LXP Industrial Trust (LXP) 2003 Q2 法說會逐字稿

Welcome to the Lexington second-quarter 2003 earnings call and company update. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question and answer session. (CALLER INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, July 23, 2003. I would now like turn the conference ever to Ms. Clair (indiscernible) with FRB Weber Shandwick.

Thanks for joining us on Lexington Corporate Properties conference call. Their press and supplemental packet of information were distributed this morning. If anyone on line did not receive a copy, they are on the Company's Website at www.LXT.com in the press release action. Additionally we're hosting a live webcast of today's call which you can access on Lexington's home page or at CCBN.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, they can give no assurance those expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time in the Company's filings with the SEC.

Having said all of that I'd like to turn the call over to management. With us today we have Will Eglin, Chief Executive Officer and President; Dick Rouse, Vice Chairman and Chief Investment Officer; Pat Carroll, Chief Financial Officer; and Paul Wood, Chief Accounting Officer. Without further adieu I'll turn it over to Will.

Welcome to everybody on the call. We thank you for your interest in Lexington and appreciate your attending our second-quarter conference call. Today Lexington announced funds from operations of 45 cents per share before the effect of the onetime charge associated with retiring unfavorable debt, and that's consistent with the guidance that we gave of 44 to 45 cents that we put out in our June press release. FFO per share was 3 cents less than the second quarter last year as a result of the temporary dilution from our capital raising activities during the quarter. And our guidance for third-quarter is 45 to 46 cents of FFO per share and $1.85 to $1.88 per share for the full year. And again, the full year number is before the effect of the onetime charge.

Capital raising activities dominated our second-quarter. We raised 74 million in a common share placement and 76.5 million in a perpetual preferred offering at a coupon of 8.05 percent. Proceeds were utilized to retire bank debt and 78.1 million of unfavorable debt, primarily our REMIC which would have matured in May, 2005. We view both moves as being very positive for the Company and we believe that our capital raising activities will enhance our distributions over time. Retiring the REMIC accomplished several important things for us. First and foremost we wanted the ability to take advantage of market opportunities for the assets securing this debt. This means selling some assets now when cap rates are low and financing others long-term when interest rates are so low. We're considering selling several of these properties and also arranging long-term financing on three properties that would generate proceeds of about 25 million later this year.

The other reason to retire the REMIC was to take out a balloon payment that could not easily be refinanced with individual mortgages two years from now, and now we have no need to reserve line capacity to retire this liability and maturity. And accordingly we believe that our ability to grow in 2005 and beyond has been enhanced by the steps we've taken. The other big news in the quarter was the emergence of Kmart from bankruptcy and the affirmation of the lease on our Warren, Ohio distribution facility, and the recovery of $3 million in pre-petition rent and real estate taxes. We also entered into an agreement with Kmart to switch this lease from semi-annual payments in arrears to monthly in advance. We gave them a rent concession of about 500,000 in exchange for doing that. And this situation worked out almost exactly as we had expected. And in the third-quarter, we're happy to announce today, that we've collected $735,000 that Kmart owed us for interest and penalties dating back to the time that they were in bankruptcy.

While we did not acquire any properties during the quarter, our acquisition pipeline today is strong and so far in the quarter we've acquired one property for 11.4 million. We have 98.8 million under contract or letter of intent for closing over the balance of the year which should bring our total volume to 166.4 million just on what's visible today, and we certainly have a good chance of having volume of an excess of 200 million. In additionally we have letters of intent on three build to suite projects which should close early next year totaling 53.7 million. And with what's under contract we think that third-quarter closings should be about 80 million.

So while we are a little bit behind right now on the volume that we hope to achieve, we think the third quarter will be a very busy quarter on the acquisition front. We are quite well positioned to grow as a result of our balance sheet strength and the drag that we have had on our earnings from the equity offering should fade over the balance of the year, and we are expecting to show year-over-year improvement in our funds from operations in the fourth quarter. Other items from the quarter, as we discussed on our conference call during the first quarter, this year we began consolidating the activities of Lexington Realty Advisors in order to make our disclosure more transparent.

While this has no FFO impact because on the income statement we have offsetting increases in revenue, interest expense, depreciation and G&A, we are showing of course a big G&A increase relative to last year, due to the consolidation of LRA. It is a typical year-to-year comparison. We think the better comparison is to compare our second-quarter G&A to first quarter this year. That number was about 2.3 million, so our G&A for the quarter is about $100,000 more than it was in the first quarter of 2003.

Our interest coverage number continues to be good. It was about 2.8 times for the quarter compared to about 2.8 times in the second quarter last year. So our coverage is good, even though we ran the company with high cash balances for most of the second quarter. The strength in our credit statistics was a key factor in the success of our perpetual preferred offering. During the quarter we also sold two properties, which is consistent with our strategy of selling smaller, unleveraged properties in order to reemploy capital and deleverage investments, and to capitalize on low interest rates.

The two sales were, 1, our property in Canada leased to TNT which we bought for 2.9 million in August 2002. That property was sold for 3.4 million. And a little property in Tempe, Arizona leased to the Tranzonic company which we acquired in the merger of NetOne and NetTwo (ph). We bought that for $1.9 million in November 2001, and we sold that for 2.5 million.

Turning now to look at the balance sheet, of course we have seen a dramatic improvement compared to last year due to the significant changes during the quarter that we discussed. At quarter end we had 71.6 million of cash and nothing outstanding on our bank line, and we anticipate increasing our credit line from 60 million to million later this year. At quarter end we had about 445 million of debt outstanding at an average rate of 6.96 percent, 90 percent of which was fixed rate, and our leverage today is about 36 percent of our total market capitalization, and that is an all-time low for us. In addition, we're continuing to work off our debt very quickly, and just from our regular principal payments we will be amortizing about 77 million of debt over the next five years. And as we have said before, this deleveraging of the balance sheet gives us the ability to continuously releverage the balance sheet as we grow without driving our leverage up that high.

Our debt balances at maturity total only 334.2 million, which is only about 26.4 percent of our capitalization. In addition, we're retaining about $6 million a year through participation in our dividend reinvestment plan. So from a liquidity standpoint, the company is in a very, very strong position.

Turn now to talk about acquisitions a little bit. Of course sitting on this cash, we are all focused very much on our acquisition pipeline; and we're pleased to say that there are some promising acquisitions that should close in third quarter and fourth quarter. With what we have good visibility on this year, our volume would be about 166.4 million, and we for sure have a very good chance of exceeding 200 million of volume for the year. However, it being July, most of our activity will occur in the second half of the year, so the accretion from these investments won't have that much of an impact this year but should contribute to year-over-year growth in FFO in the fourth quarter. The acquisition that we closed last year -- or I'm sorry, last week was a 331,000 square foot distribution facility in Dubuque, Iowa, and that leased to McGraw Hill Companies for 14 years. The purchase price was about 11.4 million, the going in cap rate was 9.07 percent with a GAAP cap rate of 10.24 percent. In connection with the acquisition we incurred 7.4 million of mortgage debt on the property at a fixed rate of 4.89 percent with a five-year maturity. So in this case we got a long lease with an A credit at what we thought was a very good spread compared to our borrowing costs.

Our pipeline of 98.8 million consists of 39.5 million of acquisitions for our joint venture with New York Common Fund with the balance for direct investment. Of our 2004 build to suits, 30.1 million are for the JV and 23.6 million is for direct investment by Lexington. Going in cap rates in the pipeline range from about 7.8 percent to 9.2 percent with an average of about 8.25, and the GAAP cap rates tend to be 50 to 75 basis points above that. It seems to us that cap rates have bottomed out recently, and we may actually see a little bit of upward pressure now based on where treasury yields have gone in the last few weeks. Overall we have about $1 billion of acquisition capacity right now 600 million of which is in our joint venture with New York Common and 100 million in our advisory company and about 300 million for our own account. And we are hoping to find joint venture partners to partner with us on the pipeline that's not allocated necessarily to our joint venture or advisory clients. This consists mostly of good quality properties but leased to tenants with a BB credit profile, but again with high quality of real estate.

We think that that part of the market continues to represent the best opportunities, and with about 60 percent of our revenue from non investment grade or not rated companies, it's a market that we know well. On the asset management side we're also pleased to say today that we have a lease up for signature on our Columbia, Maryland retail property which would result in 100 percent occupancy, and revenues commencing October 1, 2003 with a $12 net rent per square foot which we think is quite good. We continue to have fairly modest near-term lease rollover which again we view as a positive, but nevertheless we're mindful that poor real estate fundamentals have continued, and we would not be immune from the real estate market forever because we will begin to have fairly active lease rollovers starting in 2005.

With no need for liquidity we continue to be focused on redeploying capital from some of our lower growth assets, and we continue to work diligently on our disposition list of retail properties and our smaller sized assets which we presently hold free and clear of debt. We believe that our capital here is underutilized and redeploying this capital is a key part of our business plan, not only to upgrade our portfolio but also enhance our return on equity. And right now we have half a dozen properties that are on the market for sale. Our next lease expiration is our Bank One property in Phoenix which is the end of the November this year; and, as we said before, we expect that this property will be vacant although it's certainly possible that we'll have a one to three month hold over. Our model for the company for next year includes no revenue from this asset and projected carrying costs of about $550,000. The net effect of which impact FFO by about $2.5 million or 6 cents a share on an annualized basis.

Our longer-term occupancy watchlist includes our property in Phoenix leased to Bull Information Systems which is in October, 2005. Expiration -- our Artisan North America property in Milpitas, California which is a December, '05 expiration; and our Lockheed Martin property in Marlboro, Massachusetts, a December, 2006 expiration. Each of these three properties in our business plan is viewed as a retenanting scenario, and both the Boston and San Francisco markets continue to be very poor. In addition, we note that Fidelity has the right to cancel their lease next year early by paying us one year's worth of rent; and their intent there isn't clear, but this facility has been underutilized and a portion of it has been available for sublease. Even though we've had very (inaudible)tenant retention, we note that the Company is about to enter a period where lease rollovers will be more frequent; and we believe that our shareholders should anticipate that we'll have more leasing work to do than we've had in the past.

In summary I'd like to say first that we remain comfortable with the range of FFO per-share this year of $1.85 to $ 1.88, and again that's before the impact of the debt satisfaction charge this quarter; and implicit in our guidance is that all our tenants continue to make timely rental payments as they are now and that we meet our acquisition objectives. Our guidance for next year which we initiated today is for funds from operations per-share ranging from $1.90 to $1.95. We're assuming that we have acquisition volume of 250 million at GAAP cap rates of 300 basis above our financing costs. That's quite a conservative spread compared to what we've earned in the past, so we can make our numbers by investing less at wider spreads or perhaps have an earnings surprise on the upside if we're able to make the spreads that we have in the past. And of course the impact of the Bank One vacancy will negate a lot of the benefits generated by our planned acquisitions.

For next year we're targeting a pay out ratio of between 70 and 72 percent of FFO which includes a modest dividend increase in January. Our portfolio continues to be in good shape. Our credit quality remains good with all tenants paying in a timely manner, and our capacity for acquisition growth is at an all-time high. In view of our financial strength we would certainly be comfortable at this point with a pay out ratio of up to 75 percent. In summary, we believe we have the Company in a very good position. While the acquisition environment is competitive, it's not without opportunity; and we expect to demonstrate that over the balance of the year. Our longer-term planning for the Company is over the next four to five years to hopefully be able to increase our total assets by about a billion; and we have the financial wherewithal to do that, so our asset growth is a function of when not if. We think that that's a very good position to have the company in. As we get bigger we'll become more diversified; and again, that's very important to us because it will diminish the effect of any vacancies that we might incur when we start rolling our leases.

Lastly, in anticipation of our growth, we will be occupying new space to replace our lease that expires next June. We have entered into a new 12 year lease on 16,000 sq. ft. which we think will give us sufficient space to grow the company's asset base up to 4 billion over a 10 or 12 year period from our current 1.6 billion. We believe that we can do that with a headcount increase from today's 28 employees to perhaps as many as 38 but over a 10 to 12 year period. So with the growth that we're expecting do have we should get very, very good operating leverage, and that's particularly important to us because we're mindful of working our G&A number down both as a percentage of revenue and as a percentage of total assets. That concludes our opening remarks. And, operator, we'll turn it over to you for the question-and-answer session.

(CALLER INSTRUCTIONS) Chris Pike (ph) with Wachovia Capital Markets.

First, with respect to acquisitions in the quarter, Will, I thought you said in closing you said last week you closed the $11.4 million asset or was that during the quarter?

That was last week, so that was outside of the quarter.

In terms of the quarter itself, did you expect for more closings in the quarter, or was there some slippage into Q3?

That's a safe assumption, yes.

What caused the slippage? Was it market conditions, negotiations, what drove that slippage?

In one case I would just say it was a negotiation on a purchase contract that took a lot longer than we had expected, and in the other the seller negotiated for the right to adjourn the closing for a 45 day period so that they could have accomplished their own tax deferral strategy.

Okay. In terms of dispositions for 2003, understanding that you're going to be selling some of the assets that you just freed up, what number should we assume for 2003 acquisitions at this point? I'm sorry, dispositions?

The three that are on the market, there are two Circuit City stores in that pool and a CompUSA store. Probably between them that's 12 or 14 million of value. And there are a few others there that we're discussing. If we have half a dozen sales -- it won't be a big number in total, maybe it's $20 million.

Great. Thanks a lot.

Josh Federman with J.P. Morgan.

Just a couple quick things. First off, is there anything we should note, anything new about credit quality, any issues that have cropped up?

No, the percentage of revenue that we derive from investment grade, non investment grade and unrated is really the same as it was last quarter. If anything credit quality is probably improved a little bit, so no, we don't think there are any looming credit quality issues in the portfolio.

And then just on straight line rents (indiscernible), where do you guys see that for this year? It looks like you're on pace for about upwards of 4 million for the year, is that right?

Yes, for the year we're on base for about 3.5 million. And that terms -- on the portfolio we have in place now that actually terms in '04.

Onto the (indiscernible) side?

Yes, it would be about 1.5 million.

Great, thanks a lot.

Steve Tape with Tocqueville (ph) Management.

I would like a little clarification on your shareholders equity. There's been a lot of changes. This $483 million, can it be broken down to how much is for product, how much is common equity? I mean, it shows an increase and as the increase -- is the result of any retained earnings compared to the end of December 31st, or is the increase entirely due to the capital rates?

Approximately 76 million is the preferred raise. The common raise that we did was approximately 74 million. The shareholders equity that you're seeing on the supplement includes minority interest of about -- the major case from the two preferred raises and the common raise, our distribution always exceeds our GAAP net income because of depreciation. So accumulated deficit will always be increased.

So without the capital raising there was a net decrease?

There always would be (multiple speakers) distributions will always exceed GAAP net income because of depreciation charges.

If you have a minute, you have over 5,000 partnership operating units, and at the end of June 30th last year you had 5 million less. I think that was a result of your taking over certain units and the reorganization there. I was wondering, is the income and expenses included in the income statement? Are the assets and liabilities included in the income statement?

The answer is yes. Those minorities (indiscernible) units are part of the ownership of our operating partnerships (inaudible) and to a smaller extent (multiple speakers)

I can't hear you too well.

The answer is all the assets and liabilities and revenues are shown on their respective balance sheet or income statement, and in the minority interest line on the P&L is where you'll see the charges for the income that's allocated to those partners.

How much of the -- on the balance sheet now, how much of the shareholders equity is attributable to these partnership units?

The answer is shareholders equity is just the REIT owners, we have a separate line on the balance sheet which will show a $54 million minority interest liability, and that's their share of all the net assets and liabilities.

That's the partnership units?

The number of units outstanding is about the same as it was last year at this time.

Okay. You mentioned that you're acquiring some buildings that are being completed, is that what I understand you to say?

That's correct.

Could you speak a little bit about those buildings, what they consist of, how much you're paying, where they're located, how long the lease is, etc.?

Generally, until we have a contract signed, we wouldn't disclose the specifics of what's in a letter of intent. But one transaction is in a major city in Dallas that's leased to an investment grade tenant for 10 years. Another is a distribution facility that's being built for a company that's a 15 year lease in the southeast, and the third is a little property again for an investment-grade company with a 10 year lease in Minneapolis. And again, when we make a forward commitment to buy something that's being newly built, we don't take title until construction has been completed and the building has been accepted by the tenant and a certificate of occupancy issued.

How much is it in aggregate that you're acquiring, and when do you expect to acquire them?

That's about 53.3 million which would be -- probably acquired in the first quarter next year and about 30 million of that is for our joint venture with New York Common.

Thank you very much.

(CALLER INSTRUCTIONS) Josh Federman with J.P. Morgan.

A little while ago you talked about having to look at lower quality tenants for acquisitions. It sounds like from this you're getting a lot more higher quality tenants on what's coming in. Can you talk about (multiple speakers)

I just want to be clear. I wouldn't say that we're looking at lower quality tenants. Over our life as a company we've invested in property leased to tenants that range from say B in the case of where we had very strong real estate and a big market in a good location up to AA. So I wouldn't say that we've gone -- we haven't changed the credit parameters. It might be safe to say that we think the better opportunities right now in that BB credit area whereas a few years ago there was almost no pricing differential between investment grade and BB -- tended to be buy more investment-grade then because we felt like the market had the risk return sort of mispriced. But we are seeing quite a good bit of investment-grade leases. It just may be like in the case of the McGraw-Hill transaction, which is a very good transaction for us, but in a secondary market. That's why we're getting such a good yield on that one.

Great. Thank you.

Craig Crusero (ph) with Friedman Billings Ramsey.

I wanted to know if I could get a little bit more color on kind of the breakdown between your joint venture and the acquisitions that Lexington is going to completely own in '04 implicit in your 250 million of guidance?

It breaks out roughly two-thirds for joint ventures and one-third for direct. If the trend continues the mix may turn a little bit more toward -- I guess continue to be more for our own account as it is right now. And we're also hoping next year to perhaps have some joint venture partners lined up to partner with us on that part of the pipeline. So right now our model has about two-thirds for joint ventures, and if we do more for our own account it should be more positive for our FFO next year than we've indicated in our guidance.

And is the remaining joint venture acquisition that you anticipate closing this year, is that did you said about 40 million, is that about right?

Right now that's about right with what's under contract. We're hopeful that there's another deal or two that materializes to close later in the year for the joint venture.

As far as your G&A goes, should we anticipate something relatively similar to what we saw in second-quarter? Are you adding any additional bodies going forward as you get larger? What are your thoughts there?

No, I think from here the G&A that we've had in Q1 and Q2 I think is a pretty decent run rate. I think as we grow we're not likely to add high-priced personnel. We may be growing our asset management group more than any other part of the company as the portfolio gets bigger, but those tend not to be the most expensive hires.

Thank you. That's all my questions.

Thank you. Management, at this time we have no further questions. Please continue with any further remarks that you would like to make.

Once again, thanks for your interest in the company; and we'll look forward to updating you on our next conference call. And if any of you do have any questions that come up in the meantime, please don't hesitate to call any one of us. Thank you.

Ladies and gentlemen, this concludes the Lexington second-quarter 2003 earnings call and company update. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000 using the access code of 545099. Once again, if you'd like to listen to a replay of today's conference please dial 1-800-405-2236 or 303-590-3000 using the access code of 545099. We thank you for your participation. You may now disconnect and thank you for using AT&T teleconference.