LXP Industrial Trust (formerly Lexington Realty Trust): 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is by Lexington Realty Trust, a REIT focused on single-tenant industrial real estate; it is an annual report, not a quarterly filing.
Business context
At year-end, the company held interests in approximately 130 consolidated properties across 31 states, totaling 52.6 million square feet and 97.0% leased. Industrial assets represented 81.5% of gross book value, up from 71.2% a year earlier. Management’s strategy is to recycle non-core office, retail and vacant assets into leased industrial properties, while reducing lease rollover risk and maintaining balance-sheet flexibility.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $326.0 million | $397.0 million |
| Net income | $285.3 million | $230.9 million |
| Net income attributable to common shareholders | $273.2 million; $1.15 per diluted share | $220.8 million; $0.93 per diluted share |
| Cash from operating activities | $192.2 million | $217.8 million |
| Same-store NOI | $207.9 million | $211.4 million |
| FFO per diluted common share and unit | $0.78 | $0.99 |
| Adjusted Company FFO per diluted share and unit | $0.80 | $0.96 |
Revenue fell 17.9%, primarily because property sales reduced rental revenue by $79.1 million, partly offset by acquisitions. Same-store NOI declined 1.7%; same-store occupancy was 96.7%, versus 98.5% in 2018. GAAP net income rose despite lower revenue, but included $250.9 million of gains on property sales. The year-over-year improvement also reflected impairment charges falling to $5.3 million from $95.8 million and lower interest expense. Accordingly, GAAP earnings growth should not be read as equivalent to recurring operating growth. The filing does not present a single comparable operating-margin measure as a headline metric.
During 2019, LXP acquired 17 industrial assets for $703.8 million and disposed of 22 properties for gross proceeds of $621.6 million. It invested approximately $18.5 million in industrial development projects and completed 23 new leases or extensions covering 6.4 million square feet. Subsequent to year-end, it acquired four industrial properties for approximately $195 million.
Debt, liquidity and capital
Consolidated debt was approximately $1.312 billion at December 31, 2019, with a weighted-average interest rate of approximately 4.0%. Cash and cash equivalents were $122.7 million. The $600 million revolving credit facility had no borrowings outstanding and was available subject to covenant compliance; LXP reported compliance with its financial covenants. Secured mortgages and notes totaled $393.9 million, with a weighted-average rate of approximately 4.5% and weighted-average maturity of 11.1 years.
Key corporate obligations included $250 million of 4.25% senior notes due in 2023, $250 million of 4.40% notes due in 2024, and a $300 million term loan due in 2025. The term loan was swapped to a fixed rate of 2.732% through January 2025. Two office-property non-recourse mortgages, totaling $38.9 million, were in default; the collateral properties were vacant or mostly vacant. Property-specific balloon payments were $50.5 million in 2020 and $17.0 million in 2021; corporate balloon maturities include $250 million in each of 2023 and 2024.
Operating cash flow decreased to $192.2 million from $217.8 million. Cash used in investing activities was $187.0 million, compared with $554.9 million of cash provided in 2018, reflecting the timing of acquisitions and dispositions. Cash used in financing activities was $53.2 million. LXP issued 10.0 million common shares in an underwritten offering and 9.7 million shares through its at-the-market program, generating approximately $203 million of net proceeds in total, and repurchased approximately 0.4 million shares. Cash dividends paid to common and preferred shareholders were $122.8 million. The company reduced its common dividend policy during 2019; the selected financial data reports $0.4125 of declared common dividends per share for the year.
Outlook, commentary and risks
- Management expects continued portfolio transformation toward warehouse and distribution properties, and anticipates liquidity from operating cash flow, asset sales, borrowings and equity or debt issuance. The filing gives no numerical earnings or FFO guidance.
- Management noted that competition for industrial properties has increased, raising acquisition costs and reducing obtainable yields. Selling higher-cap-rate non-industrial properties to buy lower-cap-rate industrial assets may be dilutive in the near term; management expects longer-term benefits but gives no assurance.
- Lease expirations create notable rollover exposure: 10.1% of base rental revenue was associated with leases expiring in 2021, 11.1% in 2024, and 10.9% in 2027. Tenant defaults, vacancies, re-leasing costs and lower renewal rents could pressure cash flow.
- Development projects carry construction, approval, completion, leasing and financing risks. Two consolidated industrial projects were expected to complete in fourth-quarter 2020 and first-quarter 2021; other project timing and costs were not determinable.
- Variable-rate exposure included $129.1 million of LIBOR-indexed trust preferred securities; a 100-basis-point rate increase was estimated to raise 2019 interest expense by $3.2 million. LXP also highlighted LIBOR replacement uncertainty and refinancing, covenant and capital-market risks.
- Other material risks include concentration in industrial assets and single-tenant leases, environmental liabilities, impairment estimates, natural disasters and climate impacts, cybersecurity, and continued REIT qualification. The Cummins litigation was settled with the property sale and dismissed with prejudice in December 2019. Auditors issued unqualified opinions on the financial statements and internal control; impairment testing was identified as a critical audit matter.
Important facts for investors to verify
- Review the quality and recurrence of reported earnings, especially property-sale gains, impairments, and the gap between GAAP EPS and FFO.
- Assess the effect of the reduced common dividend against recurring cash flow, FFO and future capital needs.
- Check lease rollover, tenant credit, occupancy and re-leasing prospects for the significant 2021, 2024 and 2027 expirations.
- Monitor the two defaulted office mortgages, related property outcomes and any additional non-recourse debt resolutions.
- Confirm funding and returns for the post-year-end acquisitions and development pipeline, and the resulting effect on leverage and share dilution.
- Track refinancing needs, covenant headroom, variable-rate exposure and the transition away from LIBOR.