Business Context and Reporting Period
Company: Lexington Realty Trust (LXP)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: LXP is a self-managed REIT focused on acquiring, owning, and managing a geographically diverse portfolio of net-leased office, industrial, and retail properties. As of year-end 2008, the portfolio consisted of approximately 225 consolidated assets totaling 40.2 million square feet, with an occupancy rate of 93.3%. The company also holds investments in loan assets through its 50% interest in Lex-Win Concord LLC.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Gross Revenues | $441.2 million | $419.7 million |
| Net Income | $8.5 million | $76.9 million |
| Net Loss Allocable to Common Shareholders | ($12.8 million) | $50.1 million |
| Net Cash Provided by Operating Activities | $230.2 million | $287.7 million |
| Total Assets | $4.1 billion | $5.3 billion |
| Total Debt (Mortgages, Notes, Credit Facility) | $2.4 billion | $3.0 billion |
| Shareholders' Equity | $1.4 billion | $0.9 billion |
| Dividends Declared per Common Share | $1.17 | $3.60 |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased by $68.4 million (89%) primarily due to a $73.6 million decrease in income from discontinued operations and a significant decline in equity earnings from non-consolidated entities.
- Impairment Charges: The company recognized $104.9 million in other-than-temporary impairments and loan loss reserves at Lex-Win Concord, with LXP's share being $52.4 million. This was driven by the global credit crisis and widening credit spreads.
- Debt Satisfaction Gains: Despite the losses, the company recorded $65.7 million in debt satisfaction gains (net) from repurchasing $239.0 million of 5.45% Exchangeable Guaranteed Notes and $70.9 million of Trust Preferred Securities at significant discounts.
- Portfolio Reduction: The company sold 40 properties to third parties for $242.3 million and contributed/sold 13 properties to the Net Lease Strategic Assets Fund (NLS). Total real estate assets decreased from $3.7 billion to $3.3 billion.
- Dividend Reduction: The quarterly common dividend was reduced from $0.33 to $0.18 per share for 2009 to retain capital and strengthen the balance sheet.
Guidance, Outlook, and Risks
- Strategic Focus: Management's primary focus for 2009 is deleveraging the balance sheet by refinancing and repurchasing indebtedness at discounts. Acquisition activity is expected to remain low until market conditions and financing availability improve.
- Liquidity and Refinancing: Subsequent to year-end, LXP refinanced its unsecured revolving credit facility and secured term loan with a new $250 million facility ($165 million term loan, $85 million revolver) maturing in 2011. The company faces significant balloon payments of $259.6 million in 2009 (though $199.3 million was subsequently extended to 2011).
- Tenant Risks: The company faces risks from tenant defaults in the financial, retail, and automotive sectors. Notable tenants in bankruptcy or liquidation include Linens 'n Things, Circuit City, and Bally's Total Fitness. Occupancy is expected to decline in 2009 due to non-renewals and economic factors.
- Co-Investment Risks: Lex-Win Concord faces liquidity strain due to margin calls on repurchase agreements and an inability to launch new CDOs. LXP may be required to fund up to $37.5 million in additional capital contributions.
Investor Verification Checklist
- Debt Maturities: Verify the status of the $259.6 million in scheduled balloon payments for 2009 and the terms of the subsequent refinancing completed in February 2009.
- Lex-Win Concord Exposure: Assess the likelihood of LXP needing to fund the potential $37.5 million capital call for Lex-Win Concord given the entity's liquidity constraints and margin calls.
- Tenant Concentration: Review the financial health of major tenants in the automotive and retail sectors, specifically those with leases expiring in the near term.
- Dividend Sustainability: Confirm the ability to maintain the reduced $0.18 quarterly dividend given the net loss allocable to common shareholders and the requirement to distribute 90% of taxable income to maintain REIT status.
- Asset Valuation: Evaluate the impact of the $104.9 million impairment charge on the valuation of the loan portfolio and the potential for further write-downs if credit markets do not stabilize.