LXP Industrial Trust (Lexington Realty Trust): Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing identifies the registrant as Lexington Realty Trust. Unless otherwise noted, financial figures below are in millions of dollars.
Business context
The REIT owned interests in approximately 215 consolidated properties across 40 states, totaling about 42.1 million square feet; 96.2% was leased. Most properties were under net leases, with tenants bearing substantially all property-level costs. Management said its strategy emphasized long-term leased investments, cash-flow growth and stability, lower lease rollover risk, and balance-sheet flexibility.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $110.3 | $105.4 | $218.8 | $209.5 |
| Net income attributable to common shareholders | $47.7 | $12.7 | $79.5 | $11.9 |
| Basic and diluted EPS | $0.20 | $0.05 | $0.34 | $0.05 |
| Operating cash flow | Not presented by quarter | $112.5 | $103.7 | |
| FFO per diluted share and unit | $0.29 | $0.26 | $0.60 | $0.52 |
| Company FFO per diluted share and unit | $0.27 | $0.28 | $0.54 | $0.56 |
Revenue growth reflected acquisitions and expansions, partly offset by dispositions and occupancy changes. Net income rose sharply year over year, but included substantial property-sale gains and debt-satisfaction gains; these items make reported earnings less representative of recurring operations. Company FFO, management’s adjusted non-GAAP measure, declined year over year in both the quarter and half-year.
Six-month same-store NOI was $151.2 million, down 2.0% from $154.3 million; same-store occupancy fell to 97.2% from 98.6%. Management attributed the NOI decline primarily to vacancies and said renewal rents were showing a positive trend. Q2 lease extensions and new leases covered 1.2 million square feet; average GAAP base rent on extended leases was $9.84 per square foot versus $9.19 before extension.
At June 30, cash and cash equivalents were $64.4 million, down from $191.1 million at year-end. Total debt carrying value was approximately $2.10 billion, versus $2.09 billion at December 31, 2014. The $400 million revolver had $93 million drawn, $10 million of letters of credit, and $297 million available, subject to covenant compliance. The company reported compliance with applicable corporate debt covenants. Management cited $129.9 million of property-specific mortgage debt due in 2016 and said available liquidity and expected operating cash flows were sufficient to meet obligations. Most debt was fixed-rate; $93 million of consolidated debt was variable-rate and unswapped. A 100-basis-point rate increase was estimated to add about $0.25 million of interest expense for the six-month period.
Operating cash flow increased year over year, while investing activities used $212.2 million, principally for acquisitions and construction, and financing activities used $27.1 million. Common and preferred shareholder dividends paid totaled $82.2 million for the half-year. The common dividend was $0.17 per share per quarter.
Changes, outlook, risks and unusual items
- Six-month property acquisitions totaled approximately $207.4 million. Development arrangements had maximum commitments of about $368.9 million, with $147.0 million invested at quarter-end; additional contracted acquisitions were estimated at $184.7 million. Management cautioned that uncompleted transactions might not close or meet expectations.
- During the first half, the company sold three office properties for $82.0 million gross, conveyed two office properties in satisfaction of a $30.3 million non-recourse mortgage, and recorded $23.2 million of property-sale gains and $10.5 million of net debt-satisfaction gains. Six-month gains on property sales and debt satisfaction were materially higher than in 2014.
- Continuing-operations impairment charges were $1.3 million for the first half, compared with $16.4 million in 2014. A vacant retail property accounted for the 2015 charge. The filing also reported a $30.6 million contractual unpaid balance on a Westmont, Illinois loan in default; foreclosure proceedings were underway, and the company subsequently foreclosed after quarter-end.
- After quarter-end, the company contracted to sell a Baltimore property for $121 million, including assumption of its $55 million mortgage, and expected an approximately $28 million impairment charge in Q3 2015. It also sold two properties for $14.7 million, completed the Oak Creek development, announced a 10 million-share repurchase authorization, and repurchased 150,000 shares for $1.3 million.
- No formal earnings or FFO guidance was provided in the supplied filing text. Management said operating cash flow was expected to cover operating costs, regular debt service and REIT-required dividends; it also cited cash, revolver capacity, capital recycling, equity and debt issuance as potential funding sources.
- Key risks include vacancies and lease rollover, tenant defaults, interest-rate changes, dependence on acquisitions and favorable leasing for growth, and completion/performance of development and acquisition commitments. The company disclosed guarantees associated with certain unconsolidated entities and $10 million of letters of credit. Management said ordinary-course legal matters were not expected, in aggregate, to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of earnings growth came from recurring rent and operations versus the $23.2 million of property-sale gains and $10.5 million of net debt-satisfaction gains.
- Whether same-store occupancy and NOI stabilize after the reported declines, and whether renewal-rent trends translate into sustained growth.
- Funding, timing and expected returns for the $368.9 million of development commitments and $184.7 million of contracted acquisitions.
- The timing and cash impact of 2016 mortgage maturities, revolver availability and refinancing needs.
- The final sale outcome and impairment for the Baltimore property, and recoveries or costs related to the Westmont loan foreclosure.