LXP Industrial Trust quarterly report, Q3 FY2011

Business context and reporting period

This is Lexington Realty Trust’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The filing identifies the registrant as Lexington Realty Trust. It operated a diversified portfolio of predominantly single-tenant office, industrial and retail properties; at quarter-end it had interests in approximately 185 consolidated properties across 39 states, totaling about 36.0 million square feet. Amounts below are in U.S. dollars.

Key financial metrics

For the nine months, rental revenue was $221.6 million versus $218.3 million. Interest and amortization expense was $81.2 million versus $90.2 million, reflecting deleveraging. The filing does not provide a single operating-margin measure in the supplied text.

• Balance sheet at September 30, 2011: total assets of $3.164 billion, total liabilities of $1.888 billion, and total equity of $1.276 billion.
• Debt: carrying amount of debt was $1.696 billion, down from $1.775 billion at December 31, 2010. The filing estimates debt fair value at $1.556 billion. About $182 million of property-specific non-recourse mortgage debt matures in 2012.
• Liquidity: cash and cash equivalents were $71.5 million. Revolver availability was approximately $295.9 million after $4.1 million of letters of credit; no revolver borrowings were outstanding. The company reported compliance with facility covenants.
• Dividends: common and preferred dividends paid totaled $70.5 million in the first nine months, versus $57.6 million a year earlier. Subsequent to quarter-end, the quarterly common dividend rose from $0.115 to $0.125 per share.

Material changes versus the prior comparable period

• Nine-month common-shareholder loss widened to $111.2 million from $63.4 million. Continuing-operations impairment charges and loan losses rose to $80.4 million from $6.9 million; discontinued-operations impairment charges were $34.4 million versus $48.2 million.
• Q3 common-shareholder results shifted to a $37.0 million loss from near break-even. The quarter included $23.9 million of continuing-operations impairment charges and a $9.9 million loss from the change in value of the forward equity commitment.
• Revenue increased modestly, while lower interest expense partly offset higher depreciation and operating costs. Operating cash flow increased by $6.0 million for the nine-month period.
• Debt declined by approximately $78.8 million from year-end 2010. The company issued common shares and raised approximately $96.6 million during the first nine months, while selling 14 properties for a gross disposition price of $137.5 million.

Outlook, commentary, risks and unusual items

• Management said operating cash flows, cash on hand, revolver capacity, equity issuance and co-investment programs were expected to provide capital for operating costs, debt service and REIT distributions. This is not quantified earnings guidance.
• Management said future earnings growth would depend significantly on acquisitions; absent acquisitions, growth sources were expected to be limited to rent adjustments, amortizing mortgage debt and cost controls. It cited risks including economic conditions, interest rates, tenant defaults, impairment, and access to debt and equity capital.
• The company recorded substantial write-downs on non-core, retail, multi-tenant and underperforming properties. Two impaired properties had $21.0 million of non-recourse mortgage debt against estimated fair value of $14.7 million. In Q3, a Suwanee, Georgia property was written down to $4.2 million, below its $10.2 million mortgage balance net of escrows.
• A $25.994 million forward equity commitment was settled in October 2011 with a $4.024 million cash payment; 3,974,645 common shares were retired. The filing had recorded a $4.318 million loss on this commitment for the first nine months.
• During the first nine months, the company acquired five operating properties for an aggregate initial cost basis of $100.8 million and entered development arrangements with expected maximum commitments/contributions totaling $105.0 million. After quarter-end, it acquired a 475,000-square-foot distribution facility for $12.1 million and sold one property for $7.5 million.
• In a pending Deutsche Bank-related dispute, the court ruled for plaintiffs on summary judgment and referred damages for determination; the company stated it believed maximum exposure was $1.2 million plus interest and expenses and intended to appeal if damages were found. A separate county claim relating to a GSA lease remained under monitoring; management did not anticipate a financial impact.
• The filing reported no material environmental matter known to management and no material change in previously disclosed risk factors. Management stated disclosure controls were effective and reported no significant quarterly change in internal control over financial reporting.

Important facts for investors to verify

• Whether the large continuing and discontinued impairment charges reflect further valuation risk in the property portfolio, and whether additional write-downs may arise.
• The timing and refinancing or repayment plan for the approximately $182 million of mortgage maturities in 2012, alongside the terms and availability of the secured revolver.
• Cash generation and dividend coverage, including the effect of the post-quarter dividend increase and the $70.5 million of dividends paid during the first nine months.
• Actual funding requirements, completion timing, tenant leasing and returns for development projects and non-consolidated investments.
• Subsequent outcomes of the pending legal matters and any resulting liabilities.