LXP Industrial Trust (then Lexington Realty Trust) — Q3 2018 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers the three and nine months ended September 30, 2018, with comparisons to 2017. Lexington Realty Trust owned interests in approximately 145 consolidated properties across 35 states, totaling about 47.2 million square feet; 96.8% was leased. The portfolio was primarily single-tenant and net-leased. The report also presents Lepercq Corporate Income Fund L.P. (LCIF), an operating partnership controlled approximately 96% by Lexington.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Gross revenue | $100.0m | $97.7m | $308.1m | $289.5m |
| Net income | $220.9m | $5.6m | $205.2m | $55.2m |
| Net income attributable to common shareholders | $216.2m | $3.9m | $197.0m | $49.8m |
| Basic EPS | $0.91 | $0.02 | $0.83 | $0.21 |
| Adjusted company FFO per diluted share/unit | $0.24 | $0.25 | $0.74 | $0.71 |
- Cash flow: Nine-month operating cash flow was $169.7m, versus $172.4m. Investing cash flow was $577.5m provided, chiefly reflecting property-sale proceeds; financing cash flow was $467.3m used, mainly for debt repayment, distributions and share repurchases.
- Operating trends: Nine-month same-store NOI, a non-GAAP measure, rose 0.4% to $173.7m. Same-store leased area was 95.6%, compared with 98.5% a year earlier. Portfolio occupancy was 96.8% at quarter-end.
- Debt and liquidity: At September 30, debt carrying amounts totaled approximately $1.66bn, including mortgages and notes, term loans, senior notes and trust preferred securities; the revolver had no borrowings. Unrestricted cash was $128.4m, restricted cash $263.5m, and revolver availability $505m, subject to covenants. Lexington reported compliance with corporate debt covenants. The reported weighted-average mortgage and note interest rate was 4.5%.
- Distributions and equity: Common and preferred dividends paid in the first nine months totaled $132.1m. Lexington repurchased 1.87m shares during that period at an average $8.01 per share.
Material changes and notable transactions
- Net income rose sharply, but results were dominated by property-sale gains: $202.4m in Q3 and $239.6m for the nine-month period, versus $10.6m and $55.1m, respectively, in 2017.
- Lexington sold interests in 37 properties for gross proceeds of $967.8m in the first nine months, including 21 office assets transferred to newly formed NNN Office JV for $725.8m. Lexington retained a 20% JV interest. It also acquired six industrial properties for approximately $207.9m.
- Management’s capital-recycling strategy emphasizes industrial assets and disposition of non-core office, retail and vacant properties. Industrial assets represented 60.7% of GAAP rent at September 30. Management said the strategy may dilute near-term earnings but is expected to benefit shareholder value over the longer term.
- Impairment charges increased to $90.9m for the first nine months, from $43.6m, including impairments of office properties. Interest and amortization expense increased to $63.2m from $57.8m, primarily due to higher borrowing rates and debt levels.
- Quarter-end weighted-average lease term on a cash basis was 8.5 years, down from 9.1 years a year earlier. Q3 leasing and extensions covered approximately 867,000 square feet; average GAAP base rent on extended leases was $12.01 per square foot versus $10.95 before extension.
Outlook, risks and unusual items
- Management expects operating cash flows to fund operating expenses, regular debt service and REIT distributions, with liquidity also supported by cash, the revolver, asset-sale proceeds and other financing sources. No specific earnings or FFO guidance was provided.
- Management said future net income growth depends heavily on acquisitions, dispositions and leasing. It cited risks including higher interest rates, lower occupancy, tenant defaults and delayed acquisitions. It also cautioned that capital recycling may reduce near-term earnings.
- Interest-rate exposure included $323.1m of variable-rate consolidated principal debt at September 30. A 100-basis-point increase would have raised nine-month interest expense by an estimated $4.4m. Five interest-rate swaps were outstanding.
- A tenant, Cummins Inc., sued over a claimed right to purchase a Columbus, Indiana office building despite missing the stated purchase-option deadline. Cummins seeks to terminate its lease early; Lexington said it intends to defend its ownership rights. Management considered other ordinary-course litigation not expected to have a material aggregate adverse effect.
- Subsequent to quarter-end, Lexington reported fully repaying the remaining $149m balance of the 2020 term loan, selling a property for $16m, and repurchasing 2.68m shares at an average $8.06 per share; it also increased its repurchase authorization by 10m shares.
- LCIF’s results are also affected by asset sales and gains. It reported nine-month net income of $63.0m versus a $4.9m loss, while operating cash flow declined to $28.1m from $32.7m. LCIF noted that it depends on Lexington for liquidity support for maturing mortgage balloons and new investments. One tenant accounted for 17.1% of LCIF rental revenue in the first nine months.
Important facts for investors to verify
- How much of reported earnings and future performance depends on recurring rent and operations rather than property-sale gains, and how sale proceeds are redeployed.
- Whether the industrial portfolio shift and leasing activity improve occupancy, lease duration and same-store NOI after dispositions of office assets.
- Current debt maturities, variable-rate exposure, covenant headroom and the use or availability of restricted 1031-exchange proceeds.
- The effect of impairments and potential additional asset sales on property values and future rental cash flows.
- The outcome and financial implications of the Cummins purchase-option litigation, as well as LCIF’s tenant concentration and reliance on Lexington for capital support.