LXP Industrial Trust (Lexington Realty Trust) — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The filing combines Lexington Realty Trust and its operating partnership, Lepercq Corporate Income Fund L.P. (LCIF); figures below primarily describe the Trust and consolidated subsidiaries. Dollars are in millions unless noted.
Business context
The Trust owned interests in approximately 180 consolidated properties across 38 states, totaling about 47.9 million square feet. The portfolio was 97.9% leased, excluding properties subject to secured mortgage loans in default. Management described a strategy of selling non-core and shorter-term assets and reinvesting primarily in leased industrial properties. The Trust held approximately 96% of LCIF.
Financial and operating results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Gross revenue | $97.7 | $106.0 | $289.5 | $334.2 |
| Net income (loss) | $5.6 | ($27.6) | $55.2 | $79.5 |
| Net income (loss) attributable to common shareholders | $3.9 | ($27.0) | $49.8 | $74.7 |
| Basic earnings (loss) per common share | $0.02 | ($0.12) | $0.21 | $0.32 |
| FFO per share/unit, basic | $0.24 | $0.29 | $0.68 | $0.89 |
| Adjusted Company FFO per share/unit, diluted | $0.25 | $0.28 | $0.71 | $0.89 |
- Nine-month operating cash flow was $172.6 million, versus $180.6 million a year earlier. Cash and cash equivalents were $140.5 million at quarter-end.
- Net cash used in investing was $234.6 million; net cash provided by financing was $115.9 million. Common and preferred dividends paid during the first nine months totaled $129.0 million.
- Same-store NOI, a non-GAAP measure, was $209.2 million for nine months, down 0.4% from $210.1 million. Same-store leased area was 97.2%, versus 98.9% a year earlier. The cash-basis weighted-average lease term increased to 9.1 years from 8.6 years.
- At September 30, total debt carrying value was approximately $2.089 billion: mortgages and notes payable, $670.3 million; revolving borrowings, $200.0 million; term loans, $596.4 million; senior notes, $495.0 million; and trust preferred securities, $127.2 million. The figures are net of applicable unamortized costs.
- The amended unsecured credit facility was increased to $1.105 billion. Revolver availability was $300.4 million, subject to covenant compliance; the Trust reported compliance with corporate debt covenants. Fixed-rate debt represented 79.9% of aggregate principal indebtedness; variable-rate debt was $424.1 million.
Material changes and unusual items
- Revenue fell year over year, principally because of dispositions—especially New York City land investments—and lower lease-termination income; acquisitions partly offset the declines. Nine-month rental revenue decreased $44.9 million.
- Q3 GAAP results improved from a loss to income largely because impairment charges were lower: $22.0 million in Q3 2017 versus $72.9 million in Q3 2016. Nine-month impairment charges and loan losses were $43.6 million versus $75.9 million. The 2016 period included a $65.5 million impairment on three New York land investments.
- Nine-month property acquisitions and completed build-to-suit projects totaled approximately $587.6 million in capitalized cost. Three additional forward purchase commitments totaled up to $103.8 million at quarter-end; the Lafayette, Indiana property was acquired in October.
- The Trust recorded a $2.05 million litigation reserve in Q3 and subsequently executed a settlement requiring payment of that amount. The related lender claim had sought approximately $9.2 million, subject to a $10 million guaranty cap.
- The filing revised comparative 2016 statements for an immaterial lease-termination-payment accounting error; the nine-month 2016 revenue correction was $6.6 million.
Outlook, risks and contingencies
No specific earnings or FFO guidance is provided in the filing. Management said operating cash flows, cash on hand, revolver capacity, property-sale proceeds and other financing sources were expected to support operating costs, debt service and dividends. Management also noted that growth depends heavily on acquisitions and favorable leasing; absent these, growth sources are limited. It cited interest rates, occupancy, tenant defaults, delayed acquisitions and other risks as potential offsets.
- The Trust had $18.4 million of property-specific mortgage balloon debt due in 2017 that was in maturity default at September 30; another $6.6 million was due in 2018. Management cited non-recourse remedies, including transferring properties to lenders, as available alternatives.
- Forward purchase commitments were not assured of closing or meeting expectations. Lease-related obligations may include funding expansions, tenant improvements and commissions. The Trust also disclosed guarantees for certain non-consolidated entities.
- Management identified a material weakness in internal control over financial reporting. Disclosure controls were deemed ineffective at quarter-end; remediation had begun but had not been fully tested and was not considered complete.
- LCIF reported nine-month revenue of $61.2 million and a net loss of $4.9 million, compared with revenue of $105.4 million and a net loss of $20.8 million in 2016. LCIF stated that it depends on the Trust for liquidity to meet mortgage balloons and fund new investments.
Important facts for investors to verify
- Whether the $18.4 million of defaulted property mortgage maturities and the other near-term debt obligations were resolved, refinanced or satisfied through property transfers.
- Progress and testing results for remediation of the material weakness in financial reporting controls.
- Leasing, occupancy and rent collections, including performance of acquired industrial properties and lease rollover exposure.
- Completion, funding and expected returns of the remaining forward purchase commitments, and the pace of asset sales and reinvestment.
- Cash available after dividends, debt service and investment spending, and the effect of variable rates and refinancing needs on interest expense.
- How the litigation settlement, property impairments and prior-period revenue revision are reflected in subsequent reporting.