LXP Industrial Trust (LXP) 2003 Q3 法說會逐字稿

Welcome to the Lexington third quarter earnings call and company update. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Thursday, October 23, 2003. I would now like to turn the conference over to Ms. Diane Hettwer.

Good afternoon everyone. Thanks for joining us on Lexington Corporate Properties' conference call. The press release and supplemental packet of information were distributed this morning. If anyone online did not receive a copy, they are on the Company's website at www.lxp.com, in the press release section. 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 that its 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 that, I would like to turn the call over to management.

With us today we have Robert Roskind, Chairman of the Board; 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 ado, I will turn it over to Will.

Thanks Diane, and welcome, everybody, to our third quarter conference call. And thank you for your continued interest in Lexington. Today, we announced funds from operations of 45 cents per diluted share, which is consistent with the guidance that we gave on our July conference call. It was 3 cents less than third quarter last year. We had continuing dilution from cash balances resulting from our capital raising activities earlier in the year, but we've been running the Company with some cash on the balance sheet for most of the quarter, and much lower leverage. That being said, all our cash balances were invested in September. And in fact, because of acquisition volume we ended the quarter with 21.5 million drawn on our credit line. So the month of September was quite a strong month for us from a cash flow and FFO standpoint. Beyond getting our cash invested, we would comment on two themes that became apparent during the quarter. First, the sharp rise in interest rates since June we think has had a positive effect on our acquisition volume and prospects for fourth quarter, and that's quite typical after a period where rates have adjusted sharply upward. During the quarter, we acquired 120 million of property, and including the acquisition we announced earlier this week, volume for the year is 203.5 million. Which now exceeds the goals that we set out in our business plan at the beginning of the year. Today we have 104.8 million of property under contract or letter of intent for closing over the balance of the year, which would bring total volume to 308.3 million, just on -- like I said -- what's visible under letter of intent. And that would be a record for us. So in total, quarter 4 closings would be about 131 million. And in addition, we are working on about 175 million of transactions that we have pretty good visibility on and have the potential to close this year. So all this taken together leaves us feeling hopeful that the challenging acquisition that we've been in the last couple of years is behind us.

The other broad theme I would comment on during the quarter is the number of expansions and early lease extension discussions that we are now having with tenants. And that has increased dramatically compared to 90 days ago, and suggests to us that there is a general improvement in the business environment. And specifically in our portfolio, we have discussions with tenants going on now regarding 4 expansions and 6 early lease extensions. We view these developments as very positive. The other significant news in the quarter was the $100 million unsecured credit facility that we arranged, led by Fleet, that replaced our existing $60 million line. And also the formation of a second joint venture program to complement our program with New York Common Retirement Fund. In this one, our partner is Clarion Lion Properties Fund, which has made a $70 million equity commitment to this program. And with leverage, that would add 250 million of acquisition capacity to our existing investment ability. So taken together, our company is very well positioned for growth today, with the lowest leverage level that we've ever had in the mid-30s.

Turning to look at the quarter, as we have mentioned on our calls earlier this year, this year we began on the income statement consolidating the activities of Lexington Realty Advisers in order to make our disclosure more transparent. And this has no FFO impact. But on the income statement, we have offsetting increases in revenue, interest expense, depreciation and G&A. Due to the consolidation of LRA, our year to year G&A comparison is difficult. But we note that our G&A in third quarter was about the same as it was in the second quarter of 2003. So that's a consistent run rate. Our interest coverage was a record 3.33 times in the quarter, compared to 2.75 times in third quarter last year. Even after running the Company with higher than usual cash balances, our credit statistics are very strong and are clear evidence of our balance sheet strength. Our balance sheet has seen a dramatic improvement in strengthening compared to year end, due to our capital raising activities earlier in the year. At quarter end, we had $12.5 million of cash, which now is a fairly normal amount for us to have on the balance sheet at the end of the quarter. At quarter end, we had about 498 million of debt outstanding at an average rate of about 6 3/4, 86.4 percent of which was fixed rate. And as I mentioned, our leverage today is about 35.6 percent of total market capitalization, which is down from 47 percent at the start of the year. And that's an all-time low for us. In addition, we are continuing to work off our debt quickly. We will be over the next five years, just from our regularly scheduled debt service payments, amortizing about 77 million of debt. That gives us the ability to continuously re-leverage our balance sheet as we grow. And our debt balances at maturity total 384 million, which is only 27.4 percent of our present market capitalization. In addition to that, we are retaining about $7 million a year through DRP participation. So we do have the ability to self-fund a great portion of our growth.

Turning now to discuss acquisitions, I guess one comment I would make is what a difference a quarter makes. Our pipeline is very promising today, and with what we have good visibility on, our volume for the year would be about 308 million. And we have a very good chance I think of even exceeding that amount. Our previous targets we've easily surpassed, and the balance sheet moves that we made earlier in the year are paying off nicely. However, we would note that most of the activity on the acquisition front is occurring in the second half of the year and will be loaded toward the back of the year. So the accretion from these investments won't impact our 2003 results very much.

Looking at the deals that we closed in third quarter. We bought one transaction leased to McCraw Hill for 11.4 million, which is a 14 year lease on a distribution facility in Dubuque, Iowa, where the rent is an average of 10.2 percent of the purchase price. We leveraged that investment at 4.89 percent, fixed for 5 years. We also bought a regional headquarters leased for Verizon Wireless for 22.5 million. That was an 8.5 year lease with a he 9.1 percent rent constant, which we leveraged to 4.42 percent fixed for 8.5 years. Both those deals were with A rated credits and they were bought for our own account. We also bought a transaction leased to Tower Automotive for 20.6 million; a 9 year lease on a strategically important, well located industrial facility in Plymouth, Michigan, with an average rent there of about 9.2 percent. Tower is a single B credit. We did a sale leaseback with IKON Office Solutions on their headquarters in Malburn (ph), Pennsylvania, which we bought for 21.3 million on a 10 year lease, with a rent constant of about 9 percent and a very, very good location in suburban Philadelphia. IKON is a triple B minus credit. We also bought the headquarters of Green Point Mortgage for 39.5 million, which is an 8 year lease with 4 percent escalations, with an average rent of about 9.97 percent of purchase price. This is their headquarters facility in Nevada, California, which we view as a market that's very difficult to build in. We are leveraging this property at 5 3/4, and we also expect to contribute this property to our recently formed joint venture with the Lion Fund. Our other acquisitions were 2 call centers leased to Nextel on 12 year leases, where the rents average about 10 percent. And we have locked right on financing of about 60 percent today at 6.09 percent. So there's a very good spread on those acquisitions as well.

Our pipeline of 104.8 million consists of 82.6 million for joint ventures, with the balance for direct investment during the course of the year. And we have 53.7 million of build to suit commitments lined up for next year, 30 million of which would be for joint ventures, with the balance for direct investment by Lexington. Going in cap rates, I think, are pretty constant from last quarter -- ranging from 8 to 9 percent, with an average of about 8.5 percent. And we've locked right on mortgage financings today totaling 46 million at a fixed rate of about 5.8 percent. So we continue to be in an environment where we can make good spread on our equity investments. Today we have about 600 million of capacity in our joint venture with New York Common, 100 million remaining in our advisory company and 250 million in our joint venture with Lion. And some of that is likely to be satisfied with contributions of property we presently own, even after we contribute the Green Point Mortgage property.

On the asset management side, we're pleased to announce today that we've leased our Columbia, Maryland retail property, raising portfolio occupancy to 99.5 percent. And this property now generates annual net revenue of $745,000, which is about 13.1 percent of our invested capital. We continue to have modest near-term lease rollover, which we view as a positive. But we would note that real estate fundamentals remain poor, and would begin to impact us more beginning in 2005, when we begin to have heavier lease rollovers. We don't really have any need for liquidity, so we remain focused on selectively redeploying capital from lower growth assets. And we continue to work diligently on our disposition list of retail properties and smaller sized assets in smaller markets, and one which we are holding without any leverage. Our next lease expiration is our Bank One property in Phoenix at the end of November this year. We are expecting a vacancy in December, and our model, as a result, for next year includes no revenue from the asset and projected carrying costs of $550,000. The net effect is to reduce FFO by about $2.5 million, or six cents on an annualized basis. Unfortunately, a hole in our revenue stream like that will mask a lot of the accretion from acquisitions made this year. Our other negative news is that Fidelity has exercised an option to terminate its lease in (indiscernible) Kentucky next March, with a payment of one year rent. That's about $900,000, and that cushions the blow of the vacancy somewhat. As we mentioned on our call last week, our longer-term occupancy watch (indiscernible) -- last quarter, I should say -- our longer-term occupancy watch list includes our Bull Information Systems facility in Phoenix; our property in Nopias (ph), California, which is a December '05 expiration; and also, our Lockheed Martin property in Marlboro, Massachusetts. Each of these assets is viewed as a re-tenanting scenario in our business plan, and both Boston and San Francisco continue to be very poor markets. We are now entering a he period where lease rollovers will be more frequent, and shareholders should anticipate that we will have more leasing work than we've had in the past.

In summary, we'd like to say that Lexington continues to be in a very good position. The acquisition environment has improved and we expect to take advantage of a number of opportunities over the balance of the year. We think we are on track to increase our total assets over the next four to five years by at least $1 billion, and we have the financial wherewithal. So asset growth is now a matter of when and not if, and growth is very important to us because of the benefits of diversification that will diminish the effect of any vacancies that might occur in the portfolio. Based on our current capital structure and acquisition volume, we're leaving our guidance pretty much unchanged at this time, as volume late in the year has little impact on this year's numbers. That would mean our guidance range of $1.90 to $1.95 in 2004, for the fourth quarter '03 of 48 to 49 cents, $1.86 to $1.87 before debt satisfaction charges. To the extent anything in the model changes in terms of volume spread and capital mix, we will update our guidance promptly. I would note that normally greater volume would mean an increase in our guidance, but we need to factor in the Fidelity vacancy next year. And we're not quite ready to predict with confidence an increase in volume that would be sustainable through 2004.

Nevertheless, the prospect of greater acquisition volume in the near-term leaves us feeling quite bullish about our January dividend review, and our expectation at this time would be to raise the annual dividend from $1.34 to $1.40 per share. I want to note our 10th anniversary, and say that no one has made money talking about the past. But I do want to take the opportunity to note our 10th anniversary of listing on the exchange yesterday, and the success that we've had in the last 10 years. We've grown our company from a REIT with an $85 million equity base to almost 900 million today, and our total assets under management from 200 million to 1.7 billion. Including our IPO, we've raised a total of 525 million in equity over the years, which now has a market value of 800 million. So we are very proud of our track record of adding value. I will also point out that we have never sold a share at less than our net asset value or a previous issue price, which has been a key factor in generating our 10 year total return of 247 percent. And we've also accomplished our goal of growing our dividend every year. So speaking for the management team in the room, I can say that we are all very excited about the Company's prospects and the opportunities that we have before us.

With that, that ends our opening remarks. Operator, we will turn it over to Q&A.

(OPERATOR INSTRUCTIONS). Tony Paolone, J.P. Morgan.

Will, just real quick on the Fidelity lease. You had mentioned 900 some-odd thousand dollars that would help lessen the blow, or something along that. What was that again?

They had a right to cancel their lease early by paying a one year penalty, and the 900,000 is that one year of rent.

When will that hit?

That's at an end of March expiration now.

Will they pay that -- will you recognize the 900,000 as a payment?

We did, on the Fidelity leases, recognize the revenue over the shorter lease term. So the $900,000 payment will actually just bring down the straight line rent receivable we have at that time. So the rent that we record in '04 will only be through the end of April.

(indiscernible) will just be higher?

It will be through the end of April. It's the same monthly rent we (indiscernible) but we straight lined it over the termination date. So we didn't straight line it to '07, we straight lined it to '04, under the assumption that they would exercise the option.

This is the lease that causes, when looking at your rollover schedule in this package versus the one from last quarter (multiple speakers) -- that's the change? Okay. The other item is -- I think you went over some of this as well, Will. The deals teed up, on the $148 million in letters of intent --?

104.8.

Oh, 104.8. Sorry. How much of those are in the core versus some of the JVs?

The breakout is, I think, 82 million to joint ventures, with the balance to us, obviously.

Okay. And then the other deals that you all are looking at, following up with that. What do the splits look like there?

Those are mainly opportunities that we are looking for for direct investment by the REIT. But there is certainly -- up to a third might meet the criteria for investment by the joint ventures. We just haven't talked with our partners about them yet.

Stephen Swett, Wachovia Securities.

A couple of questions on the ventures. You guys now have ventures that cover the investment grade rated, as well as non-investment grade rated sections. So when you say a third of the potential acquisitions that you are indicating would fit the criteria, 2/3 would not. What makes them not fit the criteria?

For example, we have a couple of transactions that we are working on that would involve issuing OP units, which have to be done direct by the REIT. Both of our partners have real estate holdings outside of their programs with us. So there may just be a situation where they're full of a certain property type in a certain market elsewhere, So that those opportunities are coming through to the REIT level.

When you mention the (indiscernible) to suits, I think typically those have not fallen into the JV?

Our program with New York Common, we are not obligated to show forward commitments like that. We are doing some forwards with Lion. That's contemplated by our joint venture with them.

Are you taking forward risk, in terms of the financing costs or the yields in those cases?

We are. Right now we are. We don't have a gigantic volume of business right now, so we are -- we're getting a cap rate premium for taking a little bit of the forward risk. But the majority of that stuff is for delivery before April next year, so it's really not that far away.

One more question on the ventures. Are you looking at taking some of your existing properties or leasing acquisitions and putting them in the Clarion Lion?

Yes. The Green Point Property, yes, and there are two other ones that we are looking at also.

The next question, back to the Kentucky, the (indiscernible) Kentucky property. Did Fidelity indicate why they are vacating?

The facility had been underutilized. It was a trade processing center, and they're consolidating the activities elsewhere.

You have commented in the past on the Phoenix project and Milpitas (ph) project, and how you feel about those markets and buildings. How do you feel about this building and its sub market? Is it something that you don't think it will be too much of a problem to release? Or would those issues be concerns for you?

We're always concerned about releasing. I don't want to predict how long this would take. We didn't change our guidance assuming it would be vacant for the entire year next year. That being said, in the last two months, we've had three tenants look at the building that we've made proposals to. And another tenant that is interesting in doing a build to suit on some vacant land that we have there. So too early to make any prediction with any confidence, but there seems to be, at least right now, a fair amount of interest in at least looking at the building.

Last question, on the Columbia property -- have you leased that, are they in occupancy today and are they paying rent today?

We did a 25 year lease. I'm sorry -- a 21 year lease. The first year is free rent, but we are recognizing revenue over the 21 year period. And that lease started October 1.

So you are -- well you're not receiving cash, but you are recognizing rent today?

Yes, yes.

Steve Tabb (ph), (indiscernible).

I have a couple of questions on the capitalization of the Company. First at the beginning, you say that you have an equity of $900 million. Of course if we look on the balance sheet we see $483 million. I was wondering how you would get to this equity of $900 million?

We have 40.3 million common shares and OP units that are convertible into common shares. We multiply that by the stock price of -- which has been a little bit more than 20. And we add our issue of perpetual preferred to that.

It's the market value, not a historical cost value?

(indiscernible). It's a market value.

What is convertible now?

About roughly 5 million operating partnership units outstanding stayed, which are the securities that we issued when we bought properties and deferred tax for the sellers. When we talk about our equity capitalization, we consider those on an as converted basis as one single common share per unit.

But they would get share for share?

Yes.

It wouldn't increase the book value (indiscernible) you're talking about the market value.

Right. Yes, we are.

I am looking at the income statement for the quarter ended September and the quarter ended June, and the minority interest -- you have income from continuing operations and 4 minority interests and then income from operations -- from continuing operations. And in between them, minority interest. In the June quarter, they were only 98. And in the -- this quarter, they were 1,000,654.

The reason for that, Steve, is --

(multiple speakers)

I want to go over how this changed.

In the June quarter, we had those prepayment penalties, which are recognized at the partnership levels. So therefore, the minority partners share in that expense. So for the June quarter, the minority interest expense was also reduced because of their sharing of the prepayment penalties. In the three months ended September 30, those prepayment penalties weren't recorded. And therefore, minority interest expense went up to its normalized level.

So roughly was there share of the prepayment penalties? Your total prepayment penalties were --?

Minority partners own about 20 percent of the operating partnerships.

So, that's the figure of 7,685,000, up above, under expenses in the June quarter.

Exactly right.

Okay, thank you. Now, I am looking at the earnings per share computation. And if you look near the bottom of the page, it says weighted average number of shares using calculation for basic earnings per share.

Right.

And the -- you eliminated the convertible dilutive shares, because you retired those I guess. But the top item at the end of June was 32,920,000 shares. And at the end of September, it was 34,780. And I was wondering why that share count went up 1,000,860?

Because in the previous quarter when we did the offering, you only count it towards weighted average (indiscernible) outstanding. So the common share offering we did earlier in the year didn't have a full quarter impact in June, but it had a full quarter impact in September. There weren't any more shares issued in outstanding, just the weighted average calculation increased because it was outstanding for the entire quarter.

That's what we thought it was. But you issued those shares in April, and it still had such a large effect.

In fact, that would be the reason why the impact would be so large. The earlier in the quarter, the bigger the impact, the bigger the change. Because you were not counting as many shares in the previous quarter.

Right. I understand that, but I was surprised it had that big an impact.

That's how the math works.

Okay. You've bought a number of properties recently, and you haven't taken mortgages out on them yet. And now, you say that you are obligating yourself for purchasing or acquiring additional properties, on which you haven't gotten firm mortgages. And you even may put them into the joint ventures. So you've got quite a bit of exposure here, don't you, too interest rates? Between what you bought and you didn't range from mortgages on, especially since you plan on continuing to employ your money fully.

Just to review, in the third quarter, McGraw Hill had a mortgage; Verizon had a mortgage; Tower we bought with a mortgage in place. IKON, we don't have financing closed on, but we are in the market. The Green Point Building, we are closing a mortgage right now with a fixed rate of 5.75. And Nextel, we have locked rate on financing. And we do have about 23 million of debt commitments that we have locked rate on already, for properties that we close over the balance of the year. On the forward stuff next year, we are a little bit too far away from locking rate. So you are definitely correct in pointing that out.

Because (indiscernible) you mentioned the last 3, when you put out the announcement -- was it yesterday? -- on the Nextel properties, you didn't mention anything about financing, I think, on that.

We locked rate yesterday.

And that was (indiscernible) -- what rate was that again?

6.09 percent for 12 years.

(OPERATOR INSTRUCTIONS). Art Havener, AG Edwards.

I was wondering if you had any estimated straight line rent impact for 2004 and 5?

Sure, hold on one second. As you know, the biggest straight line impact property we have is the Kmart facility, and that starts turning next year. For '04, it actually should be cash in excess of straight line rents by about a couple hundred thousand dollars. And the following year grows to about $850,000.

On the positive side?

Exactly.

And that incorporates the Columbia property?

Yes.

Chris Lucas, Ferris Baker Watts..

On the -- Will, you were talking about the premiums you are getting on your build to suits. What kind of cap rate are you getting on your build to suits?

I would say the premium is probably (inaudible) basis points per year.

Excuse me, I didn't catch that. How much?

About 50 basis points in cap rate, compared to if something was closing right now.

I didn't catch -- in terms of your capacity, acquisition capacity, I got the JV breakdown. What do you have on the advisory side, and what do you have capacity-wise direct?

There's about 40 million of equity that has not been invested in the advisory company. So with leverage that would be about 100 million. We think just outside of that, with the REIT's balance sheet where it is. It arguably has the ability to buy several hundred million in property, in view of the amount of free and clear collateral that we are owning right now and our bank lines.

So another direct capacity of about, what? -- 200

Yes, that's a fair assumption. Two or 300.

The G&A sequentially is running at a pretty quick growth rate right now. Are we expecting that to continue with this 6, 7, 8 percent sequential quarterly growth? Or is that (multiple speakers) this third quarter number?

We view ourselves as running now at a pretty flat rate. We picked up a fair amount of G&A from consolidating Lexington Realty in, but I think the 2 6 represents a pretty good run rate right now.

Okay. Any guidance in terms of what you are using in terms of G&A for next year, is it in terms of how you get into your range for your FFO guidance.

(indiscernible) think a 26, a 27 run rate is a good run rate.

Mr. Eglin, there are no further questions. Please continue.

I'll just say once again, thank you all for your interest in Lexington. We look forward to communicating our progress to you next quarter. Thank you.

This concludes the Lexington third quarter 2003 earnings call and company update. If you would like to listen to a replay of today's conference call you may dial 1-800-405-2236; or you may dial 303-590-3000 and enter the access number of 555920. You may now disconnect.