LXP Industrial Trust (then Lexington Realty Trust) — Q1 2017 Form 10-Q
Business and period: The combined filing covers Lexington Realty Trust and its controlled operating partnership, Lepercq Corporate Income Fund L.P. (LCIF), for the three months ended March 31, 2017. The Trust owned interests in approximately 190 consolidated properties across 39 states; approximately 96.2% of its 43.7 million square feet was leased, excluding properties securing mortgage loans in default. Its portfolio primarily consists of single-tenant, net-leased commercial properties.
Financial results and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Trust gross revenue | $96.1 million | $111.3 million |
| Trust net income | $42.2 million | $50.5 million |
| Net income attributable to common shareholders | $40.4 million; $0.17 per diluted share | $47.8 million; $0.20 per diluted share |
| Operating cash flow | $57.4 million | $59.2 million |
| Same-store NOI (non-GAAP) | $72.0 million | $74.1 million |
| Adjusted Company FFO, diluted (non-GAAP) | $57.8 million; $0.23 per share/unit | $71.8 million; $0.29 per share/unit |
At March 31, 2017, the Trust reported $177.3 million of cash and cash equivalents, $63.5 million of restricted cash, and $1.853 billion of debt carrying value. Its $905 million unsecured credit agreement had no revolving borrowings, $4.6 million of letters of credit, and $395.4 million of available capacity, subject to covenant compliance. The Trust reported compliance with corporate debt covenants. Common and preferred dividends paid were $42.8 million. The balance sheet showed total assets of $3.447 billion and total equity of $1.430 billion.
Trust debt included $500 million of senior notes due in 2023 and 2024, $505 million of term loans due in 2020 and 2021, and mortgages and notes payable with maturities from 2017 to 2036. The weighted-average rate on mortgages and notes payable was 4.7%. Interest-rate swaps fixed the LIBOR component on the term loans through February 2018 and January 2019. The filing reported no consolidated variable-rate indebtedness at quarter-end.
LCIF, which is approximately 96% owned by the Trust, reported Q1 revenue of $19.3 million and a net loss of $0.5 million, versus revenue of $34.1 million and net income of $18.0 million in Q1 2016. LCIF’s total debt, including its allocated co-borrower debt, was $267.5 million at quarter-end. LCIF reported $47.0 million of cash and $9.9 million of operating cash flow.
Changes and operating developments
- Trust revenue fell $15.2 million year over year, principally because property dispositions reduced rental revenue by $18.9 million and occupancy changes reduced it by $2.8 million; acquisitions contributed $7.4 million of rental revenue.
- Net income attributable to common shareholders declined $7.4 million. Higher property-sale gains partially offset lower revenue, an $8.0 million combined impairment and loan-loss charge, higher general and administrative expense, and lower equity earnings from non-consolidated entities.
- Same-store NOI declined 2.8%; same-store leased area was 95.7%, compared with 98.1% a year earlier. Management attributed the NOI decline mainly to increased vacancy at certain office properties.
- Adjusted diluted FFO per share/unit fell to $0.23 from $0.29. These FFO and NOI measures are non-GAAP and are not substitutes for GAAP earnings or cash flow.
- The Trust acquired or completed three properties for approximately $118.7 million, including the final building in its Lake Jackson, Texas build-to-suit project. It sold consolidated properties for approximately $92.8 million, sold its Oklahoma City tenant-in-common interest, and assigned its Kennewick loan for 94% of principal, recognizing a $5.3 million loan loss.
- Trust operating cash flow was slightly lower, while investing cash flow was positive $67.3 million, reflecting sales and loan collections. The Trust issued 1.6 million shares through its at-the-market program at an average gross price of $10.89 per share.
Outlook, risks and unusual items
No quantified earnings or FFO guidance is provided. Management expects operating cash flow to fund operating costs, regular debt service, and dividends, and cites cash, asset-sale proceeds, revolver availability, equity issuance, and other financing as liquidity sources. It cautions that future income growth depends substantially on acquisitions, dispositions, and leasing; without acquisitions and favorable leasing, growth sources are limited. The Trust had $62.7 million of property-specific mortgage balloon debt due in 2017 and $6.6 million due in 2018; some 2017 non-recourse maturities were already in default. Management says it may transfer collateral to lenders where appropriate.
- Commitments: Two Trust development projects had an estimated remaining commitment/completion cost of $99.4 million. Forward property purchases totaled up to $71.7 million, with expected acquisitions in Q2 and Q3 2017; completion and performance are not assured.
- Litigation: A lender seeks approximately $9.2 million under a limited guaranty related to a vacated Bridgewater, New Jersey property. The Trust considers a loss reasonably possible but not probable, has recorded no liability, and states its maximum exposure is $10 million. Discovery was ongoing.
- Other contingent exposure: A conditional guarantee could cover up to $18 million of proposed EB-5 financing for a joint venture; no funds had been received and no liability was recorded.
- Financial reporting controls: Management identified a material weakness in internal control over financial reporting and concluded controls were not effective as of March 31, 2017 for both the Trust and LCIF. A remediation plan was underway. Management nevertheless stated the interim financial statements present fairly in all material respects.
- Portfolio and financing risks: Property-level debt is generally non-recourse, but defaults may result in property transfer or foreclosure. LCIF depends on the Trust for management, financing, and potentially support for distributions and maturing mortgage obligations.
- Subsequent sales: After quarter-end, the Trust sold two properties for $17.1 million gross; LCIF separately reported a property sale for $3.5 million gross.
Important facts for investors to verify
- Progress on the material-weakness remediation plan and any subsequent changes to control effectiveness.
- Status and refinancing, repayment, or foreclosure outcomes for the 2017 mortgage maturities in default.
- Actual occupancy, lease renewals, same-store NOI, and whether dispositions continue to outpace replacement rental income.
- Completion, costs, tenant occupancy, and returns on the development projects and forward purchase commitments.
- Developments in the Bridgewater guaranty litigation and the potential exposure under other guarantees.
- Liquidity, covenant headroom, dividend coverage, and the effect of future financing or equity issuance on shareholders.