Business Context and Reporting Period
Company: Lexington Realty Trust (LXP Industrial Trust)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2009
Business Overview: A self-managed REIT owning a geographically diversified portfolio of approximately 215 consolidated net-leased office, industrial, and retail properties across 41 states and the Netherlands. The Company also provides investment advisory services and holds interests in non-consolidated entities, including the distressed debt fund Concord Debt Holdings LLC.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Gross Revenues | $197,176 | $228,029 |
| Net Income (Loss) Attributable to Common Shareholders | $(161,895) | $12,564 |
| Net Income (Loss) Per Common Share (Basic) | $(1.59) | $0.21 |
| Cash Flows from Operating Activities | $84,775 | $133,557 |
| Cash Flows from Investing Activities | $85,617 | $218,670 |
| Cash Flows from Financing Activities | $(189,551) | $(606,484) |
| Total Assets | $3,790,943 | $4,105,725 |
| Total Liabilities | $2,418,697 | $2,604,654 |
| Total Equity | $1,372,246 | $1,501,071 |
| Cash and Cash Equivalents | $48,639 | $67,798 |
Material Changes vs. Prior Period
- Revenue Decline: Total gross revenues decreased by $30.9 million (13.5%) compared to the prior year, primarily due to a $32.4 million decrease in rental revenue. This was driven by the absence of $28.7 million in lease termination payments received in 2008 and the sale/contribution of properties to co-investment programs.
- Significant Net Loss: The Company reported a net loss attributable to common shareholders of $161.9 million, a reversal from a net income of $12.6 million in the prior year. The primary driver was a $130.3 million loss from equity in earnings of non-consolidated entities, largely due to impairments in the Concord Debt Holdings LLC investment.
- Impairment Charges: The Company recorded a $68.2 million other-than-temporary impairment charge on its investment in Lex-Win Concord LLC, writing the investment down to zero. Additionally, an $8.4 million impairment was recorded on a real estate asset (Circuit City property) and $1.1 million in loan loss reserves.
- Debt Reduction: The Company actively reduced leverage by repurchasing $76.6 million of its 5.45% Exchangeable Guaranteed Notes at a discount, realizing a gain of $14.0 million. Total mortgages and notes payable decreased from $2.03 billion to $1.95 billion.
- Dividend Policy Change: Dividends paid to shareholders decreased significantly to $33.1 million from $185.1 million in the prior year. The Company reduced the quarterly common dividend to $0.18 and paid 90% of the dividend in common shares to preserve cash.
Guidance, Outlook, and Risks
- Liquidity Strategy: Management aims to generate $35.0 million in property sale proceeds for the remainder of 2009 to fully repay the revolving credit facility, thereby unlocking $125.0 million in borrowing capacity for 2010. As of June 30, 2009, $60.1 million of borrowing capacity remained available.
- Outlook: The Company faces challenges from the global credit crisis, including difficulty obtaining financing, decreased property sales prices, and tenant defaults. Growth in net income is currently limited to index-adjusted rents and reduced interest expense without new acquisitions.
- Key Risks:
- Concord Debt Holdings: The non-consolidated entity Concord is in default of covenants on its warehouse facilities and has received margin calls. The Company has written off its entire investment in this entity.
- Legal Proceedings: Inland Concord (a partner in Concord) has filed suit against Lex-Win Concord regarding a $24.0 million capital call. The Company believes the claim is without merit and has filed counterclaims.
- Tenant Defaults: Continued risk of tenant bankruptcies and lease rejections, exemplified by the Circuit City vacancy.
- Unusual Items: The financial results are heavily impacted by non-cash impairment charges related to the financial crisis and the specific distress of the Concord investment, which are not indicative of the operating performance of the core real estate portfolio.
Investor Verification Checklist
- Concord Investment Status: Verify the current status of the legal dispute with Inland Concord and the likelihood of any recovery from the Lex-Win Concord investment, which has been written down to zero.
- Property Sales Pipeline: Confirm the Company's ability to meet its target of $35.0 million in remaining 2009 property sales to pay down the revolving credit facility.
- Debt Maturities: Review the schedule of $51.2 million in property-specific debt maturing in late 2009 and $95.3 million in 2010 to assess refinancing risks.
- Dividend Sustainability: Assess the impact of the reduced dividend and stock dividend policy on future cash flow requirements and shareholder returns.
- Core Portfolio Occupancy: Monitor occupancy rates and lease renewals in the core net-leased portfolio to ensure operating cash flows remain sufficient to cover debt service and reduced dividends.