LXP Industrial Trust (Lexington Realty Trust) — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is for Lexington Realty Trust (NYSE: LXP), a REIT focused on single-tenant commercial real estate, with an increasing emphasis on industrial properties. Financial statements received unqualified audit opinions; the auditor also reported effective internal control over financial reporting.
Business context and portfolio
- At year-end, the company had interests in approximately 135 consolidated properties across 34 states, totaling 47.6 million square feet and 95.1% leased.
- Industrial assets accounted for 65.4% of GAAP rent, up from 44.3% a year earlier. Industrial occupancy was 96.3%; office occupancy was 91.4%.
- The consolidated portfolio’s weighted-average remaining lease term was 8.9 years; industrial’s was 9.6 years. No tenant or guarantor represented more than 10% of annual base rental revenue.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total gross revenue | $395.3 million | $391.6 million |
| Net income | $230.9 million | $86.6 million |
| Net income attributable to common shareholders | $220.8 million | $79.1 million |
| Basic/diluted earnings per common share | $0.93 / $0.93 | $0.33 / $0.33 |
| Net cash from operating activities | $217.8 million | $227.9 million |
| Same-store NOI (non-GAAP) | $191.5 million | $191.8 million |
| FFO available to common shareholders and unitholders (non-GAAP) | $237.2 million | $232.6 million |
| Adjusted Company FFO, diluted (non-GAAP) | $236.3 million | $238.6 million |
| Cash dividends declared per common share | $0.71 | $0.7025 |
- Reported net income included $252.9 million of gains on property sales and $95.8 million of impairment charges. The earnings increase therefore substantially reflects asset-sale gains, rather than recurring rental operations.
- Same-store NOI declined 0.2%; same-store leased area fell to 92.1% from 98.9%. Adjusted Company FFO per diluted share was $0.96, versus $0.97 in 2017.
- Cash from investing activities was $554.9 million, primarily reflecting property-sale proceeds; cash used in financing activities was $707.6 million. Year-end cash and cash equivalents were $168.8 million.
Debt, liquidity and capital allocation
- Consolidated indebtedness was approximately $1.49 billion at year-end, down from $2.07 billion. Total assets were $2.95 billion; total equity was $1.35 billion.
- Mortgages and notes payable were $575.5 million, with a weighted-average interest rate of approximately 4.5% and maturity of 9.5 years. The company reported a weighted-average interest rate of approximately 4.0% across total indebtedness.
- The $505 million revolving facility had no borrowings outstanding and was fully available, subject to covenant compliance. The company reported compliance with financial covenants.
- During 2018, the company repaid the $300 million term loan scheduled to mature in 2020, repaid $160 million net under the revolver, retired $118 million of property mortgage debt, and repurchased about 5.9 million common shares for $47.2 million at an average $8.05 per share.
- Property dispositions generated approximately $1.1 billion of gross proceeds; the company also acquired eight industrial assets for $315.6 million. It contributed or sold 21 office assets to NNN Office JV for an aggregate price of $725.8 million and retained a 20% interest.
Changes, outlook, risks and unusual items
- Portfolio repositioning: Management intends to continue selling non-core and office assets and investing in industrial properties. It cautioned that selling higher-cap-rate assets and buying industrial properties at lower cap rates may dilute near-term earnings; management expects longer-term portfolio benefits but gave no quantified earnings or FFO guidance.
- Dividend: The filing says the company expected to reduce its common dividend as part of its industrial-focused strategy. Subsequent to year-end, it declared a quarterly common dividend of $0.1025 per share.
- Subsequent financing and investment: In February 2019, the company replaced its revolving facility and continued its 2021 term loan, extending the revolver’s maturity to February 2023 and reducing applicable margins. It also reported a $79.3 million property sale, two industrial acquisitions totaling about $58 million, and an agreement to purchase a Richland, Washington property expansion for $67 million upon completion.
- Leasing and market risks: Competition for industrial properties has increased and acquisition cap rates have compressed. Management also noted that speculative development may constrain build-to-suit opportunities. Lease expirations include 6.0% of annual rent in 2019, 9.7% in 2021, 9.0% in 2024 and 11.1% in 2027.
- Debt and interest-rate exposure: Variable-rate debt was $174.1 million, or 11.6% of consolidated indebtedness, at year-end. Management estimated a 100-basis-point rate increase would have raised 2018 interest expense by $4.9 million. LIBOR transition, refinancing needs, and secured debt maturities remain risks.
- Unusual and contingent matters: The company recorded $95.8 million of impairment charges, primarily tied to non-core assets, anticipated sales, vacancies and leasing prospects. Cummins Inc. sued over an allegedly untimely exercised purchase option for a company-owned office building, seeking to buy the property and terminate its lease early; the company moved to dismiss and intends to defend the claim. Management stated ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect.
- Other exposure: 41.9% of annual GAAP base rent was associated with unrated tenants, guarantors or parent/sponsor entities. The company also highlighted tenant default, vacancy and reletting costs, property impairments, environmental liability, joint-venture control, and maintaining REIT qualification as material risks.
Important facts for investors to verify
- Separate recurring operating performance from the 2018 property-sale gains: review FFO, adjusted FFO, same-store NOI and the substantial impairment charges alongside GAAP net income.
- Track whether the industrial shift improves occupancy, cash flow and returns, while monitoring the impact of asset sales and lower acquisition cap rates.
- Review the timing and refinancing of debt maturities, the post-refinancing credit terms, covenant headroom, and exposure to floating rates and LIBOR transition.
- Assess lease rollover and vacancy exposure, especially the stated 2021, 2024 and 2027 expirations, and the concentration of rent from unrated tenants.
- Confirm subsequent dividend decisions and the outcome of the Cummins litigation, which could affect the property’s ownership and lease term.