend of $0.375 per share for the quarter ended June 30, 2007 (annualized $1.50). Preferred dividends were also declared for Series B, C, and D.
- Share Repurchases: The Board authorized the repurchase of up to 10 million shares/units. During the six months ended June 30, 2007, the Company repurchased approximately 6.6 million shares/units for $137.0 million.
- Risks:
- Failure to successfully implement the strategic restructuring plan.
- Integration risks associated with the Newkirk Merger.
- Interest rate risk: 8.3% of total long-term indebtedness is variable rate.
- Environmental liabilities and tenant defaults.
Investor Verification Checklist
- Restructuring Execution: Verify the progress of the disposition program for the 140 non-core assets and the timeline for the new joint venture.
- Debt Maturities: Review the maturity schedule of the new $450M Exchangeable Notes (2027) and $200M Trust Preferred Notes (2037) versus the refinancing of the KeyBank term loan (2009).
- Preferred Dividend Impact: Assess the long-term impact of the new Series D Preferred dividends on cash flow available for common shareholders.
- Co-Investment Consolidation: Confirm the financial impact of consolidating TNI, LAC, and LAC II on future rental revenue versus the loss of advisory/incentive fees.
- Share Count: Monitor the reduction in outstanding shares due to the active repurchase program and its effect on future EPS.