Business context and reporting period
This is Lexington Realty Trust’s combined Form 10-K with Lepercq Corporate Income Fund L.P. (LCIF), for the fiscal year ended December 31, 2016, filed February 28, 2017. The filing identifies the registrant as Lexington Realty Trust; LCIF is its controlled operating partnership. The business owns and invests in primarily single-tenant commercial properties, chiefly under net leases. At year-end, the Trust had interests in approximately 195 consolidated properties across 40 states, with 43.3 million square feet and 95.9% leased, excluding properties subject to mortgages in default.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total gross revenue | $429.5 million | $430.8 million |
| Net income attributable to common shareholders | $89.1 million | $105.1 million |
| Diluted earnings per common share | $0.37 | $0.45 |
| FFO per common share and unit, basic | $1.13 | $1.19 |
| Adjusted Company FFO per share and unit, diluted | $1.14 | $1.10 |
| Net cash from operating activities | $235.3 million | $244.9 million |
| Total assets | $3.44 billion | $3.81 billion |
| Total consolidated debt | $1.86 billion | $2.19 billion |
| Cash and cash equivalents | $86.6 million | $93.2 million |
| Revolver availability | $395.4 million, subject to covenants | — |
Operating cash flow covered the $165.9 million of cash dividends paid to common and preferred shareholders in 2016. The Trust reported a 1.80 ratio of earnings to combined fixed charges and preferred dividends and stated it was in compliance with corporate debt covenants. The common dividend was $0.685 per share for the year, compared with $0.68 in 2015.
Material changes versus the prior comparable period
- Revenue was nearly flat, but common-shareholder net income fell 15.2% and diluted EPS declined from $0.45 to $0.37. The filing attributes the result to, among other items, substantially higher impairment charges and lower debt-satisfaction gains, partly offset by higher gains on property sales.
- Impairment charges and loan losses rose to $100.2 million from $36.8 million. The 2016 amount included a $65.5 million impairment on three New York land investments and charges related to other properties.
- Property sales generated $81.5 million of gains, versus $23.3 million in 2015. The Trust disposed of consolidated property interests for a gross price of $641.4 million and purchased properties for $170.3 million; it also completed $139.8 million of consolidated build-to-suit projects.
- Debt declined by approximately $330 million year over year. The Trust retired $374.1 million of property-specific mortgages and obtained $254.7 million of new non-recourse mortgage financing during 2016; it also repaid $177.0 million net on the revolving credit line.
- Same-store NOI decreased 0.6% to $248.1 million, and same-store leased area declined to 95.8% from 98.1%. Portfolio leased occupancy was 95.9% at year-end.
- The weighted-average remaining lease term was 8.6 years, down from 12.6 years (or 9.1 years excluding the New York land investments with 99-year leases) at the prior year-end. Management linked the change mainly to those land sales. Revenue from leases of at least ten years represented 36.8% of 2016 base rent, down from 42.5%.
Outlook, commentary, risks, contingencies, and unusual items
- Management’s strategy is to emphasize cash-flow stability, long-term leases, industrial assets, capital recycling, and balance-sheet flexibility. It expects office holdings to become concentrated in fewer, larger markets and anticipates continued dispositions of suburban office and other non-core assets. Management cautions that capital recycling can dilute near-term earnings.
- Year-end commitments included $177.9 million of estimated remaining costs for ongoing build-to-suit projects and $71.7 million of forward property purchases. Management cautions that completion, acquisition, cost, and timing are not assured. Subsequent to year-end, the Trust reported acquiring two industrial properties for $50.6 million, disposing of six properties for $88.9 million, completing the Lake Jackson project, and selling its Kennewick loan for $80.4 million.
- Lease rollover, vacancies, tenant credit, re-leasing costs, and property operating costs are key risks. Approximately 35.6% of base rental revenue from single-tenant leases was scheduled to expire within five years. Although no tenant represented more than 10% of Trust rental revenue, 46% of consolidated annual GAAP base rent was attributed to unrated tenants.
- Debt and refinancing risks remain material. Scheduled consolidated balloon payments include $62.7 million of property-specific payments in 2017 and corporate term-loan maturities of $250 million in 2020 and $255 million in 2021. The Trust had no consolidated variable-rate debt not subject to swaps at year-end; swaps covered $505 million of term loans, but the hedge periods expire in 2018 and 2019.
- Two loan investments totaling approximately $94.2 million remained outstanding at year-end. The Kennewick loan was in covenant default and the Oklahoma City loan was in monetary default; the company said it was exercising remedies on the latter. Both loans were subsequently addressed through sales or collections described in the filing.
- A lender sought approximately $9.2 million under a limited guaranty in litigation concerning a foreclosed New Jersey property. The Trust had recorded no liability because it assessed a loss as reasonably possible, but not probable, and stated its maximum exposure was $10 million. The motion to dismiss was generally denied; discovery was ongoing.
- Both the Trust and LCIF disclosed a material weakness in internal control over financial reporting involving policies and controls for critical accounting matters and significant or unusual transactions, including lease-termination accounting. KPMG issued an adverse opinion on the Trust’s internal controls, while issuing an unqualified opinion on the financial statements. Management said quarterly results were amended for immaterial corrections to the treatment of a $7.685 million lease-termination payment and began a remediation plan in 2017.
Most important facts for investors to verify
- Whether management’s remediation plan resolves the material weakness, and whether subsequent filings report effective controls over lease terminations and unusual transactions.
- The sustainability of occupancy, same-store NOI, rent collections, and re-leasing outcomes as leases expire, particularly given the reduced long-term lease share and unrated-tenant rent exposure.
- Actual cash proceeds and realized gains from asset recycling, and the effects of dispositions on recurring rental income and FFO.
- Progress on the 2020–2021 term-loan maturities, property-specific refinancing needs, covenant headroom, and liquidity available after dividends and investment commitments.
- Recovery and final disposition of the defaulted loan exposures, and the outcome of the New Jersey guaranty litigation.
- Quarterly earnings comparability: the filing revised 2016 quarterly results for the timing of lease-termination revenue recognition, while stating the corrections were immaterial.