LXP Industrial Trust (then Lexington Realty Trust) — Q3 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The REIT reported interests in approximately 135 consolidated properties across 32 states, with 50.5 million square feet and 97.4% leased. Its strategy was to grow its industrial portfolio, sell non-core assets, reduce lease rollover risk, and preserve balance-sheet flexibility. Industrial assets represented 77.7% of gross book value, excluding assets held for sale.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Gross revenue | $81.6 million | $100.3 million | $242.9 million | $308.8 million |
| Net income attributable to common shareholders | $141.6 million | $216.2 million | $189.7 million | $197.0 million |
| Basic earnings per common share | $0.60 | $0.91 | $0.81 | $0.83 |
| FFO per diluted share/unit | $0.18 | $0.24 | $0.58 | $0.76 |
| Adjusted Company FFO per diluted share/unit | $0.20 | $0.24 | $0.60 | $0.74 |
Net income was substantially affected by property-sale gains: $140.5 million in Q3 2019 versus $202.4 million in Q3 2018; nine-month gains were $176.7 million versus $239.6 million. Thus, reported earnings and margins do not by themselves indicate recurring operating performance.
- Revenue and operations: Q3 gross revenue fell 18.7%, mainly due to property sales and lower occupancy, partly offset by acquisitions. Nine-month rental revenue declined $69.0 million year over year. Same-store NOI for the first nine months fell 1.8%, to $163.1 million from $166.1 million.
- Cash flow: Nine-month operating cash flow was $142.9 million, down from $169.7 million. Investing cash flow was negative $114.7 million, versus positive $577.5 million, reflecting higher acquisitions and lower disposition proceeds. Financing cash outflow was $71.7 million, versus $467.3 million. Cash, cash equivalents and restricted cash totaled $133.8 million at period end, including $126.1 million of unrestricted cash.
- Debt and liquidity: Debt carrying value totaled approximately $1.296 billion at September 30, down from $1.492 billion at year-end 2018. The $600 million revolving facility was undrawn, subject to covenant compliance; the company reported compliance with corporate debt covenants. The $300 million term loan was extended to January 2025 and its LIBOR exposure swapped to a current fixed rate of 2.732%. Property-specific mortgage balloon debt of $39.9 million was due in 2019 and $32.0 million in 2020.
- Equity and distributions: The company issued 10.0 million shares in an underwritten offering for $100.7 million net and issued shares through its ATM program for $31.1 million net during the first nine months. Common and preferred dividends paid totaled $96.1 million for the period.
Material changes and management commentary
- During the first nine months, the company acquired 11 industrial assets for approximately $439.8 million and disposed of 12 properties for $448.9 million gross, generating $334.4 million in net proceeds. In Q3 alone, it acquired three industrial properties for $179.8 million and sold six consolidated properties for $328.6 million gross.
- Management said operating cash flows, cash on hand, property sales, the undrawn revolver, and other financing alternatives were expected to provide adequate liquidity for operating costs, debt service, and REIT distributions. This is a qualitative assessment, not quantified earnings guidance.
- Q3 leasing activity included new leases and extensions covering 1.6 million square feet. Average fixed rent on extended leases was $5.79 per square foot, compared with $5.67 before extension.
- Two non-recourse mortgage loans totaling $38.9 million were in default, secured by vacant or mostly vacant office properties in Overland Park, Kansas, and Charleston, South Carolina.
Risks, contingencies, and unusual items
- Cummins litigation: The tenant at the Columbus, Indiana office property disputes the company's position on a purchase option and lease term. The court permitted future rent to be deposited into an administered account; approximately $1.2 million was held in escrow at September 30. Discovery was ongoing, and the company said it intended to defend its position. Outcome and timing remain uncertain.
- The company recorded a $352,000 reduction in nine-month rental revenue for amounts deemed uncollectible, primarily related to a tenant bankruptcy in Thompson, Georgia. It also did not recognize an approximately $1.1 million rent receivable related to the Columbus litigation pending greater certainty.
- Nine-month impairment charges were $2.4 million, compared with $90.9 million in 2018; management attributed the prior-year level in part to an extensive review of non-industrial assets amid a potentially shorter holding period.
- Adoption of the new lease accounting standard added $39.1 million of operating right-of-use assets and $40.3 million of operating lease liabilities at September 30; the company reported no material impact on operating results or cash flows.
- After quarter-end, the company satisfied $15.7 million of non-recourse mortgage loans, acquired three industrial assets for approximately $53.4 million, and sold three assets for $13.8 million gross.
Most important facts for investors to verify
- Whether recurring FFO and same-store operating trends stabilize after asset sales, vacancies, and portfolio repositioning.
- Progress and eventual outcome of the Cummins dispute, including release or continued restriction of escrowed rent.
- Resolution of the two mortgage defaults and the carrying value or disposition plans for the related vacant office assets.
- Liquidity against upcoming property-level mortgage maturities, acquisition spending, and distributions, including availability under the revolver and covenant headroom.
- The impact of share issuance on per-share performance and whether industrial acquisitions generate sufficient cash flow to offset revenue lost from dispositions.