Business Context and Reporting Period
Company: Lexington Realty Trust (LXP)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: LXP is a self-managed REIT focused on acquiring, owning, and managing a geographically diverse portfolio of net-leased office, industrial, and retail properties. As of December 31, 2009, the company held interests in approximately 210 consolidated properties totaling 38.3 million square feet across 40 states and the Netherlands, with an occupancy rate of 91.5%. The company operates under an umbrella partnership REIT (UPREIT) structure.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Gross Revenues | $376.6 million | $418.1 million |
| Net Loss | $(211.3) million | $(3.5) million |
| Net Loss Attributable to Common Shareholders | $(242.4) million | $(18.5) million |
| Loss Per Common Share (Basic & Diluted) | $(2.22) | $(0.28) |
| Net Cash Provided by Operating Activities | $159.3 million | $230.2 million |
| Total Assets | $3.58 billion | $4.11 billion |
| Total Debt (Mortgages, Notes, Credit Facility) | $2.07 billion | $2.37 billion |
| Shareholders' Equity | $1.21 billion | $1.41 billion |
| Weighted Average Interest Rate on Debt | 5.7% | 5.5% |
Material Changes vs. Prior Period
- Revenue Decline: Total gross revenues decreased by $41.5 million (10%) primarily due to a $28.7 million reduction in rental revenue from lease terminations in 2008, property sales, and increased vacancy rates.
- Significant Impairments: The company incurred $175.9 million in non-cash impairment charges in 2009. This included a $68.2 million write-down of its investment in Lex-Win Concord LLC to zero, $35.3 million in real estate asset impairments (including properties leased to Circuit City and Vastar Resources), and $38.5 million on assets disposed of below book value.
- Deleveraging Strategy: Consolidated indebtedness was reduced by $305.6 million. This was achieved by repurchasing $123.4 million of 5.45% Exchangeable Guaranteed Notes at an 18.1% discount and selling non-core assets.
- Dividend Policy Change: To preserve cash, the company reduced its common share dividend to $0.10 per quarter for 2010. In 2009, 90% of dividends were paid in common shares (stock dividends) under IRS Rev. Proc. 2008-68, retaining approximately $52.9 million in cash.
Guidance, Outlook, and Risks
Management Strategy: The primary focus for 2010 remains reducing leverage, preserving capital, and generating liquidity. The company plans to continue disposing of non-core, vacant, or non-performing assets and refinancing debt. Acquisition activity is expected to remain low until market conditions improve, though the company is exploring debt investments secured by real estate.
Outlook: Management anticipates continued economic uncertainty and capital market volatility. They expect to face challenges in refinancing debt and re-leasing vacant properties at favorable rates. The company has $106.0 million in property-specific balloon payments maturing in 2010.
Key Risks:
- High Leverage: The company is highly leveraged, increasing the risk of default on obligations.
- Tenant Concentration & Defaults: Risks associated with single-tenant leases and potential defaults in the automotive, financial, and retail sectors.
- Impairment Charges: Continued risk of material non-cash impairment charges due to the economic environment.
- Refinancing Risk: Significant balloon payments due in 2010 and 2011 require successful refinancing or asset sales.
Investor Verification Checklist
- Debt Maturities: Verify the company's ability to refinance or sell assets to cover the $106.0 million in property-specific balloon payments due in 2010 and the $171.3 million in corporate recourse balloon payments due in 2011.
- Lex-Win Concord Exposure: Confirm that the investment in Lex-Win Concord is fully written off and that there are no remaining contingent liabilities or funding obligations.
- Vacancy Trends: Monitor the re-leasing status of major vacant properties, particularly those previously leased to Circuit City, Vastar Resources, and Johnson Controls.
- Dividend Sustainability: Assess whether the reduced dividend of $0.10 per quarter is sustainable given the net loss and cash flow constraints.
- Legal Proceedings: Review the status of the lawsuit with Deutsche Bank regarding the Farmington Hills and Antioch claims, and the litigation with Elsevier STM regarding unpaid rent.