LXP Industrial Trust (then Lexington Realty Trust) — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The filing identifies the registrant as Lexington Realty Trust. Financial amounts below are in U.S. dollars; unless stated otherwise, figures are in millions.
Business context
The REIT owned interests in approximately 225 consolidated properties across 41 states, totaling about 41.1 million square feet; approximately 97.5% was leased. The portfolio focused on single-tenant office, industrial and retail properties, predominantly under net leases. Same-store occupancy was 97.3%, versus 96.5% a year earlier.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Gross revenue | $87.7 | $79.8 | $250.1 | $235.3 |
| Net income (loss) | $175.3 | $(30.8) | $186.4 | $(103.8) |
| Net income (loss) attributable to common shareholders | $169.0 | $(37.0) | $163.6 | $(111.2) |
| Diluted earnings (loss) per common share | $0.96 | $(0.24) | $0.98 | $(0.73) |
| Operating cash flow | Not presented by quarter in the supplied filing text | $120.5 | $118.8 | |
| Company FFO, as adjusted (non-GAAP) | $45.5 | $41.4 | $132.4 | $124.4 |
| Adjusted FFO per share (non-GAAP) | $0.25 | $0.23 | $0.73 | $0.71 |
Revenue increased about 9.8% in the quarter and 6.3% year to date, primarily from acquisitions and improved occupancy at Transamerica Tower, partly offset by lease rollover and lower tenant reimbursements. Interest and amortization expense declined to $24.9 million for the quarter from $27.0 million, and to $73.7 million for nine months from $80.4 million. The filing does not provide a clear operating-margin figure.
At September 30, cash and cash equivalents were $72.4 million; restricted cash was $25.1 million. Total debt carrying value was approximately $1.994 billion, compared with $1.662 billion at December 31, 2011. The revolving facility had $93.0 million drawn and $203.3 million available. Total assets were $3.387 billion and total equity was $1.175 billion.
Material changes and unusual items
- The company acquired the remaining interest in Net Lease Strategic Assets Fund (NLS) on September 1 and began consolidating it. The transaction produced a $167.9 million gain, primarily from remeasurement of the company’s prior NLS investment. This nonrecurring gain was the main driver of reported profitability; excluding it, the period’s earnings picture was substantially different. Pro forma results excluding the gain showed a $0.7 million common-shareholder loss for Q3 and a $19.6 million loss for nine months.
- During the nine months, the company completed $104.3 million of acquisitions/build-to-suit transactions and had five development commitments totaling an expected maximum $152.9 million, with estimated completion cost of $161.7 million.
- It refinanced debt with a $215 million secured term loan, due 2019, and a new $300 million revolving facility, due 2015 with an extension option. At quarter-end it reported covenant compliance. It had $33.9 million of property-specific debt due in 2012 and $238.0 million due in 2013.
- In October, the company issued 17.25 million common shares for approximately $156.3 million net proceeds, used mainly to repay $93.0 million drawn on the revolver and $57.45 million of debt assumed with NLS. It also increased the term loan by $40 million and converted $20.4 million principal of convertible notes into common shares.
- Impairment charges declined year over year: continuing operations recorded $4.3 million for the first nine months versus $38.7 million; discontinued operations recorded $5.7 million versus $76.1 million. Property sales generated $8.9 million of gains for nine months in 2012.
Outlook, risks and contingencies
Management said operating cash flow, cash on hand, revolver capacity, asset-sale proceeds, equity issuance and other financing sources were expected to fund operations, debt service and REIT distributions. No specific earnings or FFO guidance was provided. Management noted that future earnings growth depends significantly on acquisitions and leasing; without these, growth sources are limited, and higher rates, lower occupancy or tenant defaults could offset improvements.
Risks and exposures include upcoming mortgage maturities, variable-rate debt, development execution and leasing commitments, and loan credit issues. Two defaulted real-estate loans were in foreclosure proceedings; the company believed collateral values exceeded its investments, but recovery was uncertain. A tenant-improvement/base-building completion guarantee related to an Orlando property was estimated at $8.1 million, plus a $7.6 million tenant-improvement allowance. The company settled litigation during Q3 for $2.8 million. Management stated ordinary-course legal proceedings were not expected, in aggregate, to materially harm results.
Quarterly common dividends increased from $0.115 per share in 2011 to $0.125 in the first nine months of 2012; the October 2012 quarterly dividend rose to $0.15 per share. Management cautioned that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Separate recurring property performance and adjusted FFO from the $167.9 million NLS remeasurement gain; review the acquisition’s pro forma results and future contribution.
- Confirm the effect of the October equity offering, debt repayments, term-loan increase and convertible-note conversion on share count, leverage, interest expense and liquidity.
- Review the 2012–2013 debt maturities, facility covenants and refinancing capacity, including subsequent changes to the borrowing facilities.
- Track occupancy, lease expirations and renewal economics, development commitments, and the status and recoverability of defaulted loans and guarantees.
- Assess whether operating cash flow and recurring FFO support the higher dividend; FFO measures are non-GAAP and are not substitutes for cash flow or net income.