LXP Industrial Trust (filing-era registrant: Lexington Realty Trust) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results; amounts below are in millions except per-share data.
Business context
The REIT owned interests in approximately 185 consolidated properties across 39 states, with about 36.0 million square feet, focused primarily on single-tenant office, industrial and retail real estate. Most properties were subject to net leases. The filing describes a strategy of selling non-core assets, acquiring core office and industrial properties, and using proceeds to strengthen the balance sheet.
Financial performance and liquidity
- Revenue: Q2 gross revenue was $82.7, up from $80.6 year over year; first-half revenue was $165.3, up from $162.1. Rental revenue for the first half rose to $147.5 from $144.7.
- Profit and impairment: Q2 net loss attributable to common shareholders was $50.5 ($0.33 per share), versus $30.4 ($0.23 per share). First-half common-shareholder loss was $74.2 ($0.50 per share), versus $63.4 ($0.50 per share). The six-month income statement reported $53.6 of impairment charges and loan losses in continuing operations; discontinued operations included a further $35.1 of impairment charges.
- Cash flow: First-half operating cash flow was $79.4, versus $72.4. Investing activities used $43.7; financing activities used $24.2. Cash and cash equivalents ended at $64.1, up from $52.6 at year-end 2010.
- Debt and liquidity: Debt carrying amount was approximately $1.71 billion at June 30, down from $1.77 billion at December 31, 2010. No amounts were drawn on the $300 million secured revolver; available capacity was approximately $295.9 million after letters of credit. The company reported covenant compliance. Approximately $191.7 million of property-specific mortgage debt matured during the remainder of 2011 and 2012.
- Equity and distributions: The company raised approximately $94.8 million from common-share issuances in the first half. Common dividends increased to $0.115 per share per quarter from $0.10 in 2010; cash dividends to common and preferred shareholders totaled $46.2 in the first half.
Changes versus prior comparable periods
- First-half gross revenue increased $3.3, primarily from acquisitions and leasing activity; interest and amortization expense declined $6.5, which management attributed to deleveraging.
- Impairment charges and loan losses in continuing operations rose sharply year over year, reflecting non-core, retail, multi-tenant and underperforming properties. This was the principal factor worsening the first-half common-shareholder loss despite higher revenue and lower interest expense.
- Property sales generated $121.9 of gross disposition price for 11 properties in the first half, compared with $42.3 from five properties in the first half of 2010. Net cash proceeds from property sales were $86.8.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management said operating cash flow, cash on hand, revolver capacity, equity issuance and co-investment programs were expected to fund operating needs, debt service and REIT distributions. Management cautioned that future net-income growth depends substantially on acquisitions; without them, growth sources are limited.
- Risks highlighted include economic and competitive conditions, construction costs, interest rates, asset impairments, access to debt and equity markets, and tenant defaults. The company noted uncertainty in fair-value estimates and impairment assumptions.
- A borrower on a Wilsonville, Oregon loan defaulted; the company anticipated a deed-in-lieu-of-foreclosure process. The impaired loan had a $6.9 net carrying value and $10.6 contractual principal balance at quarter-end.
- A New York lawsuit concerning bankruptcy-claim sale guarantees remained pending; the company estimated maximum exposure of $1.2 plus interest and expenses, with damages still to be determined.
- Applebee’s agreed to pay $19.9 to terminate its lease and vacate a Kansas facility, while the company entered a 10-year lease for the facility with the GSA. The GAO denied a bid protest after quarter-end; a separate county claim seeking to enjoin the lease was pending, and management did not anticipate a financial impact.
- The company’s $300 million revolving credit facility matures in January 2014 and may be extended to January 2015. The filing also disclosed put dates for exchangeable and convertible notes, including January 2012 for the exchangeable notes.
Important facts for investors to verify
- Whether the elevated property impairment charges signal further valuation reductions or dispositions, and how they affect recurring earnings.
- The refinancing or repayment plan for approximately $191.7 million of mortgage maturities through 2012 and the January 2012 exchangeable-note put.
- Actual performance and collectability of the delinquent Wilsonville loan and other higher-yield real estate loans.
- Progress on non-core asset sales, planned acquisitions and the company’s capacity to sustain its increased common dividend.
- Developments in the pending legal matters and the GSA lease challenge, including any change to management’s stated assessment of exposure.