LXP Industrial Trust (filed as Lexington Realty Trust) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. Amounts below are in U.S. dollars. The filing reports financial statement figures in thousands unless otherwise noted.
Business context
The REIT owned interests in approximately 215 consolidated properties across 40 states, totaling about 41.8 million square feet; approximately 96.7% was leased. Most properties are single-tenant net-leased assets. Management described its strategy as expanding long-term leased investments, reducing lease rollover risk, recycling capital, and maintaining balance-sheet flexibility.
Financial performance and position
- Revenue: Gross revenue was $108.6 million, up 4.3% from $104.1 million. Rental revenue rose to $100.0 million from $96.4 million.
- Profit: Net income attributable to common shareholders was $31.8 million, or $0.14 per diluted share, versus a loss of $0.8 million in Q1 2014. The comparison was substantially affected by debt-satisfaction gains and lower impairment charges in 2015. Debt-satisfaction gains were $10.4 million versus a $3.3 million charge; continuing-operations impairment charges were $1.1 million versus $16.4 million.
- Operating performance: Same-store NOI fell 3.7% to $81.8 million. Same-store occupancy declined to 96.4% from 98.2%. Company FFO, a non-GAAP measure, was $64.5 million, or $0.26 per diluted share and unit, compared with $66.5 million, or $0.28.
- Cash flow: Operating cash flow was $57.9 million, down from $59.9 million. Investing activities used $233.1 million, primarily for acquisitions and construction; financing activities provided $38.9 million. Cash and cash equivalents fell to $54.8 million from $191.1 million at year-end.
- Debt and liquidity: Total reported debt and trust preferred securities were approximately $2.14 billion at quarter-end. Cash was $54.8 million, and the $400 million revolving facility had $93.0 million drawn, $12.1 million of letters of credit, and $294.9 million available, subject to covenant compliance. The company reported covenant compliance. Fixed-rate debt represented 95.7% of consolidated indebtedness.
- Dividends: Common-share dividends were $0.17 per share per quarter, up from $0.165 in 2014. Cash dividends to common and preferred shareholders totaled $41.0 million.
Material changes and transactions
- Acquired five properties for approximately $197.3 million. During the quarter, it also retired $113.6 million of non-recourse mortgage debt, obtained $80.8 million of long-term mortgage financing at a weighted-average rate of 3.7%, and drew $93.0 million on its revolving facility.
- Disposed of interests in three office properties for aggregate gross proceeds of approximately $35.2 million. Two Issaquah, Washington office properties were transferred by deed-in-lieu of foreclosure in satisfaction of a $30.3 million non-recourse mortgage.
- Had $125.6 million invested in build-to-suit developments and maximum commitments/contributions of approximately $309.2 million across four projects. It also had two committed future acquisitions totaling approximately $184.7 million; completion and closing were not assured.
- Weighted-average lease term was approximately 12.4 years, up from 11.1 years a year earlier. Q1 leasing activity covered 0.9 million square feet; management said renewal rents were expected to continue declining through year-end 2015.
Outlook, risks, and contingencies
- No quantified earnings or FFO guidance was provided. Management expected operating cash flows, cash on hand, revolving-credit capacity, capital recycling, and other financing sources to fund operations, debt service, dividends, and business needs.
- Management expected lower renewal rents through the end of 2015, with the impact after 2015 to be mitigated by capital recycling and rent increases under long-term leases. It cautioned that future net-income growth depends materially on acquisitions and favorable leasing.
- Near-term risks highlighted include vacancies, tenant defaults, interest-rate increases, delayed acquisitions, and leasing conditions. Same-store base rent declined due to vacancies; the company also cited higher vacancy-related operating costs.
- Two loan exposures were problematic: the Westmont, Illinois borrower was in default and foreclosure proceedings had begun, and the Southfield, Michigan loan was impaired. Subsequent to quarter-end, the company foreclosed on the Southfield borrower.
- Outstanding commitments included development funding and tenant-related obligations. Management said ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect. No material changes to the annual-report risk factors were reported.
- Subsequent events included a $12.4 million gross sale of a Fort Myers office property and conversion of $2.8 million principal amount of convertible notes into approximately 428,707 common shares.
Important facts for investors to verify
- Whether same-store occupancy and NOI weakness persists, and whether expected renewal-rent declines through 2015 are offset by leasing, rent escalations, or asset sales.
- The cash-flow and return profile of the $197.3 million of acquisitions and the substantial development and acquisition commitments, including whether projects are completed on schedule and within budget.
- Progress and recoveries on the Westmont and Southfield loan exposures, and any further property transfers or impairment charges.
- Liquidity after the large Q1 cash decline, upcoming property-specific mortgage maturities ($29.2 million in 2015 and $129.9 million in 2016), and continued compliance with debt covenants.
- How much reported earnings growth reflects recurring property operations versus the $10.4 million net debt-satisfaction gain and lower impairment charges; compare GAAP earnings with Company FFO and operating cash flow.