LXP Industrial Trust quarterly report, Q2 FY2016

Full document

LXP Industrial Trust (then Lexington Realty Trust) — Q2 2016 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2016; filed August 9, 2016. The filing combines Lexington Realty Trust’s and Lepercq Corporate Income Fund L.P.’s (LCIF) reports. LXP owned approximately 96% of LCIF, which had no employees or separate management team.

Business context

LXP was a REIT focused on single-tenant commercial properties and land, primarily under net leases. At quarter-end, it had interests in approximately 210 consolidated properties across 40 states, with 96.2% occupancy (excluding properties securing mortgage loans in default) and a weighted-average lease term of about 12.5 years on a cash basis. Management’s strategy emphasized selling non-core assets and reinvesting in long-term leased properties, including build-to-suit developments.

Financial results and liquidity

  • Q2 revenue: $109.6 million, down from $110.3 million. Net income attributable to common shareholders was $46.8 million versus $47.7 million; diluted EPS was $0.20 in both periods.
  • First-half revenue: $221.2 million, up from $218.8 million. Net income attributable to common shareholders rose to $94.9 million from $79.5 million; diluted EPS increased to $0.41 from $0.34.
  • Non-GAAP measures: First-half FFO available to common shareholders and unitholders was $136.5 million ($0.58 per share/unit), versus $141.5 million ($0.60). Adjusted Company FFO was $143.9 million ($0.59 diluted), versus $131.5 million ($0.54). Same-store NOI fell 1.0% to $144.3 million; same-store occupancy was 96.6%, compared with 97.1% a year earlier.
  • Cash flows: First-half operating cash flow was $116.9 million, up from $112.5 million. Investing activities provided $13.7 million, versus $212.2 million used in 2015; financing activities used $164.1 million, versus $27.1 million. Cash and cash equivalents were $59.8 million at June 30.
  • Debt and liquidity: Consolidated debt carrying value was approximately $2.095 billion, down from $2.182 billion at year-end 2015. Revolver borrowings were $123 million, with $277 million available subject to covenant compliance. LXP reported compliance with corporate debt covenants. First-half common and preferred dividends paid were $82.2 million.
  • Portfolio and capital activity: LXP acquired two industrial properties for a combined $91.0 million and reported $166.8 million in gross property disposition proceeds for the first half. It repurchased 1.184 million shares at an average $7.56 during the first half.

Changes, outlook, risks, and unusual items

  • First-half earnings benefited from higher property-sale gains ($42.3 million versus $21.6 million in the income statement), a $5.4 million gain on a non-consolidated property sale, and lower property operating costs. Results also included $3.0 million of impairment charges and $3.4 million of net debt-satisfaction charges. Q2 debt-satisfaction charges were $3.2 million, compared with a gain in the prior-year quarter.
  • Management attributed the first-half revenue increase to acquisitions, expansions, and lease-termination income, partly offset by dispositions and occupancy changes. Q2 revenue declined slightly, mainly because of dispositions and occupancy changes. Management noted that future earnings growth depends substantially on acquisitions and favorable leasing; sales, vacancies, interest rates, tenant defaults, and delayed transactions may offset growth.
  • No numeric earnings or FFO guidance was provided. Management expected operating cash flow, cash on hand, the revolver, asset-sale proceeds, and financing alternatives to support operations, debt service, and REIT distributions. It identified $75.7 million of property-specific mortgage balloon debt due in 2016 and $59.9 million in 2017, including $36.4 million then in default.
  • Development commitments included three consolidated build-to-suit projects with maximum commitments totaling $265.6 million and estimated completion dates from Q4 2016 through Q2 2017. LXP cautioned that projects might not be completed or perform as expected. A separate Houston joint venture had up to $56.7 million of construction financing committed, of which $33.9 million had been funded.
  • An Oklahoma City loan with an $8.5 million carrying value was in maturity default, and LXP was exercising remedies. In litigation concerning a Bridgewater, New Jersey property, a lender sought approximately $15.5 million under a limited guaranty; LXP said it would defend the claim. A related foreclosure sale had been postponed.
  • LXP disclosed an $18 million maximum contingent guaranty related to proposed EB-5 financing for a Houston joint venture; no funds had been received and no liability was recorded at quarter-end. After quarter-end, LXP obtained a $197.15 million non-recourse mortgage for its Lake Jackson development and converted the remaining $11.9 million principal of convertible notes into 1.892 million common shares.
  • Management concluded disclosure controls were effective and reported no material changes in internal controls during the quarter. It stated there were no material changes to previously disclosed risk factors, while emphasizing that FFO, adjusted FFO, and NOI are non-GAAP measures and are not substitutes for GAAP results or operating cash flow.

Important facts for investors to verify

  1. Reconcile the increase in first-half GAAP earnings with lower reported FFO and the contributions of property-sale gains, lease-termination income, and the non-consolidated investment gain.
  2. Track the $36.4 million of mortgage debt identified as in default, the $75.7 million and $59.9 million balloon maturities, and the status of the Oklahoma City loan default.
  3. Assess the outcome and potential exposure in the Bridgewater guaranty litigation, including the requested approximately $15.5 million and foreclosure proceedings.
  4. Monitor occupancy, same-store NOI, lease extensions, and delivery and funding of the build-to-suit projects and Houston joint venture.
  5. Confirm post-quarter effects of the Lake Jackson mortgage and convertible-note share issuance on debt, liquidity, and dilution.