Business Context and Reporting Period
Company: Lexington Realty Trust (LXP)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: LXP is a self-managed, self-administered Maryland statutory REIT focused on acquiring, owning, and managing portfolios of net-leased office, industrial, and retail properties. As of December 31, 2010, the consolidated portfolio consisted of approximately 195 properties in 39 states, totaling 36.9 million square feet with a 93% occupancy rate. The company also engages in loan origination and debt securities related to real estate.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Gross Revenues | $342.9 million | $356.3 million |
| Net Loss | $(37.4) million | $(211.3) million |
| Net Loss Attributable to Common Shareholders | $(58.1) million | $(242.9) million |
| Loss Per Common Share (Basic & Diluted) | $(0.44) | $(2.22) |
| Net Cash Provided by Operating Activities | $164.8 million | $159.3 million |
| Total Assets | $3.33 billion | $3.58 billion |
| Total Debt (Mortgages, Notes, Credit Facility) | $1.78 billion | $2.07 billion |
| Shareholders' Equity | $1.28 billion | $1.21 billion |
| Weighted-Average Interest Rate on Debt | 5.8% | 5.6% |
Material Changes vs. Prior Period
- Improved Net Loss: Net loss attributable to common shareholders decreased significantly from $(242.9) million in 2009 to $(58.1) million in 2010. This improvement was driven by a reduction in impairment charges and a reversal of losses in non-consolidated entities.
- Revenue Decline: Total gross revenues decreased by $13.5 million (3.8%) due to a $7.8 million decrease in rental revenue and a $5.0 million decrease in tenant reimbursements, attributed to increased vacancies in certain properties.
- Deleveraging: The company reduced consolidated indebtedness by $300.3 million in 2010, continuing a strategy to strengthen the balance sheet. This included repurchasing $25.5 million of 5.45% Exchangeable Guaranteed Notes and retiring property-specific debt.
- Impairment Charges: Non-cash impairment charges and loan losses totaled $56.9 million in 2010, a significant decrease from $175.9 million in 2009. The 2009 figure included a $74.7 million charge related to the Lex-Win Concord investment.
- Equity in Non-Consolidated Entities: Equity in earnings of non-consolidated entities swung from a loss of $(123.2) million in 2009 to earnings of $21.7 million in 2010, primarily due to the absence of the massive Concord impairment charge recorded in the prior year.
Guidance, Outlook, and Risks
Management Commentary & Strategy: Management continues to focus on maintaining a strong balance sheet and improving long-term growth prospects. The strategy involves deleveraging, recycling capital by selling non-core assets, and acquiring core single-tenant net-leased properties. In 2010, the company raised approximately $157.8 million through public common share offerings and $8.6 million via a direct share purchase plan, primarily to retire indebtedness.
Outlook: The company anticipates an increase in acquisition activity in 2011, with a pipeline consisting mostly of build-to-suit transactions. However, management notes that the economy has not fully recovered and capital market volatility remains a factor.
Key Risks & Contingencies:
- Legal Proceedings: The company is involved in litigation with Deutsche Bank regarding bankruptcy damage claims (Farmington Hills and Antioch claims) where a court ruled in favor of plaintiffs on summary judgment in November 2010; damages are being determined by a special referee. Additionally, Experian Information Solutions filed a complaint alleging breach of lease and fraud regarding unfunded tenant improvements.
- Refinancing Risk: Significant balloon payments are scheduled for 2011 ($12.9 million) and 2012 ($191.0 million). The ability to refinance or sell properties to meet these obligations depends on market conditions.
- Impairment Risk: The company may continue to incur non-cash impairment charges due to the economic environment and the disposition of assets acquired in the Newkirk Merger that have a high cost basis.
- Forward Equity Commitment: The company has a forward equity commitment to purchase 3.5 million common shares at $5.60 per share, with a remaining balance of $4.0 million as of year-end, due for settlement by October 2011.
Investor Verification Checklist
- Debt Maturities: Verify the company's ability to refinance or sell assets to cover the $191.0 million in property-specific balloon payments due in 2012.
- Legal Exposure: Monitor the outcome of the special referee's determination of damages in the Deutsche Bank litigation and the status of the Experian lawsuit.
- Impairment Volatility: Assess the potential for future non-cash impairment charges, particularly regarding assets acquired in the 2006 Newkirk Merger.
- Forward Equity Commitment: Confirm the settlement method (cash vs. shares) for the $4.0 million remaining balance of the forward equity commitment due in October 2011.
- Acquisition Pipeline: Evaluate the progress of the two major build-to-suit transactions (Byhalia, MS and Shelby, NC) expected to close in Q2 2011.