LXP Industrial Trust (Lexington Realty Trust) — Q2 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2017. Lexington Realty Trust (LXP) is a REIT focused on single-tenant commercial real estate, primarily net-leased properties. At quarter-end it reported interests in approximately 185 consolidated properties across 38 states, with approximately 98.1% leased, excluding properties subject to secured mortgage loans in default. Its combined filing also reports Lepercq Corporate Income Fund L.P. (LCIF), its operating partnership, in which LXP held approximately 96%.
Financial performance and position
Unless stated otherwise, amounts below are for LXP and are in millions; income-statement comparisons are year over year.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total gross revenue | $95.7 | $116.9 | $191.8 | $228.2 |
| Net income attributable to common shareholders | $5.5 | $53.9 | $45.9 | $101.7 |
| Basic earnings per common share | $0.02 | $0.23 | $0.19 | $0.44 |
| Operating cash flow | Not separately presented | Not separately presented | $106.0 | $116.9 |
| Same-store NOI | Not separately presented | Not separately presented | $139.9 | $143.1 |
| FFO per share/unit, basic (non-GAAP) | $0.23 | $0.31 | $0.44 | $0.61 |
| Adjusted Company FFO per share/unit (non-GAAP) | $0.23 | $0.32 | $0.47 | $0.62 |
- Q2 results included $10.2 million of property-sale gains and $13.6 million of impairment charges and loan loss. For the first half, property-sale gains were $44.4 million and impairment charges and loan loss were $21.6 million, including a $5.3 million loss on a loan disposition.
- Same-store NOI fell 2.3% in the first half, primarily due to increased vacancy in certain office properties. Same-store leased area was 97.8% at June 30, 2017, versus 98.9% a year earlier.
- At June 30, LXP had $93.3 million of cash and cash equivalents and $35.9 million of restricted cash. Debt carrying value was approximately $1.83 billion. The $400 million revolving facility had no borrowings, $4.6 million of letters of credit, and $395.4 million available, subject to covenant compliance. LXP reported compliance with corporate debt covenants.
- First-half investing cash flow was $4.8 million; financing cash use was $104.1 million, including $85.9 million of common and preferred dividends. LXP’s balance-sheet total liabilities were $1.97 billion at June 30, 2017.
Material changes and operating activity
- Revenue declined principally because of asset sales—especially New York City land investments—lower lease termination income, and occupancy changes. Acquisitions partly offset the declines. LXP said rental revenue from properties sold fell $38.5 million in the first half, while acquisitions contributed $16.8 million.
- LXP completed approximately $284.2 million of acquisitions and build-to-suit transactions in the first half, including industrial and office properties. It sold properties for gross proceeds of approximately $151.9 million. Management described a strategy of selling non-core, vacant, or shorter-lease assets and reinvesting in build-to-suit and industrial properties.
- During Q2, LXP acquired three industrial properties for $104.2 million, completed the Charlotte office build-to-suit, and disposed of properties for approximately $59.1 million. It also had an Opelika, Alabama development underway and $86.3 million of forward purchase commitments in Warren and Romulus, Michigan.
- The filing revised 2016 comparative results to recognize a $7.685 million lease termination payment in the quarter received rather than over the subsequent lease term. The adjustment increased reported Q2 2016 revenue and net income by $7.335 million and basic EPS by $0.03; first-half 2016 revenue and net income increased by $6.996 million. Comparisons above use the adjusted figures.
Outlook, risks, and unusual items
- Outlook: No specific earnings or FFO guidance was provided. Management expects operating cash flow, cash on hand, revolving-credit capacity, asset-sale proceeds, equity issuance, and other financing alternatives to support liquidity. It cautioned that future earnings growth depends substantially on acquisitions and leasing activity; results may be affected by rates, occupancy, tenant defaults, and transaction timing.
- Debt maturities: LXP disclosed $43.7 million of property-specific mortgage balloon debt due in 2017 and $6.6 million due in 2018. Three 2017 non-recourse maturities totaling $22.0 million were in maturity default at quarter-end. Management stated it believed liquidity was sufficient; property mortgages are generally non-recourse, and the company may transfer collateral to lenders where it considers that beneficial.
- Litigation: A lender seeks approximately $9.2 million under a limited guaranty related to a vacant property and mortgage default. LXP recorded no liability, characterizing a loss as reasonably possible but not probable; it believes maximum exposure is $10 million and is defending the claim. Discovery was ongoing.
- Other contingencies: LXP guaranteed up to $18 million relating to proposed EB-5 financing for a joint venture; the venture had not received the funds and no liability was recorded. The filing also describes lease-related funding obligations and guarantees.
- Controls: Management concluded that disclosure controls were ineffective at June 30 because of a previously identified material weakness in internal control over financial reporting. A remediation plan had begun, but the changes had not been tested and the weakness was not considered remediated.
- Subsequent events: After quarter-end, LXP sold two properties for $7.7 million, acquired an industrial property for $66.7 million, and borrowed $70 million on its revolver.
Important facts for investors to verify
- Progress and cost of remediating and testing the material weakness in financial reporting controls.
- Status, refinancing or resolution of the $22.0 million of defaulted mortgage maturities, and the remaining 2017–2018 balloon obligations.
- Leasing, occupancy, and tenant-credit trends, particularly in office properties; same-store leased area and NOI declined year over year.
- Execution and funding of the development and forward-purchase commitments, including the stated $86.3 million of Michigan commitments.
- Outcome and potential cost of the Bridgewater Hills guaranty litigation, alongside the company’s impairment and asset-disposition assumptions.
- Comparability of reported earnings with 2016, including the revised lease-termination-payment treatment and the contribution of property-sale gains and impairment charges.