LXP Industrial Trust (LXP) Q3 2022 Earnings Report, Transcript and Summary

Good day. My name is [Shantel] and I will be your conference operator today. At this time I would like to welcome everyone to the LXP Industrial Trust Third Quarter 2022 Earnings Conference Call and Webcast. As a reminder today's conference call is being recorded. [Operator Instructions] Heather Gentry, you may begin your conference.

Thank you, operator. Welcome to LXP Industrial Trust third quarter 2022 conference call and webcast. The earnings release was distributed this morning and both the release and quarterly supplemental are available on our website at www.lxp.com in the Investors section and will be furnished to the SEC on a Form 8-K. Certain statements made during this conference call regarding future events and expected results may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. LXP believes that these statements are based on reasonable assumptions. However, certain factors and risks including those included in today's earnings press release and those described in reports that LXP files with the SEC from time-to-time could cause LXP's actual results to differ materially from those expressed or implied by such statements. Except as required by law LXP does not undertake a duty to update any forward-looking statements. In the earnings press release and quarterly supplemental disclosure package, LXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure. Any references in these documents to adjusted company FFO refer to adjusted company funds from operations available to all equity holders and unit holders on a fully diluted basis. Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of LXP’s historical or future financial performance, financial position or cash flows. On today's call, Will Eglin, Chairman and CEO; Beth Boulerice, CFO; Brendan Mullinix CIO; and Executive Vice President; James Dudley will provide a recent business update and commentary on third quarter results. I will now turn the call over to Will.

Thanks, Heather. Good morning, everyone. We delivered solid third quarter results as our team continues to execute our prudent disposition and investment strategies to enhance our portfolio and drive strong leasing and rental growth. Our industrial portfolio continues to perform well with quarterly same store NOI growth of 6.2%. Additionally, our weighted average lease term of 6.4 years investment grade tenancy of 59.1% average building age of 8.6 years and functional utility of our industrial assets provides us with stability and valuable defensive attributes. We are confident in our ability to continue to build on our momentum to drive strong financial performance and enhance shareholder value as we capitalize on leasing and releasing opportunities in advance our development pipeline. Asset sales for the quarter totaled $92 million at weighted average gap and cash cap rates of 5.4% and 5.1% respectively. We're in the homestretch for dispositions in our office and other assets portfolio with two properties sold during the quarter, one subsequent to quarter end, and an additional five currently targeted to be sold by year end or first quarter of 2023. Subsequent to quarter end, we sold the parachute Colorado asset in our DK office joint venture, and we are working on other sales in this portfolio. After selling our remaining to Louisiana industrial assets in the second quarter, we sold one industrial asset in the third quarter, which marked our departure from Oregon. These sales are consistent with our strategy to dispose of industrial assets in non-core markets that do not fit our growth priorities. This plan is primarily focused on industrial assets in St. Louis, Cleveland, Kansas City, Philadelphia and Detroit consisting of eight buildings with estimated NOI of $19.3 million. We expect proceeds from sales will be used to fund development, invest in our target markets and to retire debt. Development funding in our ongoing six projects was roughly $71 million in the quarter. We substantially completed our 1.1 million square foot project in Atlanta, Ohio in the third quarter, and subsequent to quarter end, we leased 100 acres of land at our Olam Farms site in Phoenix. Our remaining projects are estimated for substantial completion by the end of this year through second quarter of 2023. We continue to produce strong leasing performance, with 270,000 square feet lease during the quarter at high industrial base and cash base rental spreads of 47% and 41% respectively. Year-to-date base and cash base rents on new and extended industrial leases increased approximately 31% and 26% respectively, with average annual escalations of 3.4% or [4] million square feet of leasing volume. Our leasing outlook remains positive for next year. And we believe we continue to have a very good mark to market opportunity ahead of us. We return capital to shareholders during the quarter through the repurchase of 5.6 million common shares at an average price of $10.16 per share. Year-to-date, we've returned a total of $131 million to shareholders via share repurchase activity. Going forward share repurchases will be considered in the context of maintaining leverage within our target range of six to seven times net debt to adjusted EBITDA and development funding needs. Leverage increased during the quarter but is expected to decline when proceeds over forward equity are utilized at year end to reduce debt levels. We also announced this morning that our board of trustees authorized a quarterly dividend increase that reflects the strength of our operations. The new declared quarterly common share dividend, which will be paid in the first quarter of 2023 will be $12.5 per share, representing an increase of approximately 4.2% over the prior quarterly dividend. On the ESG front, we're pleased to have published our second corporate responsibility report in October, which includes a comprehensive overview of the significant progress we're making on our ESG and our initiatives and strategies. A commitment to ESG is core to who we are at LXP. And we are dedicated to continuing to advance our initiatives and enhance our policies and practices to help our tenants create a more sustainable future to embrace diversity and inclusion on our team in our communities and to foster a culture that supports and empowers our employees. In recognition of our progress to date, we received a score of A for public disclosure reporting above the global average in this year's Gresb real estate assessment and increased our overall score relative to last year. We also remain committed to best in class governance practices, including ensuring we have the right board structure to continue to oversee the execution of our strategy and maximize value for shareholders. In addition to refreshing our board with seven new independent members since 2015 our nominating committee recently adopted a resolution to recommend Jamie Handwerker as the next lead trustee in May 2023 when our current lead trustee Richard Frary steps down. In summary, we believe the industrial sector continues to perform well, despite valuations that have been impacted by higher interest rates and financial market conditions. While our portfolio value is not immune to these effects, so far, we've seen little softening intended demand. We remain very focused on our development initiatives, as well as leasing existing vacancy, stabilizing or development projects, maintaining high levels of occupancy and raising rents. With that, I'll turn the call over to Brandon to discuss investments in more detail.

Thanks Will. Both 2022 development spend on the six ongoing projects through the third quarter was approximately $192 million and we anticipate an additional $56 million to be funded by year end. Our EDNA Ohio development project that reached substantial completion on September 30 resides in a prime location in the East Columbus sub-market right off by 70 and spans 1.1 million square feet. This class A warehouse distribution facility features modern specs including a 40 foot clear height. We've experienced a good deal tenant interest since the project's completion and we are hopeful of full building user will occupy the space in the coming months. We also expect to deliver our Ocala in Indianapolis projects, along with the previously leased building at our Greenville Spartanburg three property project by year end. Also subsequent to quarter end, we entered in to a 20 year ground lease with a data center user for approximately 100 acres at our 420 acre Olam farms land parcel Phoenix. Initial annual ground rent for this approximately 100 acres is estimated to be $5.2 million with 4% annual rental increases. This is a great outcome as approximately 25% of the site is already expected to produce an initial 5.2% annual return on our original $101 million purchase. The lease includes options to extend for up to an additional 30 years, as well as the purchase option after two years for $20 per square foot. A significant appreciation in asset value when compared to the $5.5 per square foot we paid for the land in December 2021. We continue to work on our development plans for additional projects at the site where user interest remains quite strong. Looking ahead to 2023 we anticipate development spend for our ongoing six development projects will be approximately $113 million excluding partner promotes. With that I'll turn the call over to James to discuss leasing.

Thanks, Brendan. In general, tenant demand remains positive despite pockets of softening in certain markets due to some supply demand imbalances. More specifically, rent growth in our target markets grew on average 25% year-over-year through the third quarter. We currently estimate our industrial portfolios and place leases to be approximately 20% below market based on independent brokers estimates presenting us with significant teacher mark to market opportunities. In fact, our industrial portfolio cash rents today are forecasted to grow on average 43% for lease expirations through 2028 or 33% when adjusted for rent escalations based on independent progressiveness. Our mark to market opportunity underscores our successful portfolio strategy to grow in key markets with high quality assets that are likely to attract strong tenant interest. Vacancy remains low and our stabilized industrial portfolio with occupancy of 99.4% representing a slight increase when compared to last quarter. For the remainder of 2022, and then to 2023 we intend to focus on leasing our small amount of existing vacancy as well as stabilizing our development portfolio. With respect to the remaining 2023 explorations, we expect expiry rents to increase within a range of 40% to 50%, based on current negotiations and third party broker estimates. Notable industrial leasing activity during the quarter included a second generation three year extension with 3.8% bumps on an early 2023 exploration in Tampa, Florida resulting in a 41% cash rental increase, as well as a new lease for the remaining 36,274 square feet of space in our Lakeland Florida facility for five years. This lease resulted in a starting rent of $7 a square foot approximately 35% above our original underwriting assumptions, with annual bumps of 4%. Subsequent to quarter end, we had successful leasing outcomes for an existing lease and a new lease on vacant space. And our 510,000 square foot industrial facility in Dallas, Texas we extended a 2023 exploration for three years the 4% annual rent bumps and increase the rent by 43% over the prior terms cash base rent. We also leased 81,000 square feet at our 211,000 square foot industrial facility in Greer, South Carolina for just over five years, bringing the building to full occupancy. The starting rental rate of $6.25 is roughly 17% above our original underwriting assumptions, and the 4% annual rent bonds are very attractive. We continue to receive indications of interest and field RFPs for our development portfolio and we will continue to provide updates as this activity progresses. With that I'll turn the call over to Beth to discuss financial results.

Thanks James. Third quarter revenue was approximately $80 million with property operating expenses of $14 million, of which 85% was attributable to tenant reimbursements. Adjusted company FFO for the quarter was approximately $48 million or $0.17 per diluted common share. We announced this morning that we are tightening our 2022 guidance range, the $0.65 to $0.68 per diluted share by raising the low end by a penny per share. G&A in the quarter was approximately $9 million and we expect our 2022 G&A to be within a range of $35 million to $37 million excluding certain advisory costs. Our same-store industrial portfolio was 99.8% leased at quarter end. And our same-store industrial NOI grew 6.2% quarter-over-quarter and 5.3% year-to-date. We are increasing our 2022 industrial same store NOI growth guided by 75 basis points at the midpoint to a range of 5% to 5.5%. At quarter end, approximately 96.5% of our industrial portfolio leases had escalations with an average annual rate of 2.4%. The majority of our office portfolio remains held for sale as of September 30, with the aggregate market value for these properties, now estimated to be within a range of $95 million to $105 million, and forecasted 2022 NOI of approximately $11 million. Net debt to adjusted EBITDA at quarter end was 7.1 times, which we expect to decline by year end in conjunction with the maturity of the forward equity contracts. And we sell the contracts at quarter end. Our net debt to adjusted EBITDA would have been 6.3 times. As of September 30, we had an aggregate of $182.1 million under unsettled four common share sale contracts, which we intend to settle at contract maturity in December. At quarter end, our unsecured NOI was over 93% of our total NOI. We currently have $450 million of borrowing capacity available under our unsecured revolving credit facility. During the quarter we amended our unsecured credit facility, extending the maturity of the revolving portion out to July 2026 for added balance sheet flexibility and improved the terms for a clickable margin and debt covenant calculation. Consolidated debt outstanding at quarter end was approximately $1.6 billion with over 84% of this debt fixed. Total consolidated debt had a weighted average interest rate of 3.1% and a weighted average term to maturity of 6.5 years at quarter end continuing to keep us well protected against rising rates. With that I'll turn the call back over to Will.

Thanks, Beth. I will now turn the call over to the operator who will conduct the question and answer portion of this call.

[Operator Instructions] Our first question comes from James Allen Villard with Ladenburg Thalmann. Your line is open.

Good morning, guys.

Good morning.

Can you give us some more color on the 100 acres in Phoenix that you rented subsequent to quarter end?

Sure. As I indicated in the prepared remarks, it's 100 acres that we ground these two data center operator who plans to develop a data center park on that portion of the site. The lease has an initial term of 20 years and there are extension options for 30 years beyond that.

Okay, that's helpful. Yes, just kind of, again kind of big picture. How are you balancing stock repurchases versus deleveraging? And would the trust preferred be a potential target for deleveraging activity?

Yes. As I said, what one of the things that we're monitoring is just making sure that we're keeping our overall leverage within that six to seven times area. Buyback has been a good use of capital this year compared to acquisitions. Our funding needs for our projects underway at the moment aren't huge next year, but we want to have capital available to exploit opportunity in the land bank especially Olam farms where we had a great outcome on that land lease that Brendan was just talking about, but we want to have capital available to build as well. And the trust preferred is interesting because that's the sort of principal piece of our floating rate exposure. But it's roughly a 15 year maturity. So while it would be from a deleveraging standpoint, I guess the highest return, you sort of have to balance that compared to the shorter maturities in 2024 and then 2025.

Right. That's kind of helpful. Kind of just bigger picture, what are you seeing in the acquisition and the disposition market today and kind of how you thinking about it going into 2023?

Well, just broadly speaking, the transaction market continues to be really slow. And there's a lot of price discovery in the market that began with the spike in inflation expectation and rising interest rates. So the market is pretty tough to [pick] today. In terms of our own activity today and how we're looking at capital allocation presently, we're really, as we've said before, focused on our ongoing development pipeline, and future opportunities in our existing land bank. So we're not presently active in the acquisition market although we're monitoring it.

And on the disposition side, we mentioned in the comments that we have some properties in markets where we have just one or two buildings that we'll look at as sources of liquidity to keep our revolver balances low next year. And we can't give pricing information there yet. But I will say that we've got the two Michigan assets in the market, and there's very strong investor interest.

Thanks is helpful. That's it from me. Thanks.

Thank you.

[Operator Instructions] There are no further questions at this time. I will now turn the call back over to Wilson Eglin. We have one more question from Jon Petersen with Jefferies. Your line is open.

Great, thanks. Got in just in time. So on the -- I guess, on the development portfolio I know you got a decent amount that that is still needs some pre-leasing seems like demand for industrial still remains strong. But I mean, anything you're seeing in the macro environment that might be slowing down kind of the potential to lead some of those developments that has expected yields changed at all, just given everything that's been going on in the world?

Yes. Why don't [indiscernible] if you want to talk about the demand side [indiscernible] why don't you start with that?

Okay, so there's still quite a bit of demand and all of our markets. We're tracking north of 10 million in every one of our development markets in 20 and some. I will say the user demand is maybe slowed a little bit, just from a decision making perspective. It seems like maybe there's not as much releasing right now. And users are taking a little bit more time to make their decisions. And it does seem like it's softer. But I just would point out that that's relative to record setting year last year, and this year still seems to be on track to be the second highest net absorption year in history. So though it feels softer relative to what it was last year and I do think that there's still significant demand in the market, and that we're going to have positive outcomes. So there may be a little bit of downtime to lease them versus releasing.

And then in regard to your question on yield, I do think that there may be opportunities for our projects to exceed our past yield expectations, just as a result of market rent growth that has occurred during the development process of the buildings, as well as, as you're aware, we do develop in joint venture and with rising exit cap rates, that the partner promotes are very sensitive to that. So between some market rent growth and higher exit cap rates, lower promotes or after promote yield. I think there's good, there are opportunities there to exceed our prior guidance on yield.

Okay, all right, that's helpful. And then on [market] sales. And I know, the prior indications were to get it done by yearend, I think you indicated it some of that might be pushed into the first quarter of next year. I mean, can you pull back the curtain a little bit? I mean, it's there. There been a lot of retraining, like if we've been close to selling some of these buildings, and then obviously, the debt markets move and some of these deals fall through, like, can you give us a little more context on how --

Yes. I mean that I think that the CEA property in New Jersey, which has the longest lease has been the one that's been most sensitive to [debt] market conditions. The two other big components of value are the Wells Fargo facilities and 1701 Market Street where we're working with buyers, we just don't have them under contract with non refundable deposits yet. So we're making progress. Unfortunately, it has become just the more challenging market to transact in.

Okay. And I apologize if I missed this, but did you indicate what the mark to market is on your portfolio right now?

20% at the moment.

Is that GAAP or cash?

Cash.

Cash. Okay. Great. Okay, that's all for me. Thank you.

Thank you, Jon.

Our next question comes from [indiscernible] with Bank of America. Your line is open.

Hi, good morning. I see over the past few years, you've been shifting the weighted average lease term to shorter duration. Could you just comment on what you see is an appropriate level for the portfolio and how these release trending or leasing pipeline are trending?

Sure. I think a weighted average lease term has been trending shorter and will continue to do so. I think if it makes it to five years, that's about the right balance between short term leasing opportunity and longer term stability of cash flow. And in terms of leasing on rollover sometimes we get sort of three to five year extensions often on new construction tenants are making significant investments in those facilities and are negotiating for more term. So it's a little bit hard to predict. We just try to make the most of every negotiation to do what's right for each asset.

Okay. And just final question for me. In your opening remarks, you commented on higher lease escalators signed on new leases. Could you comment what it is on a portfolio level?

Sure. We're at about 2.4% at the moment on leases that we completed this year. We had 3.4% and about 4 million feet. And we have signed some recent leases with 4% escalators. So that's still continuing to move in our favor overall.

Okay. Thank you for taking my questions.

Great, thank you.

[Operator Instructions] There are no further questions at this time. I’ll now turn the call back over to Will Eglin for closing remarks.

Well, once again, we thank you for joining us this morning. And we encourage you to visit our website or contact Heather Gentry if you would like to receive our quarterly materials. And in addition, as always, you may contact me or any other member of our senior management team with any questions. Thanks again and have a great day.

This concludes today's conference call. You may now disconnect.