LXP Industrial Trust (filed as Lexington Realty Trust) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. The registrant reported approximately 140 consolidated properties in 34 states, totaling 47.3 million square feet, with 94.9% leased. Industrial assets represented 72.2% of gross book value. The filing describes a strategy of growing leased industrial assets, selling non-core properties, reducing lease rollover risk, and maintaining balance-sheet flexibility.
Financial performance and position
Unless stated otherwise, amounts are in millions of dollars.
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Gross revenue | $81.2 | $102.8; down $21.6 |
| Net income (loss) | $28.3 | ($14.8) |
| Net income (loss) attributable to common shareholders | $26.4; $0.11 per diluted share | ($16.0); ($0.07) per diluted share |
| Operating cash flow | $47.6 | $56.2 |
| Investing cash flow | $19.8 provided | $51.2 provided |
| Financing cash flow | $65.1 used | $121.9 used |
| Same-store NOI (non-GAAP) | $62.0 | $63.4; down 2.2% |
| FFO per diluted share and unit (non-GAAP) | $0.20 | $0.25 |
| Adjusted Company FFO per diluted share and unit (non-GAAP) | $0.20 | $0.25 |
Cash and cash equivalents were $170.3 at quarter-end; cash, cash equivalents and restricted cash totaled $179.6. Total debt carrying value was $1,485.3, compared with $1,492.5 at December 31, 2018. Debt fair value was estimated at $1,422.0. The company reported $600.0 of available revolving-credit capacity, subject to covenant compliance, and said it was compliant with all applicable corporate debt covenants. Total assets were $2,970.2 and total liabilities were $1,624.9.
Debt included $562.951 of mortgages and notes, a $298.792 term loan, $496.243 of senior notes, and $127.321 of trust preferred securities. Mortgage and note rates ranged from 2.2% to 6.5%, with a 4.5% weighted-average rate. Senior notes of $250 each mature in June 2023 and June 2024, bearing rates of 4.25% and 4.40%. The term loan matures in January 2021; the revolving facility matures in February 2023, with an option to extend to February 2024. Variable-rate principal was $429.1, or 28.7% of consolidated debt; the company had no interest-rate swaps at March 31. A 100-basis-point increase in variable borrowing rates would have increased quarterly interest expense by an estimated $1.0.
The company declared a Q1 quarterly common dividend of $0.1025 per share, down from $0.1775 declared in Q4 2018. Cash dividends to common and preferred shareholders were $45.3 in Q1, versus operating cash flow of $47.6.
Material changes and notable items
- Rental revenue fell $22.7, mainly from property sales ($24.3) and lower occupancy ($3.7), partly offset by $6.0 from acquisitions. Other revenue increased $1.1, primarily from NNN JV fees.
- Net income improved by $42.4 year over year, chiefly because impairment charges declined to $0.6 from $53.0. Gains on property sales were $21.0, versus $22.8. The prior-year impairment included a vacant office property with a mortgage in default and another office property later sold.
- Same-store NOI declined 2.2%; same-store occupancy was 94.8% at March 31, versus 97.2% a year earlier. Portfolio leased occupancy was 94.9%.
- Q1 acquisitions were two industrial properties for $58.0. The company agreed to buy, upon completion, a Richland, Washington industrial-property expansion for $67.0. Property dispositions generated $79.3 of gross proceeds. Five properties were classified as held for sale at quarter-end, versus two at year-end.
- New leases and extensions covered approximately 1.5 million square feet. Fixed rent on extended leases averaged $12.95 per square foot, compared with $12.16 before extension; weighted-average tenant-improvement and leasing-commission costs were $0.38 per square foot for extensions and $23.58 for new leases.
- In February, the company replaced its revolving facility and continued its 2021 term loan under a new credit agreement: revolving capacity rose from $505 to $600, the revolver maturity was extended from August 2019 to February 2023, and applicable margins were reduced. The company incurred $0.1 of debt-satisfaction charges.
- FFO and adjusted FFO declined to $0.20 per diluted share and unit from $0.25, despite the GAAP net-income improvement. FFO is a non-GAAP measure and is not cash flow available for distributions.
Outlook, risks, and contingencies
- Management said operating cash flows should fund operating and administrative costs, regular debt service, and REIT-required distributions; it also cited cash, the revolver, asset-sale proceeds, equity issuance, and other financing sources as liquidity sources. No specific earnings or FFO guidance was provided in the supplied filing text.
- Property-specific mortgage balloon debt of $76.4 was due in 2019 and $32.0 in 2020. Management believed available liquidity was sufficient to meet obligations. Many property mortgages are non-recourse, subject to stated exceptions.
- Interest-rate exposure remains relevant: variable-rate debt had a 3.8% weighted-average rate in Q1 2019, versus 2.8% in Q1 2018; no swaps were outstanding at quarter-end.
- A tenant, Cummins Inc., sued over a purchase option for the Columbus, Indiana office building, seeking the right to purchase and terminate its lease early despite not timely exercising the option. The company filed a motion to dismiss and intended to defend its ownership; a hearing was scheduled for May 16, 2019. Management said other ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect.
- Other commitments include potential funding of tenant improvements and property expansions, certain completion or allowance guarantees, and a funding agreement supporting distributions on operating-partnership units; no amounts had been advanced under that agreement.
- After quarter-end, the company satisfied a $15.2 non-recourse mortgage, sold three properties for $32.6 gross proceeds, and acquired two industrial assets for approximately $61.0.
- The company adopted lease-accounting standard Topic 842 on January 1, 2019, recording $40.9 of operating right-of-use assets and $42.0 of lease liabilities at March 31; adoption did not materially affect operations or cash flows. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether occupancy, leasing activity, and same-store NOI stabilize after the year-over-year decline and property dispositions.
- Execution and pricing of planned asset sales, industrial acquisitions, and the $67.0 Richland expansion purchase.
- Coverage of dividends by recurring operating cash flow and the implications of the reduction in the declared common dividend.
- Repayment or refinancing plans for the $76.4 of 2019 and $32.0 of 2020 mortgage balloon debt, and continued compliance with credit covenants.
- Developments in the Cummins litigation and any effect on the property’s ownership, lease term, or cash flows.
- The effect of unhedged variable-rate debt and the extent to which the reported liquidity depends on asset-sale proceeds or revolver availability.