LXP Industrial Trust (LXP) 2002 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the Lexington Corporate Properties Trust first quarter earnings conference call. At this time, all participants are in listen only mode. Later we will conduct a question and answer session. And questions will follow at that time. If please press the star, then zero keys on your touch tone telephone. If anyone should disconnect, and need to rejoin, please dial 1-877-817-7175.

And as a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host for today's conference of . Please go ahead, sir.

Thank you. Good afternoon everyone, and welcome to Lexington Corporate Properties first quarter conference call. By now everyone should have received a copy of 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, at 312-640-6691, and she will fax or e-mail you a copy immediately. Additionally, we are also holing a live webcast of today's call, which you connect through ccbn.com, or llexi.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 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 it's expectations will be attained.

Factors and risks that could cause actual results to defer materially from expectations are detailed in this morning's press release, and from time to time in company filings with . Additionally, we wanted to let the people know that the information and statements made during the call are made as of the date of this call. With listeners that the passage of time by itself will diminish the quality of the statements.

Also, the contents of the call are 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 Egland, president and chief operating officer. Pat Carroll, chief financial officer. Paul Wood, chief accounting officer, and Dick Rouse, Vice chairman and CEO. And now at this time, I'd like to turn the call over to Will for his opening remarks.

cm: Thank you Mark. And thanks to everyone for joining our first quarter conference call. Today Lexington for the first quarter, 47 cents per share, which was as we expected, and that matched . And was a two cent improvement compared to the first quarter last year. The main thing driving the growth compared to last year, was our accession financing activity in 2001. Most specifically the accession of Net One and Net Two.

A large portfolio acquisition that closed in November. We're particularly satisfied with these results, because the growth in the company was achieved utilizing reduced leverage compared to the period last year. And we also achieved positive growth even though we've had lower occupancy in the portfolio. And at a time when external growth has become difficult due to a very competitive acquisition environment.

So our view of the quarter is that it's another good one for Lexington, after a very transformative year in 2001. Of the 47 cents of FFO we think represents a good run rate for the company after the accession of Net One and Net Two. Our 33 cent dividend represented about 70 percent of funds from operations, and that's our targeted payout ratio today. Operating results for the quarter were not materially influenced by any acquisition activity during the quarter as we acquired only one property, and that was in March.

Looking down, income we have had a bump up in general administrative and property operating costs, primarily as a result of the accession of the net partnerships. But our increased property operating costs also were impacted by carrying costs on our bank in Columbia, Maryland property. Our interest in coverage improved significantly from 2.4 times in the quarter of last year, 2.7 times. Our by the lower leverage that we're utilizing in the company right now. And substantial savings, refinancing activity completed during the last 12 to 15 months.

During the quarter we sold two properties, and we also sold at in a third property. That generated gains of about $850,000 that we've utilized those sale proceeds for acquisition activity and to fully repay our credit facility. As a result of activity in the first quarter, we're continuing to run the company with higher cash balances than usual. And the impact of having cash from the balance offset any benefit from the acquisition made during the quarter.

Starting now to look at the balance sheet, continues to be in really, really good shape. We think it's our strongest balance sheet ever, Lexington has a very high degree of financial flexibility. At quarter end we had $444.6 million in mortgage outstanding. Total debt has an average interest rate of 7.33 percent. 89 percent is at fixed rates. matures in the next two years, and then 97 percent of our debt is non-recourse.

Our average borrowing cost has improved significantly from 7.8 percent that year in 2000, as significant refinancing opportunities to lower our overall cost and debt capital. Today our $60 million credit facility, where we can borrow short term about three and a half percent, is fully available. And our leverage at the end of the quarter was percent of our total market capitalization.

If you view that as conservative for this in view of our credit quality and then shows another measure of our balance sheet capacity. As we discussed before, we're paying down our debt rapidly just from regularly scheduled amortization payments. And we expect to burn off about 76 million of debt over the next five years. And over time this will lead to interest savings, debt service reductions, and of course finding increase in asset value as our debt is burned off.

Our total mortgage balance is due at maturity after giving effective built in amortization, total $331.3 million, compared to the $444.6 million today, that's a significant decrease, and those amounts only represent about 34 percent of our total market capitalization, and about 37.4 percent of our un-depreciated real estate and cash assets. So you can see that we will be continuing to significantly de-leverage the balance sheet over time.

One other item, subsequent to realty securities, which own two million convertible preferred shares, did converge . And while I said there's no FFO impact on us, because we've been reporting our results diluted for the conversion, it does approve our coverages, and as we believe, caused the balance sheet our diluted share account in the long includes any senior securities.

And we have a lot of balance sheet flexibility today because we have no senior securities on the balance sheet. If you recall, we retired to convertible debt in the third quarter of last year, as a result of our common share offering. Turning now to discuss the acquisition environment, it continues to be a challenge being an environment where we're noticed have continued to decline as capital is into real estate.

In addition, we are competing with some buyers who are using more fund rate debt, and finance acquisitions. And that creates some downward pressure on cap rates. We continue to believe that the way finance is with long term fixed rate debt, and in order to match our assets and liabilities. Today we have about $800 million in acquisitions under review. That's about 200 million more than last quarter. So at least in one respect the pipeline is better.

Because transaction flow is better. On the other hand, cap rates range today looking at from abut 8.7 percent to 11 percent. And over the last quarter that suggests there's been a decline of about 15 to 20 basis points in compared to the acquisition and pipeline looked like last quarter. Our volume growth for the year continue to pay back $200 million, nevertheless the environment continues to be quite competitive.

But we think the right thing to do is stick with our pricing motto rather than chasing deals at a time when we think pricing is really as tight as I've seen it in 15 years since I've been in this business. One acquisition that we did complete in the quarter was the headquarters of . This was a hundred thousand square foot office facility in two, two story buildings.

A ten year lease in what we think is a very good Orange County location. After taking into account the increases in rent during the term, the average cap rate is about 10 point six percent. And we've financed $11 million at the $17 million price, at a ten year fixed rate of 7.26 percent. So there we think we have very good positive leverage. And a much better long term capital appreciation play compared to the industrial buildings we sold in the quarter.

One in Modesto, California and on in Alabama. On the management front, we're continuing to work very hard on leasing our Columbia, Maryland retail property where we have 60 thousand square feet vacant. And we continue to have about a hundred thousand square feet of vacant space in our Memphis facility. As I mentioned, we've sold two properties during the quarter. Both at sub ten percent cap rates. And we also sold a 77 percent joint venture in our Florence, South Carolina property.

Today we're under contract to sell two retail properties at sub nine and a half percent cap rates. And also a third property that we view as being a slow growth market. Our lease roll over for 2002 represent less than one percent and we continue to believe that there's a high probability of renewal in both cases. And other than the net we have about a hundred million in the debt free properties. And that represents about 20 percent of our equity capital.

We think we have opportunities to leverage our equity further, and improve our return by recycling capital. As we did in this quarter, in cases of selling , we will continue to redeploy capital in order to enhance long term capital appreciation prospects. So before we turn to the Q&A, I'd just like to make some summary remarks. Our quarterly results improved quite nicely from first quarter last year, even as we de-leverage the balance sheet, and saw our occupancy decline from a hundred percent to 98.3 percent.

In the last three quarters we had, I think, very nice upward trends in operations per share. Going from 42 cents in third quarter, to 45 cents in the fourth quarter, and 47 cents most recently. That represents a good run rate for the company, and the continued balance growth of the balance of the year, I think. With the reflective of what our acquisition is.

The portfolio remains in very good shape, with a very little near term roll over. remains as good, and again, our lease roll over risk is quite low right now. And about 90 percent of our rents come from leases that expire post 2005. And last time we've spent quite a bit of time discussing our K-Mart exposure, we did put out a release a few weeks ago saying that K-Mart is current in the rent to us, and is filing for bankruptcy.

And today we don't have anything further to report, other than to say that we continue to be confident of K-Mart's long term to utilize the facility in their distribution network. The balance sheet today continues to be in very good shape, and we have a lot of capacity to fund our growth, and even though the acquisition environment is challenging, we continue to be in a tracked interest rate environment, and also rates continue to enjoy a very high level of support in the capital markets.

We could very well positioned to raise capital, if we have a good use for it. And as I mentioned, we do not have any senior securities on the balance sheet, so we have quite a bit of flexibility. We have a lot of acquisition capacity today, between our joint venture with New York Common, and our advisory company. We have about $750 million of acquisition capacity. And once again our two allows us to invest at a much higher return among equity without taking more asset toward a credit risk.

One thing I do want to point out once again about our business plan, is that it does rely primarily on equity that's already committed to the company. Both in joint ventures and advisory. And that means that we have the ability to stay on track and achieve our operating objectives of growing our assets management to about two billion within the next several years.

If there are opportunities to grow faster, we will. But right now we're on track to reach that two billion asset target that I mentioned. That concludes the formal remarks for the call. Operator, if you'll open up for questions and answers.

Thank you. Ladies and gentlemen, at the time if you have a question, please touch the one key on your touch tone telephone. If your question has been answered, or you wish to remove yourself from the cue, please press the pound key. If you're using a speaker phone, please pick up the hand set before asking a question. Our first question comes from of .

Thank you. Good afternoon. A couple of questions. Could you break out the fees received in Q1. Were any of those, what proportion of those were one time in nature versus recurring?

OK, on LRA, we're or recognized. And we had a related to the sale of the 77 . That was about 240 thousand. And, as you know we recognized management fee, absolution fee in any acquisitions we make, or sale from that joint venture property. But on a recurring basis, management fee comes at about $225,000, two percent rent.

Okay. Just a little more color on I guess what you guys are doing about K-Mart. And I understand you're locked in to a whole lot. But I guess, could I just ask what you guys might be doing proactively, while you wait a decision. Are you spending time out there and figuring out what your options are? Are you in touch with the company, what are you guys doing?

Yeah, we were actually there about two weeks ago on site. And also, you know, a meeting with K-Mart sort of operations people. And you know, getting a very good sense of where this facility fits in to the normal distribution network, and where they might be closing distribution facilities. And we think that we're in a very good slot.

We've also retained a group that specializes in, you know, logistics, services for corporations who are looking to build warehouse and distribution facilities to help us, you know, be very smart. Not only about our position but from an alternative user standpoint also.

Okay. That's good. And then I just wanted to confer on your acquisition targets, the two hundred for the year that you said. That's the volume?

Yes, that's correct.

OK, and that would include the separate count as well as the joint venture?

Yes, that's right.

OK, thanks.

Yep.

Our next question comes from of .

You answered most of my questions. I just have one. With respect to the five arrows converting to a common . Does that coincide, as the one gentlemen from the and was replaced, does that, do you have any idea what their intentions at are at this point?

Well they did make it a 13 day filing the other day. What I said, that they haven't sold a few hundred thousand shares of the two million share position.

Okay.

You know, but beyond that, I'm not sure obviously they haven't been lot of stock. You know, but they have, it's going to take some clarity out of their position.

OK good. Thank you.

Once again, if you have a question, please hold the one key on your touch tone phone. Our next question comes from , .

Good morning guys, good afternoon guys, sorry about that. What's the, do for '02 and '03?

Yeah, this year, you know, the range is a $1.90 to $1.92, and coming . And, you know, next year, a lot of it depends on what volume is to this year and next year. But really anywhere in the $1.96 to $2.00 range, we'd be comfortable, I'd say.

And your assumption on that '03 are based on what volume of acquisitions?

Same thing as we're forecasting this year, about two hundred million.

Two hundred million. And then if I could just go back to the K-Mart, quickly. Have they, I know, I guess last fall you had put up some money to them as a roof. Is there additional capital improvements that they're making on the property?

In March they finished upgrading and replacing about nine hundred thousand feet of roof area. That was the main element of the program.

OK, and then as far as upgrading the logistics inside, is that, was that priority?

Yeah, nothing major. They're doing a few things. But nothing significant on the inside of the building right now.

Okay. And just in general, what is their response in terms of getting back to you in terms of getting back to you in terms of reforming that lease, or how do you deal with that?

No dialogue either way.

No dialogue either way at this point? But is there a real time frame in which they have to commit to you guys?

Chris, 2003, for all their leases. And .

Okay. And do they not have an option for the Or is there a scheduled.

The by about a million dollars on cash basis. Starting with the period that begins so the rent won't be paid until April the following year.

Okay.

But the base at least goes, you know through September 30 .

Very good, thank you.

Our next question comes from of .

OK, good afternoon. I just have a couple questions. You mentioned that the GNA $300,000 from the year before. Is that, is there any one time item from there? Or is that a good ?

I would say actually .

OK, and then the non-recurring fee, you know fee from the sale, was that recognizing the partnership income line?

Exactly right.

OK, that's it. Thanks.

Thanks a lot.

Our next question comes from of Raymond, James And Associates.)

Thank you guys. A couple of questions. Could you give us some more, or shed some more light on what your and of course capital rates out there, so we can do a better on your portfolio for purposes?

Yeah, this is with respect to the rates on the deals working out for the joint venture, keep in mind that means very good credit deals, long institutional grade real estate. The cap rates there have become very aggressive. I would say percent. Which is probably now a good 40 or 50 basis points from where it was just six, eight months ago. now seeing the competition is in the lower credit transactions, which we're not a big player in.

So it doesn't really help us to see higher cap rates in lower yields. But I do think you know, the pressure we're seeing on cap rates in the markets generally is you know, creating an interest .

With the on cap rates allow you to divert more away from an office to an acquisition still retain the focus on office?

Well totally office and industrial.

The pressure on cap rates is in both areas.

You directions given the desire to million dollars a year.

Yeah, generally, and our New York tends to focus on, you know, say the $25 to $60 million asset range. You know, where you don't see as many industrial buildings that you want to go in and necessarily. So I think, yeah, the focus continues to be, for the most part, on office.

Once again, if you have a question, please press the one key. Our next question comes from of .

Your balance sheet shows about $800, a little over $800 million in assets. You said you wanted to go to two billion, I wasn't clear, in two or three years. By assuming joint venture. How much access do they have now? And what does it represent in terms of lowering the assets year by year?

You know, we have almost $400 million of off balance sheet assets and joint ventures today. And you know, the $750 million of buying power that I mentioned, so it's relatively, it's subject in joint venture and advisory. To the extent the company continues to have good capital market support, where they all could be adding to assets on the company's own balance sheet . So, you know, that's several years of $200 to $300 million of acquisition activity, up to the two billion dollar level.

OK, thank you very much.

the minimum amount of assets that are just based on current capital commitments to us enter on the position.

One more thing. So you have a lease coming up next year, is that the pipeline office building?

Pipeline is 2009.

coming up next year .

Bank One facility in Phoenix, Arizona.

Have they indicated to you what they plan on doing?

We haven't had any discussions with them.

OK, thank you.

Gentlemen, there are no further questions time, would you like to proceed with any closing remarks:

Sure, once again, thanks very much for participating in our call, and if there are any other questions that you have, please don't hesitate to call any one of us directly. And beyond that we'll look forward communicating our results over the events of the year. Thanks.

Ladies and gentlemen, that does conclude the conference call for today. Again, thank you for participating, and you may all disconnect. Everyone have a great day.

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