LXP Industrial Trust (filed as Lexington Realty Trust) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; dollar figures below are in millions unless stated otherwise. The filing identifies the registrant as Lexington Realty Trust.
Business context
The REIT owned interests in approximately 140 consolidated properties across 33 states, totaling about 48.9 million square feet and 97.7% leased. Its strategy emphasized growing industrial holdings, selling non-core office, retail and vacant assets, and maintaining balance-sheet flexibility. Industrial properties represented 73.9% of gross book value excluding assets held for sale.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Gross revenue | $80.1 | $105.7 | $161.4 | $208.5 |
| Net income (loss) attributable to common shareholders | $21.7 | $(3.3) | $48.1 | $(19.3) |
| Diluted EPS | $0.09 | $(0.01) | $0.20 | $(0.08) |
| Adjusted Company FFO per diluted share/unit | $0.20 | $0.25 | $0.40 | $0.50 |
Q2 revenue fell $25.5 million, primarily from property sales and occupancy changes, partly offset by acquisitions. The net-income improvement largely reflected lower impairment charges: $1.1 million in Q2 2019 versus $35.3 million a year earlier. For the first half, impairment charges were $1.7 million versus $88.3 million. Gains on property sales were $36.2 million for the first half, compared with $37.2 million in 2018.
First-half same-store NOI declined 1.9% to $120.0 million from $122.3 million, attributed primarily to vacancies and office renewals or re-leasing at lower rents. First-half operating cash flow was $88.6 million, down from $110.9 million, which management attributed mainly to property sales and vacancies, partly offset by acquisitions. Cash used in investing was $147.2 million; cash used in financing was $57.7 million. Cash, cash equivalents and restricted cash totaled $61.0 million at June 30, including $43.8 million unrestricted cash.
At June 30, balance-sheet debt was $1.410 billion, net of issuance costs and excluding $109.5 million of mortgage debt associated with assets held for sale. The revolving facility had $55 million drawn and $545 million available, subject to covenant compliance. The company reported compliance with corporate debt covenants. Total assets were $2.997 billion and total equity was $1.344 billion. The filing reports a 4.6% weighted-average rate on mortgages and notes payable.
Material changes and transactions
- Acquired eight industrial properties for approximately $260 million in the first half, covering about 4.15 million square feet; first-half property dispositions generated $119.4 million of net proceeds.
- Seven properties were classified as held for sale at June 30, versus two at December 31, 2018. The company reported $181.2 million of related assets and $111.8 million of liabilities.
- A February 2019 credit agreement increased the revolving commitment from $505 million to $600 million, extended its maturity to February 2023 with a company option to extend to February 2024, and reduced applicable margins.
- After quarter-end, the company satisfied $21.4 million of non-recourse mortgages and extended its $300 million term loan maturity to January 2025, swapping its LIBOR component to a current fixed rate of 2.732%.
- Adoption of the new lease standard added $40.0 million of operating right-of-use assets and $41.1 million of operating lease liabilities at June 30; management said adoption did not materially affect operations or cash flows.
Outlook, risks and unusual items
Management stated that operating cash flow should fund operating costs, regular debt service and REIT distributions, with cash, credit capacity, asset-sale proceeds and other financing sources available for additional needs. It cited $61.2 million of property-specific mortgage balloon debt due in 2019 and $32.0 million due in 2020. No numerical earnings or FFO guidance was provided.
Management described industrial investment markets as competitive and said limited speculative development, including through joint ventures, was part of its strategy. The filing identifies development risks including approval delays, cost overruns, slower lease-up, insufficient tenant demand or rents, and unavailable financing. Two non-recourse mortgages totaling $38.9 million were in default, secured by vacant or mostly vacant office properties in Overland Park, Kansas, and Charleston, South Carolina.
A material litigation matter involves tenant Cummins Inc., which seeks to exercise a disputed purchase option for an office property despite allegedly missing the contractual notice deadline. Discovery was ongoing; the company said it intended to defend its ownership and enforce the lease terms. The filing also notes $307,000 of first-half rental revenue reduction for receivables deemed uncollectible, primarily related to a tenant bankruptcy.
At June 30, variable-rate debt was $484.1 million; management estimated that a 100-basis-point rate increase would have raised first-half interest expense by $2.1 million. No interest-rate swaps were outstanding at quarter-end. The company also cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the held-for-sale properties close as expected and at values consistent with carrying amounts and reported gains.
- Leasing, occupancy and renewal trends, particularly the drivers of lower same-store NOI and the ability to maintain portfolio occupancy.
- Progress on the two defaulted mortgages, the associated properties, and the outcome of the Cummins purchase-option litigation.
- Debt and liquidity after the post-quarter mortgage repayments and term-loan extension, including the effects of variable interest rates and upcoming mortgage maturities.
- Execution and potential returns of speculative industrial development and the planned shift toward an industrial-focused portfolio.