LXP Industrial Trust (Lexington Realty Trust) — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in millions unless stated otherwise. The filing combines Lexington Realty Trust (“LXP”) and its operating partnership, Lepercq Corporate Income Fund L.P. (“LCIF”); LXP owned approximately 96% of LCIF. LXP reported approximately 200 consolidated properties across 40 states, with 95.3% of its portfolio leased.
Financial performance
- Revenue: Q3 gross revenue was $106.3, up 0.8% from $105.4; nine-month revenue was $327.5, up 1.0% from $324.2. Nine-month rental revenue increased $3.6, while tenant reimbursements declined $0.3.
- Profit and earnings: Q3 net loss attributable to common shareholders was $26.7, or $0.11 per share, versus a $7.6 loss, or $0.03 per share, a year earlier. Nine-month common-shareholder net income was $68.3, or $0.29 per share, versus $71.9, or $0.31 per share.
- Non-GAAP measures: Nine-month FFO available to common shareholders and unitholders was $204.8 ($0.86 per share/unit), versus $205.7 ($0.87). Adjusted Company FFO was $211.4 ($0.87 per diluted share/unit), versus $198.4 ($0.81).
- Operating performance: Nine-month same-store NOI decreased 0.6% to $201.3 from $202.6. Same-store occupancy was 95.0%, compared with 96.8% a year earlier. Portfolio leased occupancy was 95.3% at quarter-end.
- Cash flow: Nine-month operating cash flow was $180.6, slightly below $181.5 in 2015. Investing activities provided $29.3, compared with $172.8 used in 2015, principally reflecting higher property-sale proceeds. Financing activities used $185.3, versus $113.4 used. Cash and cash equivalents ended the period at $117.8.
- Debt and liquidity: Debt carrying value was approximately $1.88 billion, down from $2.18 billion at year-end 2015. The $400.0 revolving facility was undrawn, subject to covenant compliance; the company reported compliance with corporate debt covenants. LXP had $16.8 of property-specific mortgage balloon debt due in 2016 and $59.9 due in 2017; all 2016 non-recourse maturities were in default at September 30. The company reported no consolidated variable-rate debt outstanding and stated fixed-rate debt represented 100% of consolidated principal indebtedness.
- Distributions: LXP paid $123.3 in common and preferred dividends during the first nine months, approximately level with 2015. LCIF distributions were $49.9, or $0.60 per weighted-average unit, versus $44.4, or $0.62 per unit.
Material changes and significant transactions
- LXP continued selling non-core assets and reinvesting primarily in long-term-lease build-to-suit projects. Nine-month property sale proceeds were $293.6 in LXP’s cash flow statement; reported gross sale prices were $561.8 for LXP and $445.6 for LCIF. Buyers assumed or the company retired substantial property-level debt.
- Nine-month property-sale gains were $58.4. Impairment charges rose to $75.9 from $34.1; the largest item was a $65.5 impairment associated with the sale of three New York land investments, including a $91.2 deferred-rent receivable write-off. Q3 impairment charges were $72.9.
- Nine-month rental growth from acquisitions, expansions, and lease-termination income was partly offset by property dispositions and occupancy changes. Management said it expected rental revenue to decrease as a result of the New York land sales.
- LXP completed industrial acquisitions in Detroit, Anderson, and Wilsonville for aggregate capitalized cost of $134.1. Development investments outstanding at quarter-end totaled $137.6, with maximum commitments of $265.6 across Lake Jackson, Charlotte, and Opelika projects.
- In Q3, LXP obtained $197.2 of 20-year non-recourse financing at a fixed 4.04% rate secured by the Lake Jackson project. It also converted the remaining convertible guaranteed notes, issuing 1.9 million common shares; none remained outstanding at quarter-end.
Outlook, risks, and contingencies
- Management provided no quantified earnings or revenue guidance. It said operating cash flow, cash on hand, the undrawn revolver, property-sale proceeds, and financing alternatives were expected to provide liquidity for obligations. It also noted LCIF depends on LXP for capital events to fund balloon maturities or new investments.
- Management’s strategy emphasizes cash-flow stability, long-term leased investments, lower lease rollover risk, asset sales, and balance-sheet flexibility. The weighted-average lease term was approximately 8.6 years on a cash basis at quarter-end.
- A lender seeks approximately $15.5 in a Bridgewater, New Jersey guaranty action. LXP recorded no liability, assesses the loss as reasonably possible but not probable, and believes its maximum exposure is $10.0. The lender foreclosed on the property in September; LXP recognized an $8.8 debt-extinguishment gain. The court had not ruled on LXP’s motion to dismiss.
- After quarter-end, the tenant at an approximately 104,000-square-foot Rock Hill, South Carolina office property filed an assignment for the benefit of creditors; management expected the tenant to reject the lease. LXP also reported subsequent sales of two properties for $40.3 gross, and LCIF reported a property sale for $32.0 gross.
- Development arrangements may not be completed or perform as expected. The filing also identifies risks from tenant defaults or vacancies, refinancing and interest rates, property values, and legal proceedings. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Review the composition and expected timing of the $75.9 in impairment charges, particularly the New York land-sale write-off and its effect on future rental revenue.
- Verify the status and funding plan for the $16.8 of 2016 mortgage maturities in default and the $59.9 due in 2017, as well as refinancing and foreclosure exposure.
- Track leasing and tenant credit developments, including the Rock Hill tenant, portfolio occupancy, and the decline in same-store leased percentage.
- Assess whether development projects meet completion, cost, leasing, and financing expectations, including remaining commitments and the Lake Jackson financing.
- Follow the Bridgewater guaranty litigation, other non-recourse carve-out claims, and the company’s stated liquidity and dividend capacity.