LXP / Lexington Realty Trust — FY 2017 Form 10-K
Period note: This is an annual report for the fiscal year ended December 31, 2017, not a standalone Q4 filing. The filing also reports quarterly results; figures below refer to Lexington Realty Trust and consolidated subsidiaries unless noted.
Business context
Lexington Realty Trust (NYSE: LXP) was a REIT focused on diversified, primarily single-tenant commercial properties, predominantly net leased. At year-end it held interests in approximately 175 consolidated properties across 37 states, totaling 48.6 million square feet and 98.9% leased. Industrial properties represented 35.4 million square feet; office properties, 10.9 million. No tenant or guarantor exceeded 10% of Trust annual base rent. LCIF, its operating partnership, was approximately 96% owned by Lexington and depended on Lexington for management and financing.
Financial and operating results
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Gross revenue | $391.6 million | $429.5 million | Down $37.9 million (8.8%), mainly property sales and lower lease-termination revenue; acquisitions partly offset the decline. |
| Rental revenue | $359.8 million | $398.1 million | Down $38.2 million. |
| Net income | $86.6 million | $96.5 million | Down 10.2%. |
| Net income attributable to common shareholders / diluted EPS | $79.1 million / $0.33 | $89.1 million / $0.37 | Lower year over year. |
| Same-store NOI | $238.8 million | $239.4 million | Down 0.2%; management cited vacancy. Same-store leased rate was 98.4%, versus 98.7%. |
| FFO per diluted share and unit | $0.97 | $1.13 | Adjusted Company FFO was $0.97 versus $1.14. |
| Cash from operating activities | $227.8 million | $235.3 million | Down $7.5 million; management attributed the longer-term decline primarily to dispositions during portfolio repositioning. |
| Cash from investing activities | $(259.1) million | $(10.2) million | Reflects substantial property investment and transaction timing. |
| Cash from financing activities | $52.5 million | $(231.7) million | Included net borrowings and equity issuance, alongside dividends and debt payments. |
| Year-end cash and restricted cash | $107.8 million cash; $4.4 million restricted | $86.6 million cash; $31.1 million restricted | Cash and cash equivalents increased. |
Debt and liquidity: Consolidated indebtedness was approximately $2.07 billion, with a weighted-average interest rate of approximately 3.6%; total assets were $3.55 billion and total equity $1.34 billion. The Trust reported $345 million available under its revolving facility, subject to covenants, and was in covenant compliance at year-end. Scheduled corporate recourse maturities include $160 million in 2019, $300 million in 2020 and $300 million in 2021. Approximately 18.4% of consolidated principal debt was variable rate; management estimated a 100-basis-point rate increase would raise 2017 interest expense by $1.7 million.
Dividends: Common dividends declared were $0.7025 per share for 2017, compared with $0.69 in 2016; cash dividends paid to common and preferred shareholders totaled $172.1 million. The board retains discretion over future dividends.
Material changes and notable items
- The company invested $558.6 million in property acquisitions and completed $169.0 million of consolidated build-to-suit projects, primarily industrial. It disposed of consolidated properties for gross proceeds of $229.1 million and conveyed two properties in foreclosure in satisfaction of $12.6 million of non-recourse mortgages.
- Portfolio strategy continued to favor industrial assets and reduce suburban-office and non-core exposure. The weighted-average lease term increased to 9.1 years from 8.6 years; 37.7% of 2017 base rent came from leases of at least ten years, up from 36.8%.
- Impairment charges and loan losses in the Trust’s income statement totaled $45.0 million, versus $100.2 million in 2016. The 2016 figure included substantial charges related to New York land investments. The Trust also recorded a $2.05 million litigation settlement in 2017.
- Q4 2017 gross revenue was $102.2 million and net income was $31.4 million, compared with $95.3 million and $16.9 million, respectively, in Q4 2016. Quarterly earnings were uneven; Q1 2017 net income was $42.2 million, while Q2 and Q3 were $7.4 million and $5.6 million.
- After year-end, the Trust sold two office properties for $21.0 million.
Outlook, risks and contingencies
Management provided no specific numerical earnings or FFO guidance. It expected operating cash flows, cash on hand, borrowing capacity, capital recycling, and access to debt and equity markets to support operations, debt service, REIT distributions, and investment. Management acknowledged that office dispositions and buying lower-cap-rate industrial assets may dilute near-term earnings, while stating that the repositioning is intended to improve portfolio quality and long-term cash-flow stability. Acquisition competition and compressed industrial capitalization rates remained challenges; management expected rising interest rates could put upward pressure on cap rates.
- Key exposures include tenant defaults or lease terminations, vacancies and reletting costs, lease expirations, refinancing and balloon maturities, leverage and interest-rate changes, property impairments, and the illiquidity of real estate. A Memphis industrial tenant asserted an economic discontinuance option that Lexington considered invalid; the company expected rent cessation beginning March 1, 2018 and intended to enforce the lease.
- Non-recourse property debt may result in properties being returned to lenders if refinancing, leasing, or sale is not economic. The Trust also disclosed environmental, insurance, development, joint-venture, cybersecurity, REIT-qualification, and related-party risks.
- A lender lawsuit concerning a limited guaranty was settled for $2.05 million in 2017 and dismissed. Management stated ordinary-course proceedings were not expected, in aggregate, to materially adversely affect the business.
- Executive employment agreements expired in January 2018; retirement arrangements were entered into for two executives, including Chairman E. Robert Roskind, with his retirement expected in January 2019.
- Management and the auditor reported effective Trust financial-reporting controls at December 31, 2017; the company said a material weakness identified in 2016 had been remediated.
Important facts for investors to verify
- Confirm the annual-versus-quarterly basis of the figures and reconcile the Q4 earnings spike with property-sale gains, debt-satisfaction items, impairments, and other nonrecurring items.
- Review the full debt maturity schedule, facility covenants, refinancing plans, and the consequences of rising rates as interest-rate swaps expire.
- Assess lease rollover and tenant credit exposure, including the Memphis tenant dispute, the 2018–2022 expirations, and the large unrated share of annual rent (44.4%).
- Evaluate whether acquisitions and dispositions support the industrial repositioning without undermining cash flow, FFO, or dividend coverage; treat FFO and NOI as non-GAAP measures, not substitutes for cash flow or net income.
- Review the related-party mezzanine financing from an affiliate of the Chairman and the disclosed governance and executive succession arrangements.