LXP Industrial Trust (LXP) 2001 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Lexington Corporate Properties Trust (Company: Lexington Corporate Properties Trust; Ticker: LXP; URL: N/A) conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. If anyone should disconnect and need to rejoin, please dial 1-888-413-4411. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Mark Muehlfelt of the financial relation board Weber Shandwick.

Mr. Muehlfelt, you may begin.

Thank you.

Good afternoon everyone, and welcome to Lexington Corporate Properties' fourth quarter year end conference call.

By now, everyone should have received a copy of the press release that was distributed this morning. If anyone did not receive a copy, you can go to Lexington's Web site and download a copy of it; or you can contact my assistant, Debbie at 312-650-6786 and she will fax or e-mail you a copy immediately. Additionally, we are also holding a live Webcast of today's call, which you can access through CCBN.com or LXP.com.

At this time, management would like me to inform you that certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Lexington believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from expectations are detailed in this morning's press release and from time to time in the company's filings with the SEC. Additionally, we wanted to let people know that the information and statements made during the call are made as of the date of this call. Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statement. Also, the contents of the call is the property of the company, and any replay or transmission of the call may be done only with the consent of Lexington Corporate Properties.

From management today, we have Will Eglin, President and Chief Operating Officer; Pat Carroll, Chief Financial Officer; Paul , Chief Accounting Officer; Chip Cinnamond, Senior Vice President; and Dick Rouse, Vice Chairman and co-CEO. And at this point, I'd like to turn the call over to Will for his opening remarks.

Thanks, Mark. And welcome to everybody who is on the call and thank you for attending today. We, you know, continue to appreciate your interest in Lexington.

Today, we announced funds from operations per share for the fourth quarter of 45 cents, which was what we expected. And that matched consensus estimates and was a three cent improvement compared to third quarter. The flat growth compared to last year reflected the short-term dilution that we had from our common share offering. That resulted in us operating Lexington with more cash than usual and lower leverage during the first two months of the fourth quarter.

That being said, cash balances were fully invested at the end of November in income-producing property. And as a result, the prognosis for quarterly growth through 2002 is good. And with that in mind, we were pleased to increase our dividend last week for the sixth time in six years.

The first thing I want to talk about today is our exposure to K-Mart (Company: K-Mart Corporation; Ticker: KM ; URL: http://www.kmart.com/). You'll notice in the press release that we provided extensive disclosure on dis-property, the underlying lease and debt structure.

But in summary, in August 1998, we acquired a 1.7 million square foot distribution facility on 103 acres in Warren, Ohio for $63.9 million. We made an equity investment of $21.7 million and assumed mortgage debt of $42.2 million at an interest rate of seven percent.

The property, at 1.1 million feet of which features 40-foot clear heights - with most of the balance with 30-foot clear heights - is one of 16 warehouse distribution facilities utilized by K-Mart. And according to K-Mart, ranks third in terms of volume of goods shipped and is the primary supply source for 185 K-Mart stores, which is about nine percent of their total today, in addition to supplying other distribution facilities. We think those facts illustrate the strategic importance of the facility to K-Mart. K-Mart has utilized the facility for almost 20 years and employs about 600 people at this location.

K-Mart's lease with us expires on September 30, 2007. Annual net rents today are $8.4 million, an increase to an annual rate of $9.4 million this October. The mortgage presently has a balance of $29.8 million and requires annual payments of $6.16 million, which will be sufficient to fully amortize the principle amount at the end of the basic lease term. So we would have no debt outstanding at that point.

Following the base lease term, K-Mart has 10 five-year renewals, the first six of which are at fixed annual rents of about $4.5 million. That's $2.60 net per square foot. So assuming K-Mart exercises those renewals, their average rent for this building over the next 35 years would be about $3.11 net, and we do view that as a competitive long-term occupancy cost for them.

At the same time, our debt service - once we hit those renewals - would decline from $6.2 million to zero. That would increase our free cash flow by about 40 percent and generate an un-leveraged return on our equity investment of over 20 percent.

Last March, we obtained a second mortgage on the building of $12.5 million, which today bears interest at a floating rate that's presently 5.73 percent. We deployed this capital into other investments, which are generating a significant spread over that borrowing cost. This debt is guaranteed by Lexington and so I do think the proper way to look at it from an analytical standpoint is to consider that second mortgage a corporate obligation of Lexington, similar to its credit facilities.

K-Mart, today, is current in the rent obligations to us, as they've been since we owned the property. But it is a big investment for us, representing about eight cents over after-debt service cash flow, which you can see in the chart that we put in the press release. And we expect it to generate about 23 cents per share of funds from operations in 2002, based on two semiannual rent payments, one due in April and one due in October. And, of course, when we increased our dividend last week, we were fully aware of our K-Mart exposure and their financial difficulties.

I want to now just revisit some of the things that we accomplished last year, because 2001 was a great year for the company. Our shareholders enjoyed a total return of 42 percent, and the company had numerous successes, which I think positioned us very well for continued growth. And among those are: one, increasing our equity base by 100 million, which has greatly improved the trading volume of the stock and made it a much more liquid equity security.

We completed acquisitions of almost 200 million of property, including the portfolio acquisition of the net partnerships. We also received an additional equity commitment of $150 million from New York Common Retirement Fund, our joint venture partner. And we obtained new mortgage financing of about $100 million at attractive interest rates. And we succeeded in increasing our own secured credit facility from $35 million to $60 million.

So, as a result, our balance sheet is in great shape. We don't think there's any question that the company has its strongest balance sheet ever, at a very high degree of financial flexibility. At quarter end, we had 445 - $446 million of mortgage debt outstanding and $10 million outstanding on our credit line, making our blended borrowing cost 7.28 percent, which is a 50 basis point reduction compared to our borrowing cost at the end of last year. So we were able to, I think, take advantage of a very favorable financing environment in 2001 to lower our borrowing cost and improve our balance sheet flexibility.

Today, on our line, we have about $58 million of availability, and we can borrow short term as at low a cost as 3.25 percent, which puts us in a good position to take advantage of acquisition opportunities as they arise. In addition, we lowered our leverage from 57 percent to 48 percent of total market capitalization during the year. We view that as a conservative level for this asset class. And, again, it gives us a fair amount of financial flexibility to utilize our balance sheet capacity to continue to execute our business plan.

Looking at acquisition volume for the year, the year did turn out to be slower from a total dollar standpoint than we thought. But, today, on our weekly deal sheet, we do have about $600 million of acquisitions that are at various stages under review, and that's, I think, a very - a fairly typical amount in terms of the number of transactions that we're looking at. Cap rates range from nine percent to as high as 11 percent; again, depending on the length of lease term, what markets those properties are in and what the rental increases are like during the lease term.

Our volume goals for 2002, we continue to be - have at about 200 million, 150 million in joint ventures, and 50 million in our advised account. Acquisition volume in the fourth quarter was about $45 million, not counting the acquisition of the net partnerships. And that was a big improvement, because over the previous nine months we'd only close on about $25 million of acquisitions.

In the asset management area, we have two leasing jobs that we're working on. One is our empty retail facility in Columbia, Maryland; and our building in Memphis continues to be about 75 percent vacant, although the tenant in the remaining space is paying 100 percent of the carrying costs. And, unfortunately, while we continue to work on those areas, we don't have anything new to report today.

We did sell two of the Wal*Mart (Company: Wal*Mart Stores Inc.; Ticker: WMT ; URL: http://www.wal-mart.com/) stores that were owned by the net partnerships, one just before closing and one in December. So consistent with our strategy, we are looking at our retail properties as a source of new capital to deploy into office and industrial acquisitions; and, specifically, in the joint venture area. And, today, we are working on two additional retail property sales, which are at cap rates of about 9.5 percent, which we think is a good execution for us.

Credit quality in the portfolio is holding up quite well; we have no delinquent rents. And 2002 rollovers are less than one percent of rents, and we think there's a high probability of renewal by existing tenants.

Looking at the portfolio, today, we have about 100 million of properties that are free of mortgage debt that represents about 20 percent of our equity capital. So we think that we do have opportunities to leverage our equity further and improve our returns.

Before going to the question and answer period, I'd just like to sum it up by saying this was a good quarter for us. We showed sharp improvement from the third quarter. We think the portfolio is in a good spot with very low lease rollover risk over the next few years and good credit quality.

The balance sheet is in very strong shape, and we have a lot of capacity to fund our growth, and what continues to be an attractive interest rate environment. And I think, you know, obviously, the big news in the fourth quarter for us was New York allocating another 150 million of equity into joint venture programs with us. Between that, and our advised account, right now we have about 750 million of acquisition capacity.

And, as a result, you know, we're well positioned to grow our assets under management from 1.2 billion to 2 billion over the next few years. And almost all the capital necessary to do that has been already committed to us in the form of our joint venture relationship and advised account. If we do have opportunities to grow faster, so much the better. But we're very well positioned and we're on track to meet our growth objectives for the next few years.

And with that, we'll be delighted to answer any questions that you have.

Thank you.

Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

Our first question comes from Steve Swett from Wachovia Securities (Company: Wachovia Corporation; Ticker: WB; URL: http://www.wachovia.com/). You may proceed.

Hey, good afternoon, Will.

I just have a couple of questions. Given the acquisition activity in the quarter, and as you look at the expected volumes in 2002, how do you think the - the fee income line runs out in 2002? Does - is it a fairly smooth number, does it bounce around a lot? Or, at this point, is it just too early to tell?

You know, right now, we're - we're forecasting that it will be smooth. I mean, the reality is that, you know, you never have the same volume in any one quarter. But we think it, you know, a million dollars of fee impact from the acquisition program. You know, right now, it's too early to say whether we're going to be really busy in first quarter or more busy in second quarter.

OK. I guess, you know, I just was trying to make sure that I got the run rate after, you know, a lot of the activity that's gone on recently.

I think you're good.

OK. Could I ask you to elaborate a little more on the pipeline? You know, you say you've got, you know, 600 million under review. Is any of that under contract? Is any of it under letter of intent? How does - how does that stand?

You know, we have a lot of bids out right now, but unfortunately nothing under contract right this second. You know, we're being, I think, a very active bidder, but we continue to be a prudent bidder. And, you know, we've been quite conservative underwriting residual value over the last year or so. And, you know, so - unfortunately, while there are - I think the amount of transactions that we're looking at is quite robust. You know, there's nothing that's yet under contract, unfortunately.

Are you seeing any change in the - in the competitive nature of the bidding process? Are there more bidders or less bidders in, you know, the past six months or so?

I think I'll ask Dick Rouse, our head of acquisitions, to just jump in and ...

Yeah, I - we have not really seen any dramatic change. There might be a few more bidders out there now as more and more institutional investors recognize the - you know, of the safety that at least investments offer. But apart from that, we haven't really seen any dramatic change. So I would say, you know, nothing dramatic.

OK. And then just one last question on K-Mart. Do you have any sense on when you might get some confirmation out of either K-Mart or the bankruptcy court as - on the affirmation of that lease?

You know, I don't have anything specific I can say. I think that, you know, obviously their first job in terms of the real estate is figuring out which of - you know, which of the stores they want to close in addition to the ones that are already dark. And, you know, that's a 60 or 90-day process for them probably. And it's obviously a gigantic job. So I think it's probably somewhere after that. But, again, that's just a best guess today.

OK. All right, thanks a lot.

Again, ladies and gentlemen, if you have a question, please press the one key on your touch-tone telephone.

Our next question comes from Brian O'Flanagan from Mercury Partners. You may proceed.

O'flanagan: Good afternoon.

Getting back into the - the K-Mart situation, if we look again at the worst case scenario that K-Mart rejects the lease in bankruptcy, you know, given the considerable amount of equity you have in the property, would it really make sense for you to walk away from it? Would the asset be that impaired that you would want to walk away from that asset?

You know, not necessarily, Brian. You know, not necessarily. But, again, I think it's - it's going to be quite a long period of time here, you know, before we know what the outcome is. There are a lot of facts that we think, you know, support a continuing use of the facility by K-Mart given how - how important it is, we think, to their operation. So, you know, I wouldn't want to - want to speculate on what our strategies might be.

Yeah, I think the other - the other unknown I think, Will, is - is that the first mortgage loan is held in a , and we really don't know what they want to do yet. Particularly, if K-Mart starts to indicate that they might want to disaffirm that lease. Our guess is that there might be some flexibility there as to - at what price we can pre-pay that loan, but we just don't know that.

O'FLANAGAN: OK. Regarding the debt service number that you estimated for 2002 in that property, how much of that is principle?

About $4.2 million.

O'FLANAGAN: OK.

Getting into your - your asset sales that you're looking at, what is the deal - I guess the big picture is, what is the overall timing that you're thinking of getting out of retail completely, and, you know, what are your expectations as far as sales volume this year and next year?

You know, honestly, we have about 30 fairly small retail properties. So while it's not a big portion of our asset base, it is a lot of small, you know, one-off sales. And I think the key for us, you know, is selling each asset at the right time for it and also being sure that we have, you know, a good use for reinvesting the capital. In several of those instances, we have low tax bases, so we want to be careful about being able to defer our gain.

So, you know, it could be a five-year project. Beyond, you know, the two Wal*Marts that we did sell effectively in fourth quarter, you know, there are two that were - not Wal*Marts, but two retail stores that we're working on right now that I feel pretty good about. And there are three to four other retail property sales that we're working on a little bit, but it's too - you know, it's sort of too soon to tell whether I think any of those are going to come to fruition.

O'FLANAGAN: OK. But if you were to guess at a volume, would you say it would be something like 25 million, say, or something like that in '02?

I guess I would - yeah, I mean, I'd look at it more from the standpoint of number of properties, you know, five to six perhaps?

O'FLANAGAN: OK. All right, great. Thank you.

Which probably is 25 to 30 million.

O'FLANAGAN: OK. Thanks a lot.

Gentlemen, it appears that we have no more questions, if you would like to continue with any remarks.

Well, once again, we'd like to say thank you for tuning into our call today. We have been out on the road giving an informational road show the last couple of weeks, so we were delighted to have the chance, I'm sure, to see some of you in person. We probably will be back out in the fall sometime and we'll look forward to continuing to communicate our progress to you as we go through the rest of the year. Thanks again.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Good day.