LXP Industrial Trust (then Lexington Realty Trust) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. The filing reports the registrant as Lexington Realty Trust. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context
The REIT owned interests in approximately 220 consolidated properties across 41 states, totaling 41.2 million square feet; 97.4% was leased. Its portfolio was predominantly single-tenant office, industrial and retail real estate, much of it subject to net leases. The company also made real-estate loans and provided investment advisory and asset-management services.
Financial and operating results
- Revenue: Gross revenue was $97.1 million, up 24.1% from $78.2 million. Rental revenue rose to $89.0 million from $70.5 million, primarily reflecting acquisitions, including properties consolidated from NLS, and improved occupancy at certain properties.
- Profit and per-share results: Net loss attributable to shareholders was $2.6 million, compared with net income of $3.6 million. Net loss attributable to common shareholders was $7.3 million, or $0.04 per share, versus a $2.2 million loss, or $0.01 per share. Continuing-operations loss attributable to common shareholders was $12.2 million.
- Significant earnings items: Results included $11.0 million of continuing-operations debt-satisfaction charges, largely from conversion of $42.8 million principal amount of convertible notes, and $2.4 million of continuing-operations real-estate impairment. Discontinued operations included $10.5 million of debt-satisfaction gains and $7.3 million of impairment charges.
- Cash flow: Operating cash flow was $57.1 million, up from $43.8 million. Investing activities used $112.7 million, mainly for property acquisitions, construction, capital expenditures and loans. Financing activities provided $132.9 million, principally from common-share issuance, offset in part by debt repayments and distributions. Cash and cash equivalents ended the quarter at $111.4 million, compared with $34.0 million at year-end.
- Operating measures: Same-store NOI fell 2.4% to $69.2 million from $70.9 million; same-store occupancy was 97.1%, versus 97.7%. Reported Company FFO was $51.4 million ($0.25 per share), compared with $42.8 million ($0.24 per share); adjusted Company FFO was $51.9 million ($0.25 per share), versus $42.7 million ($0.24 per share). FFO is a non-GAAP measure and is not cash flow or a substitute for GAAP earnings.
- Debt and liquidity: Debt carrying value, including mortgages, term loans, convertible notes and trust preferred securities, was approximately $1.69 billion, down from $1.88 billion at year-end. Mortgages and notes payable were $1.27 billion; their weighted-average rate was 5.5%. The company had no borrowings on its $300 million unsecured revolver, with $292.4 million available after letters of credit, and a new $250 million unsecured term facility was undrawn. It reported compliance with financial covenants.
- Equity and distributions: A 23.0 million-share public offering generated $258.1 million net proceeds; an at-the-market program generated $35.9 million net proceeds. The company raised equity to repay debt and fund general purposes, including acquisitions. Quarterly common dividends paid were $0.15 per share, up from $0.125 a year earlier.
Material changes and transactions
- Acquired an industrial facility in Houston for $81.4 million, with a 25-year net lease, and completed a Long Island City industrial build-to-suit through a majority-owned joint venture, at a stated capitalized cost of $41.9 million and a 15-year lease.
- Refinanced the $300 million secured revolving facility with a $300 million unsecured revolver, obtained a $250 million unsecured term-loan facility, and released collateral securing an existing $255 million term loan.
- Converted $42.8 million principal amount of 6.00% convertible notes into approximately 6.2 million common shares, with $2.7 million in cash payments plus accrued interest. Common shares outstanding increased materially during the quarter.
- Transferred two vacant properties in foreclosure to lenders in satisfaction of $23.3 million of non-recourse mortgage debt. The company also satisfied $145.3 million of other non-recourse mortgage debt during the quarter.
Outlook, risks and contingencies
Management said operating cash flow was expected to cover operating and administrative costs, regular debt service and REIT-required distributions, with cash, credit availability, asset sales, equity and debt financing as additional funding sources. No specific earnings or FFO guidance was provided. Management noted future net-income growth depends substantially on acquisitions and leasing; absent those, growth sources are more limited and may be offset by higher rates, lower occupancy or tenant defaults.
At quarter-end, $88.6 million and $251.0 million of property-specific non-recourse debt were scheduled to mature in 2013 and 2014, respectively. Development commitments totaled up to $111.2 million, and the company separately committed to acquire a Nebraska property for $39.1 million upon completion. A tenant could terminate the $20.8 million Bingen, Washington commitment before construction. The company cautioned that contracted acquisitions and build-to-suit projects might not close or meet expectations.
A $21.6 million Schaumburg, Illinois loan was in default; the company had initiated foreclosure, believed collateral value exceeded its investment, and did not recognize $0.9 million of interest during Q1. Guarantees for tenant improvements and related costs totaled approximately $9.5 million. Management said ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect. No material change to previously disclosed risk factors was reported.
Subsequent events: After quarter-end, the company redeemed all Series D preferred shares for $155 million, repaid $176.6 million of secured mortgage debt due through 2014 (incurring $11.8 million of yield-maintenance costs), borrowed $250 million under the revolver and $64 million under the new term loan, and sold a vacant Honolulu retail property and parking garage for $25.9 million.
Important facts for investors to verify
- Reconcile the reported GAAP loss with FFO and adjusted FFO, including the effects of debt-conversion charges, impairments and foreclosure-related gains.
- Assess same-store NOI decline and occupancy, and compare lease extensions’ average GAAP base rent of $5.43 per square foot with $6.24 before extension.
- Review debt maturities, post-quarter refinancing and repayment activity, remaining liquidity, covenant headroom and the costs of retiring debt.
- Evaluate dilution and capital allocation following the public and at-the-market offerings, note conversions, preferred-share redemption and common dividend increase.
- Monitor the Schaumburg loan foreclosure, development/acquisition commitments, tenant-improvement guarantees and execution risks for projects not yet completed.