LXP Industrial Trust (then Lexington Realty Trust): FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is for Lexington Realty Trust, the company identified in the request as LXP Industrial Trust.
Business context
The company is a Maryland REIT focused on single-tenant net-leased real estate, land and related loans. At year-end, it reported interests in approximately 215 consolidated properties across 40 states, totaling 42.3 million square feet. Management’s strategy emphasized long-term leases, capital recycling, lower lease rollover risk and balance-sheet flexibility.
Financial and operating performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $430.8 million | $423.8 million |
| Net income | $114.9 million | $97.5 million |
| Net income attributable to common shareholders | $105.1 million; $0.45 per share | $86.3 million; $0.38 per share |
| Cash from operating activities | $244.9 million | $214.7 million |
| Cash used in investing activities | $388.3 million | $43.1 million |
| Cash from/(used in) financing activities | $45.5 million | $(57.8) million |
| Year-end cash and cash equivalents | $93.2 million | $191.1 million |
| Consolidated indebtedness | Approximately $2.2 billion; weighted-average rate approximately 4.0% | Approximately $2.1 billion |
| Common dividends declared per share | $0.68 | $0.675 |
| FFO per diluted share/unit; Company FFO per diluted share/unit | $1.19; $1.10 | $1.05; $1.11 |
Same-store cash NOI was $283.9 million, down 0.1%; same-store occupancy declined to 97.6% from 98.0%. The company reported overall portfolio occupancy of 96.8% excluding a property with a mortgage in default; the property chart separately shows 96.5% for the consolidated portfolio. Reported rental revenue was $399.5 million. Net income included $25.2 million of debt-satisfaction gains, $23.3 million of property-sale gains and $36.8 million of impairment charges. These items mean earnings growth should not be read as equivalent to recurring operating growth.
Changes versus the prior year
- Revenue increased 1.7%, mainly reflecting income from acquisitions and expansions, partly offset by properties sold.
- Common-shareholder net income rose to $105.1 million from $86.3 million. Continuing-operations income attributable to common shareholders increased to $103.4 million from $37.7 million; the prior year included substantially more discontinued-operations income from property sales.
- Operating cash flow increased by $30.3 million. Investing cash outflow rose substantially, principally with higher real estate investment spending.
- Interest and amortization expense fell $7.6 million, primarily from lower borrowing rates and increased capitalized interest, partly offset by higher debt.
- Management reported a cash-based weighted-average lease term of 12.6 years, up from 12.1 years. Rental revenue from single-tenant leases expiring through 2020 declined to 31.9% from 33.9%.
- Secured debt, including debt classified as held for sale, was approximately $891 million versus $948 million; management reported a lower weighted-average interest rate after refinancing and debt retirement.
Liquidity, capital allocation and outlook
At December 31, 2015, cash was $93.2 million and availability under the revolving credit facility was $223.0 million, subject to covenant compliance. The new unsecured credit agreement had a $905 million capacity and extended maturities on the revolving facility and term loans. The company was in compliance with financial covenants. It retired $216.0 million of property mortgages at a 5.3% weighted-average rate and obtained $190.8 million of new non-recourse mortgage financing at a 3.9% weighted-average fixed rate.
Management said operating cash flows were expected to fund operating costs, regular debt service and REIT-required distributions, with cash, borrowing capacity, asset sales and capital markets as additional sources. No quantified earnings or FFO guidance was provided. Management planned continued investment in long-term leased assets, dispositions of non-core and shorter-term assets, and reduction of secured debt. It cautioned that capital recycling could dilute near-term earnings and that acquisition competition remained strong.
FY2015 acquisitions and completed build-to-suit transactions totaled approximately $491.1 million. Ongoing development arrangements had estimated maximum commitments of approximately $298.6 million, with $95.4 million invested at year-end; a separate joint venture project had an estimated total cost of $86.5 million. The company also reported a $29.7 million Detroit acquisition commitment, completed in January 2016. Subsequent events included a $57.5 million, 15-year mortgage at 5.2% fixed interest and repurchases of 951,792 common shares at an average $7.48.
Risks, contingencies and unusual items
- Single-tenant reliance exposes property cash flow to individual tenant defaults, lease terminations and vacancy costs. Approximately 50.6% of annual GAAP base rent was associated with unrated tenants; 34.5% was associated with investment-grade tenants.
- Debt maturities and refinancing remain significant risks. Scheduled property-specific balloon payments were $113.4 million in 2016 and $68.7 million in 2017; the company also disclosed a possible $12.4 million put of convertible notes in 2017.
- The company reported $177 million of variable-rate debt not covered by swaps at year-end. It estimated a 100-basis-point rate increase would raise 2015 interest expense by approximately $889,000.
- A lender sued over a limited guaranty related to a Bridgewater, New Jersey property whose sole tenant vacated. The lender seeks approximately $15.5 million plus costs; the company intended to defend the claim. A motion to dismiss was pending, with a hearing scheduled for March 2016.
- Real estate impairment charges were $36.8 million in 2015. Loan foreclosures led the company to acquire vacant office properties in Westmont, Illinois and Southfield, Michigan.
- The company identified no environmental condition believed likely to have a material adverse effect, while warning that undiscovered conditions or legal changes could create future liabilities.
- Management cited risks involving lease renewals, development completion and cost, property values, interest rates, access to capital, joint ventures, environmental exposure and continued REIT qualification.
- The company adopted the revised discontinued-operations guidance in 2015. It changed presentation of property disposals, reducing comparability with 2014; management said adoption did not materially affect financial position, results or cash flows.
Key facts for investors to verify
- Reconcile the occupancy figures: 96.8% excluding the mortgage-default property versus 96.5% in the consolidated property chart.
- Assess recurring earnings and cash generation separately from debt-satisfaction gains, property-sale gains, impairments and discontinued-operations presentation changes.
- Review debt maturities, refinancing plans and covenant headroom, including the 2016 property-specific maturities and 2017 convertible-note put option.
- Evaluate tenant credit quality and lease rollover exposure, particularly the high share of base rent from unrated tenants and the shorter-term multi-tenant portfolio.
- Track delivery, remaining funding needs and lease economics for build-to-suit projects and the subsequent Detroit acquisition and Richmond financing.
- Monitor the Bridgewater guaranty litigation and any change in management’s assessment of potential exposure.
- Compare dividends with operating cash flow and capital requirements; FFO and Company FFO are non-GAAP measures and are not substitutes for cash flow or GAAP income.