Business Context and Reporting Period
Company: Lexington Realty Trust (LXP Industrial Trust)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: A self-managed REIT owning a geographically diversified portfolio of approximately 225 consolidated net-leased office, industrial, and retail properties across 41 states and the Netherlands. The Company also manages co-investment programs, including Concord Debt Holdings LLC and Net Lease Strategic Assets Fund L.P.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Gross Revenues | $100.8 million | $105.5 million |
| Net Income (Loss) | ($63.8) million | $11.9 million |
| Net Loss Attributable to Common Shareholders | ($71.6) million | ($1.4) million |
| Net Loss Per Common Share (Diluted) | ($0.72) | ($0.02) |
| Cash Flow from Operating Activities | $43.7 million | $68.0 million |
| Cash Flow from Investing Activities | $12.7 million | $128.8 million |
| Cash Flow from Financing Activities | ($77.2) million | ($500.4) million |
| Total Assets | $3,961.4 million | $4,105.7 million |
| Total Debt (Mortgages, Notes, Exchangeable Notes, Trust Preferred) | $2,321.2 million | $2,367.0 million |
| Cash and Cash Equivalents | $47.0 million | $67.8 million |
Material Changes vs. Prior Period
- Revenue Decline: Total gross revenues decreased by $4.7 million (4.4%) primarily due to a $5.6 million decrease in rental revenue resulting from property sales and contributions to co-investment programs in the prior year.
- Significant Losses: The Company reported a net loss of $63.8 million compared to net income of $11.9 million in Q1 2008. This reversal was driven by substantial impairment charges and losses from non-consolidated entities.
- Impairment Charges: Total impairment charges and loan loss reserves were $10.6 million, consisting of $9.5 million in real estate impairments (including a Circuit City property) and $1.1 million in loan loss reserves.
- Non-Consolidated Entity Losses: Equity in earnings of non-consolidated entities swung from a $5.5 million gain to a $47.1 million loss. This was primarily due to a $29.1 million other-than-temporary impairment on the investment in Lex-Win Concord and the Company's share of Concord's $40.3 million in impairment losses.
- Debt Repurchases: The Company repurchased $22.5 million of its 5.45% Exchangeable Guaranteed Notes at a discount, recognizing a gain of $6.7 million.
- Dividend Reduction: Dividends paid to shareholders decreased significantly to $24.7 million from $158.2 million in Q1 2008, largely due to the absence of a special dividend paid in the prior year and a reduction in the quarterly common dividend rate.
Guidance, Outlook, and Risks
- Business Strategy: Management has refocused strategy to preserve capital and improve liquidity. Key actions include repurchasing debt at a discount, aggressively managing the core portfolio, generating liquidity through asset sales, reducing G&A expenses, and paying dividends partially in stock.
- Liquidity: The Company believes cash flows from operations, existing cash, and its secured credit facility are sufficient to fund operations and debt service. A new $250 million secured credit facility ($165M term, $85M revolver) was established in February 2009.
- Key Risks:
- Global Credit Crisis: Continued market volatility has increased the cost of capital, reduced property sales prices, and led to tenant defaults.
- Lex-Win Concord: The co-investment program faced a $35 million margin call in March 2009. Management does not anticipate providing new capital to this venture, and future cash flow needs must be met by asset sales or third-party financing.
- Impairment Risk: Significant use of estimates regarding the recoverability of assets and investments in a depressed market environment.
- Subsequent Events: Post-March 31, the Company repurchased an additional $14 million of exchangeable notes, sold a property for $1.8 million, and increased its secured credit facility to $290 million.
Investor Verification Checklist
- Lex-Win Concord Status: Verify the current status of the $35 million margin call and the ability of Concord to meet amended facility requirements without additional capital from LXP.
- Real Estate Impairments: Review the specific details of the $9.5 million impairment charge, particularly the Circuit City property in Richmond, VA, and the likelihood of further write-downs.
- Debt Covenants: Confirm continued compliance with the new KeyBank secured credit facility covenants given the recent losses and asset sales.
- Dividend Policy: Assess the sustainability of the reduced dividend policy and the impact of stock dividends on share dilution.
- Asset Sales: Monitor the pipeline of non-core asset sales intended to generate liquidity and reduce leverage.