LXP Industrial Trust (then Lexington Realty Trust) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing is under the name Lexington Realty Trust. Financial amounts below are in millions unless noted.
Business context
The REIT owned interests in approximately 220 consolidated properties across 41 states, totaling about 41.5 million square feet; 97.7% was leased. Its portfolio was primarily single-tenant office and industrial properties and land under net or similar leases. Rental receipts were the principal source of revenue.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Gross revenue | $109.8 | $94.7 | $219.9 | $186.2 |
| Net income attributable to common shareholders | $12.7 | $(0.8) | $11.9 | $(8.1) |
| Basic earnings per common share | $0.05 | $0.00 | $0.05 | $(0.04) |
| Company FFO, as adjusted | $67.6 | $56.5 | $134.0 | $108.7 |
| Adjusted Company FFO per share | $0.28 | $0.25 | $0.56 | $0.50 |
- For the first half, cash from operations was $103.7, versus $95.2 in 2013; investing used $121.2 and financing provided $69.4. Cash and equivalents ended June at $129.1.
- Same-store NOI increased 0.9% to $150.3 for the first half. Same-store occupancy was 97.6%, down from 98.2% a year earlier.
- At June 30, total debt was approximately $2.17 billion, compared with $2.06 billion at year-end 2013. Debt fair value was estimated at $2.17 billion. Mortgages and notes payable carried a weighted-average rate of 5.2%.
- The $400 million revolving facility had no borrowings, $16.1 million of letters of credit and $383.9 million of availability, subject to covenants. The company reported covenant compliance. Cash plus available revolver capacity provided substantial reported liquidity.
- Six-month cash dividends paid to common and preferred shareholders were $78.3 million. The quarterly common dividend was raised to $0.165 per share in 2014 from $0.15 in 2013.
Material changes versus the prior comparable period
- First-half revenue grew $33.7 million, mainly from $35.2 million of acquisition-related rental revenue, partly offset by lower rents on certain renewals and new leases and increased vacancy.
- Common-shareholder earnings improved from a loss to income, while adjusted FFO per share rose to $0.56 from $0.50 for the first half.
- First-half continuing-operations impairment charges increased to $16.4 million from $2.4 million, including a $16.4 million write-down of an office property in Rochester, New York. Discontinued-operations impairments were $10.7 million.
- Interest and amortization expense rose to $50.4 million from $44.4 million for the first half, principally reflecting higher corporate-level debt. Net debt-satisfaction charges fell to $7.5 million from $22.4 million.
- The company issued $250 million of 4.40% senior notes due 2024 and used proceeds in part to repay secured debt and reduce revolver borrowings. Mortgages and notes payable declined from year-end, while senior notes and term loans increased.
Outlook, commentary and risks
- No numerical earnings or FFO guidance was provided. Management said future earnings growth depends substantially on acquisitions and leasing; absent those, growth sources are limited to rent escalations, debt amortization or refinancing savings, and expense controls.
- Management cited continued acquisition-market cap-rate compression, while describing build-to-suit transactions as offering attractive yields. Such projects defer cash flow and FFO during construction.
- Three active build-to-suit projects had maximum commitments totaling $287.4 million, with estimated completion dates from Q2 2015 to Q4 2016. Management cautioned that transactions may not close or perform as expected. The company also had a $40.0 million planned Auburn Hills acquisition and a $15.3 million property expansion underway.
- Leasing activity included 10 new leases and extensions covering 0.9 million square feet in Q2. Average GAAP base rent on extended leases was $4.66 per square foot, versus $5.74 before extension.
- A Westmont, Illinois loan was delinquent; the borrower had missed debt-service payments and the property tenant had terminated its lease. The loan’s contractual unpaid balance was $26.4 million, versus a $12.4 million carrying value. The company had previously recorded an impairment.
- Mortgage debt of $39.5 million was due in 2014 and $156.6 million in 2015. Interest-rate swaps covered $505 million of term loans; management estimated $5.5 million of accumulated swap losses would be reclassified as additional interest expense over the next 12 months.
- Legal proceedings in the ordinary course were not expected by management to have a material adverse effect. No material risk-factor changes were reported. Subsequent to quarter-end, the company sold three properties for $48.3 million, converted $1.4 million of convertible notes into shares, and acquired an additional property interest for $2.1 million.
Important facts for investors to verify
- Whether acquisition-driven rent growth offsets weaker leasing economics, vacancy and modest same-store NOI growth.
- The valuation and recovery prospects for the impaired Rochester property and delinquent Westmont loan.
- Funding, completion timing and expected returns for development commitments and upcoming mortgage maturities.
- How debt levels, interest costs, swap-related charges and share or note conversions affect per-share performance and dividend coverage.
- Whether reported adjusted FFO trends are supported by operating cash flow; FFO is a non-GAAP measure and is not cash available for dividends.