Business Context and Reporting Period
Lexington Realty Trust’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2013. The filing describes a REIT focused on single-tenant office, industrial and retail properties, with related real estate lending and advisory activities. At quarter-end, it held interests in approximately 215 consolidated properties across 41 states, totaling 40.8 million square feet and 97.9% leased. The filing registrant is Lexington Realty Trust; the supplied company label, LXP Industrial Trust, does not match the registrant name shown in this 2013 filing.
Financial and Operating Highlights
Amounts below are in millions of dollars unless stated otherwise. Comparisons are with the corresponding 2012 period.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Gross revenue | $99.4 | $80.8 | $194.9 | $158.2 |
| Net income | $7.8 | $5.6 | $5.7 | $11.1 |
| Net income (loss) attributable to Trust shareholders | $6.7 | $4.5 | $4.1 | $8.1 |
| Net loss attributable to common shareholders | $(0.8) | $(3.4) | $(8.1) | $(5.6) |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $95.2 | $80.9 |
| Same-store NOI | Not provided for quarter | Not provided for quarter | $126.8 | $130.0 |
- Revenue rose about 23% in both the quarter and six-month period, driven mainly by property acquisitions, including properties from NLS, which was consolidated beginning September 2012.
- Six-month same-store NOI fell 2.5%; same-store occupancy was 97.7% at June 30, 2013, versus 97.9% a year earlier. Management attributed the NOI decline primarily to higher property operating expenses and lease-related timing effects.
- Q2 loss per common share rounded to $0.00; six-month loss per common share was $0.04. Preferred dividends and a $5.2 million deemed dividend related to Series D redemption contributed to the common-shareholder loss.
- Adjusted Company FFO was $56.4 million, or $0.25 per share, for Q2 (versus $44.2 million and $0.25); for six months it was $108.4 million, or $0.50 per share (versus $87.0 million and $0.48). These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Six-month investing cash use was $111.5 million, principally for acquisitions, development, capital expenditures and loans. Financing provided $56.6 million, compared with $77.5 million used in the prior-year period. Cash and equivalents ended at $74.3 million; restricted cash was $20.5 million.
Balance Sheet, Debt and Liquidity
- Total assets were $3.44 billion and total liabilities $1.97 billion at June 30, 2013. Total equity was $1.48 billion.
- Debt carrying value was $1.78 billion, versus $1.88 billion at December 31, 2012; estimated fair value was $1.77 billion. Mortgage and notes payable totaled $1.04 billion, with a weighted-average rate of 5.4% and maturities from 2013 to 2027.
- The company issued $250 million of unsecured 4.25% senior notes due 2023. It refinanced and expanded its unsecured revolver to $400 million; it had no revolver borrowings at quarter-end, $7.6 million of letters of credit and $392.4 million available, subject to covenants. Its unsecured term loan facility had $186 million available.
- Management reported compliance with financial covenants. It cited $59.1 million of property-specific mortgage debt due in 2013 and $83.0 million due in 2014, and said cash, credit availability and operating cash flows were sufficient to meet obligations.
- Six interest-rate swaps hedged $319 million of variable-rate term loans. The filing reported no unhedged variable-rate debt at June 30, 2013; fixed-rate debt was approximately $1.8 billion.
Material Changes, Outlook and Risks
- Common shares issued and outstanding increased to 214.2 million from 178.6 million at year-end 2012, reflecting a 23 million-share public offering, at-the-market issuance and convertible-note conversions. The offerings generated $293.9 million net, used partly to repay revolver borrowings and otherwise for corporate purposes, including investments.
- The company redeemed all 6.2 million Series D preferred shares for approximately $155.6 million. It also converted $42.8 million principal of 6.00% convertible notes during the six-month period, incurring $10.6 million in debt-satisfaction charges.
- Six-month debt-satisfaction charges in continuing operations were $22.7 million, mainly from early repayment costs and financing-cost write-offs. Discontinued operations included $12.8 million of property-sale gains and $9.3 million of net debt-satisfaction gains, partly offset by $8.7 million of impairment charges. Continuing operations also recorded a $2.4 million impairment.
- Management expected to meet its 2013 acquisition targets, while noting some investment opportunities were taking longer than expected to contract. It identified acquisitions and leasing as important to future earnings growth; absent these, growth sources were limited. No quantified earnings or FFO guidance was provided.
- During Q2, the company entered 24 new leases and extensions covering 2.1 million square feet. Average GAAP base rent on extended leases was $11.60 per square foot versus $11.82 before extension.
- Risks noted include higher interest rates, lower occupancy, tenant defaults, leasing and acquisition execution, real-estate valuation assumptions, and development commitments. Development commitments outstanding totaled up to $98.6 million, with a further $39.1 million Omaha acquisition commitment; completion was not assured. Ordinary-course legal proceedings were not expected by management to have a material adverse effect in aggregate.
Important Facts for Investors to Verify
- Confirm the issuer and security being analyzed: this filing is for Lexington Realty Trust, not a registrant named LXP Industrial Trust.
- Assess the durability of rental growth from acquisitions against the 2.5% decline in six-month same-store NOI and slightly lower occupancy.
- Review the effect of share issuance and preferred-stock redemption on per-share results, dividend burden and future dilution.
- Verify the timing and funding of scheduled mortgage maturities, development commitments and the Omaha acquisition, including covenant-dependent credit availability.
- Examine recurring operating performance separately from debt-satisfaction costs, impairments, disposition gains and adjusted FFO.
- Monitor the defaulted Schaumburg, Illinois loan, for which interest income was not being recognized, despite management’s view that collateral value exceeded its investment.