LXP Industrial Trust (then Lexington Realty Trust) — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; filed November 7, 2014. Financial amounts below are in millions of dollars unless stated otherwise. The filing identifies the registrant as Lexington Realty Trust.
Business context
The REIT owned interests in approximately 215 consolidated properties across 40 states, totaling about 40.7 million square feet; approximately 97.6% was leased. Its portfolio focuses on single-tenant net-leased properties and land. Management emphasized acquisitions and build-to-suit projects, capital recycling, and shifting the portfolio toward industrial assets while reducing suburban-office exposure.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Gross revenue | $109.5 | $93.1 | $327.2 | $277.1 |
| Net income attributable to common shareholders | $38.7 | $3.0 | $50.6 | $(5.2) |
| EPS attributable to common shareholders | $0.17 | $0.01 | $0.22 | $(0.03) |
| Company FFO, as adjusted (non-GAAP) | $68.7 | $56.1 | $202.7 | $164.8 |
| Adjusted Company FFO per share (non-GAAP) | $0.28 | $0.25 | $0.84 | $0.75 |
- Cash flow: Nine-month operating cash flow was $165.5, versus $155.1 in 2013. Investing used $160.3; financing provided $26.8. Cash and cash equivalents ended the period at $109.3. Dividends paid to common and preferred shareholders were $118.8.
- Liquidity and debt: Total debt was approximately $2.16 billion. Cash was $109.3 and the $400 million revolver had no borrowings, $16.1 million of letters of credit, and $383.9 million available, subject to covenant compliance. The company reported compliance with corporate debt covenants. Property-specific non-recourse debt due was $39.5 million in 2014 and $155.7 million in 2015.
- Balance sheet: Total assets were $3.84 billion and total liabilities $2.34 billion at September 30, 2014. Debt fair value was estimated at $2.16 billion.
- Portfolio operations: Same-store NOI for the first nine months rose 0.2% to $217.6 million. Same-store occupancy was 97.5%, down from 98.4% a year earlier. The weighted-average lease term was approximately 11.4 years on a cash basis, compared with 7.3 years a year earlier.
Changes versus prior comparable periods
Q3 gross revenue increased $16.5 million, primarily from acquisitions; nine-month revenue increased $50.2 million, including $52.5 million of acquisition-related rental revenue, partly offset by dispositions, vacancies and lower rents on certain renewed leases. Adjusted FFO per share increased to $0.28 for the quarter and $0.84 year to date. Net income benefited materially from property-sale gains, while continuing operations included higher impairment charges year to date. Interest expense rose as corporate debt increased; lower debt-satisfaction charges partly offset that increase.
Outlook, risks and unusual items
- Management expected renewal rents to continue declining through the end of 2015. It provided no formal earnings or FFO guidance in the supplied filing text.
- Management said operating cash flow, cash on hand, revolver capacity, asset-sale proceeds and other financing sources were expected to support operating needs, debt service and REIT distributions. It targeted reducing secured debt and having approximately 65%–70% of assets unencumbered.
- Q3 included $18.5 million of gains on property sales in discontinued operations. Nine-month continuing operations included $18.9 million of impairment charges; discontinued operations included $11.1 million of impairments. Nine-month property-sale gains were $22.1 million.
- Four active build-to-suit developments represented maximum commitments of approximately $309.2 million; $89.6 million had been incurred by quarter-end. Two additional acquisitions under contract totaled approximately $195.0 million. The company cautioned that these transactions might not close or meet expectations.
- A Westmont, Illinois loan was delinquent, with a contractual unpaid balance of $26.3 million; the borrower’s tenant had terminated its lease and the company began foreclosure proceedings after quarter-end. The Norwalk, Connecticut loan maturity was extended after quarter-end. Management reported ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect.
- All consolidated long-term debt was fixed-rate at quarter-end; $505 million of term-loan exposure was hedged with interest-rate swaps. Risks include tenant defaults, vacancies, leasing costs, property valuations, interest rates, and execution of acquisitions and development projects.
Important facts for investors to verify
- Whether acquisition-driven revenue and FFO growth can persist as renewal rents weaken and same-store occupancy has declined.
- The timing, funding and expected returns of the $309.2 million development commitments and $195.0 million contracted acquisitions.
- Near-term debt maturities, revolver availability under covenants, and progress toward reducing secured debt.
- Recoverability of the delinquent Westmont loan and the assumptions supporting the reported real-estate impairment valuations.
- The contribution of property-sale gains and impairments to GAAP earnings; adjusted FFO is a non-GAAP measure and is not cash flow available for dividends.