LXP Industrial Trust (filed as Lexington Realty Trust) — Q1 2018 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. The combined filing also reports on Lepercq Corporate Income Fund L.P. (LCIF), the Trust’s operating partnership, which the Trust owned approximately 96% of at quarter-end. Unless noted, figures below are for the Trust and consolidated subsidiaries.
Business context and operating results
- The Trust owned interests in approximately 170 consolidated properties across 37 states, totaling approximately 48.1 million square feet; 97.2% was leased. The portfolio was primarily single-tenant, net-leased commercial real estate.
- Management’s stated focus was cash-flow stability, leased investments, reduced lease-rollover risk, and balance-sheet flexibility. It continued selling non-core properties and seeking to increase the portfolio’s industrial exposure.
- Leasing and extensions covered approximately 209,000 square feet. Weighted-average cash-basis lease term was approximately 8.9 years, versus 8.8 years a year earlier. GAAP base rent on extended leases averaged $5.92 per square foot, versus $5.67 before extension.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Gross revenue | $102.6 million | $96.1 million |
| Net income (loss) | ($14.8 million) | $42.2 million |
| Net income (loss) attributable to common shareholders | ($16.0 million); ($0.07) per share | $40.4 million; $0.17 per share |
| Operating cash flow | $56.2 million | $57.4 million |
| Same-store NOI | $75.4 million, up 0.2% | $75.3 million |
| FFO available to all equityholders and unitholders, diluted | $62.0 million; $0.25 per share/unit | $52.3 million; $0.21 per share/unit |
Revenue rose 6.8%, principally from rental income, including contributions from 2017 acquisitions, partly offset by dispositions and lower lease-termination income. GAAP results deteriorated mainly because impairment charges increased to $53.0 million from $8.0 million, while property-sale gains declined to $22.8 million from $34.2 million. FFO is a non-GAAP measure and should not be treated as cash flow or a substitute for GAAP earnings.
- Cash and debt: Cash and cash equivalents were $90.2 million at March 31, 2018. Total debt carrying value was approximately $2.003 billion, versus $2.069 billion at year-end 2017. The Trust had $100 million outstanding on its revolving facility and $405 million available, subject to covenant compliance.
- Liquidity and maturities: Management cited operating cash flow, cash, property-sale proceeds, revolver capacity, and future financing as liquidity sources. Property-specific mortgage balloon debt included $6.6 million due in 2018 and $83.8 million in 2019. The revolver matures in August 2019, with an option to extend to August 2020.
- Distributions and repurchases: Cash dividends to common and preferred shareholders were $44.8 million. The Trust repurchased and retired 795,775 common shares at an average $7.94 per share.
Material changes, outlook, and risks
- Impairments included $17.9 million on an Overland Park, Kansas office property and $25.4 million on a Memphis, Tennessee office property. The Overland Park property’s $32.6 million non-recourse mortgage exceeded its estimated fair value by $19.4 million.
- Management said future income growth would depend heavily on acquisitions, dispositions, and leasing. Without acquisitions and favorable leasing, identified sources of growth were limited to rent escalations, lower interest expense from amortization or refinancing, cost control, and periodic property-sale gains. The filing provides no quantified earnings or FFO guidance.
- Management stated that operating cash flow should support operating costs, regular debt service, and dividends in the short and long term, and that it believed available liquidity was sufficient for near-term obligations. These expectations are subject to risks, including higher interest rates, lower occupancy, tenant defaults, and delayed acquisitions.
- Variable-rate debt was $574.1 million, or 28.4% of consolidated principal debt. A 100-basis-point increase in the weighted-average rate would have increased quarterly interest expense by an estimated $1.3 million. The Trust reported compliance with applicable corporate debt covenants.
- Subsequent to quarter-end, the Trust acquired two industrial properties in Olive Branch, Mississippi for $92.5 million, financed with revolver borrowings. It also obtained $25.9 million of non-recourse, fixed-rate mortgage financing at 5.4%, maturing in November 2032, secured by an industrial property in Warren, Michigan.
- LCIF reported a $18.2 million net loss, including $22.7 million of impairment charges, and operating cash flow of $8.5 million. It had $14.0 million of cash and restricted cash at quarter-end and stated it depends on the Trust for liquidity for maturing debt and new investments. Preferred Freezer Services represented 16.5% of LCIF rental revenue in Q1 2018.
- The filing identifies ordinary-course legal proceedings and potential tenant-improvement and leasing-cost commitments; management did not expect the legal proceedings, in aggregate, to have a material adverse effect. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective.
Investor facts to verify
- Whether the substantial property impairments indicate further valuation or leasing risk, particularly for the Overland Park and Memphis offices.
- The status and refinancing plan for the 2018–2019 mortgage maturities and the August 2019 revolving facility maturity.
- Whether the 2018 industrial acquisitions and ongoing asset sales improve recurring cash flow, occupancy, and portfolio mix.
- How variable-rate exposure, tenant concentration within LCIF, and the Trust’s distribution level affect future liquidity and coverage.
- The assumptions behind reported property fair values and non-GAAP FFO and same-store NOI measures.