LXP Industrial Trust (LXP) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Lexington 4th quarter 2003 earnings and year end results conference. 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. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, Thursday, January 29th of 2004. I would now like to turn the conference over to Ms. Diane Heppler from the Financial Relations Board. Please go ahead.

Thank you. 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 did not receive a copy they are available on the company's website at www.lxp.com, in the press release section. Additionally, we are hosting a live webcast of today's call which you can access on Lexington's home page or at www.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 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 S.E.C.

Having said all 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, the 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 thanks to all of you for joining our conference call.

Earlier today, Lexington announced funds from operations were 45 cents per share which was the same as in the fourth quarter last year and consistent with our updated guidance that we gave at the end of the year. Nevertheless, that was a few cents less than our previous guidance mostly as a result of dilution from cash balances that came from an equity offering during the quarter and secondarily, because of couple of joint venture acquisitions spilled over into 2004. All of the cash balances that we had were invested in mid-December and in fact, we ended the quarter with 94 million drawn on our credit line after record acquisition activity in the fourth quarter.

What we are doing now is leveraging last year's acquisitions and we've locked rate or closed on financings totaling $115.2 million at awaited average interest rate of 5.59% with terms to maturity of seven to 15 years. In addition, we assumed 27.5 million of mortgage debt at 7.32% when we acquired the headquarters of New Jersey Natural Gas earlier this month and we are working on a 15-year $55 million financing of two wholly-owned properties which would bear interest at less than 6% although we haven't locked rate yet on that transaction. We made a decision not to play the short end of the yield curve and we believe that these steps will enhance our long-term cash flows and while we think this is a real long-term positive for the company, it does come at the expense of current period FFO as the company plans to operating this year with little floating rate debt.

The other theme from the quarter is that we continued to work with our tenants on a number of expansions and early lease extensions and this sort of activity has increased dramatically compared to six months and we view it as further evidence of a general improvement in the business environment and specifically, we are working on four expansions and six early lease extensions. We view these developments as very positive but note that these discussions are mostly focused on industrial properties or with tenants that are in industrial businesses and we have yet to see much activity in our office portfolio.

2003 was a very significant year for Lexington. We acquired $414 million of property, $72.2 million of which was bought into our first joint venture program with New York Common Fund and $74.7 million into our joint venture with Clarion Lion Fund. We are pleased to report that we acquired our first property for our second joint venture with New York Common in January and that the Lion Fund has expressed an interest in expanding our joint venture program so as we begin 2004, the company remains very well-positioned for growth both in its joint venture relationships and for its own accounts.

Looking at a review of the quarter as we've discussed on our quarterly calls during 2003, in 2003 we began consolidating the activities of Lexington Realty Advisors in order to make our disclosure on our income statement more transparent. This has no FFO impact but on the income statement we have offsetting interest in revenue, interest expense, depreciation and G&A. Due to a consolidation of LRA, year over year to year G&A comparison is difficult but we know the G&A was about the same as in the first three quarters of 2003 and as we move to 2003, year to year comparison will become much more meaningful.

Our interest coverage in the fourth quarter was a record 3.48 times compared to 2.71 in the fourth quarter the previous year, even after running the company with higher than usual cash balances and the strength in our credit statistics is clear evidence of our balance sheet strength which improved dramatically during the year. During the fourth quarter, we also sold one of our retail properties generating a modest gain but consistent with our long-term goal of selling our smaller properties and recycling capital and right now, we are working on several sales of comparable magnitude.

Looking at our balance sheet, we've seen a dramatic improvement in many 2003 based on how much capital we raised and the deleveraging of our balance sheet which left us at quarter ends with $15.9 million of cash which is the fairly normal amount and also at the end of the quarter we had $551.4 million of debt outstanding at an average rate of 6.24%, 80% of that was fixed rate and that's a little bit of a misleading number since we had $94 million outstanding on our credit line which we expect to pay down fairly rapidly in quarters one and two this year with the exception of our bank line, all debts are non-recourse and today we have $64 million outstanding on the line which, again, we think will be fairly rapidly paid down during the first six months of the year as we close our permanent financings that are in the pipeline.

Our balance sheet at the end of the year equated to about 34.2% of our total market capitalization which is down from 46.7% at the start of the year and that's a very low level for us. In addition, we are continuing to work off our debt quickly and just from our regular monthly payments we'll be amortizing about $76 million of debt over the next five years. What this does is give us the ability to continuously releverage the balance sheet as we grow and we note that our debt balances at maturity total only $440.5 million, which is only 28.1% of our present capitalization. We view this amortization as a real positive because it will result in reduced interest expense going forward, declines in debt service that will help offset the impact of any vacancies in the portfolio or the exercise of any favorable renewal options that our tenants have.

In addition, participation in our dividend reinvestment plan increased a lot during the year and we are retaining right now about $9.3 million of cash on an annual basis which, again, is a good source of internally generated funds to finance our growth.

On the acquisition front, 2003 was a great year and that's continued this year in January we've closed $72.4 million of acquisitions, and we have good visibility on about $224 million of additional acquisitions. 2004 could be another very good year from a volume standpoint. Nevertheless, it continues to be a competitive market and cap rates remain low although not lower than they were six or nine months ago. Our spreads over our borrowing costs are about the same.

Our volume so far this year is $33.7 million in the joint venture programs and $38.7 million for our own account and our pipeline of $224 million is $108 million for joint ventures and $116 million for direct investment. Our acquisitions closed in fourth quarter consisted of the, in the first case, of a distribution facility lease to Linens N Things, which we bought into our joint venture with the Lion Fund for $12.8 million, the 263,000 square foot facility with an adjacent 9.6-acre site that could accommodate 110,000 feet of expansion. Very good location in Logan Township, New Jersey with great access to I-295, the lease that expires in January, 2009, with average rents of 9.8% of cost. Right now we are holding that free and clear but we plan to put leverage on it this year.

With also bought for $22.7 million into our joint venture with New York Common, a property lease to Heidelberg Web Systems in Durham, New Hampshire, it's a 500,000 square foot mixed-use facility on 173 acres. This is a seventeen-year lease and we assumed about $19 million in place financing. The lease generates GAAP revenue of $1.79 million which is about 7.89% of cost. Interesting lease structure because rents reset in March 2011 based on where interest rates are at that time and assuming our interest rate on our financing stays where it is today, rents would increase to about $2.7 million which is 11.9% of costs, or a 51% increase.

We also bought an office building lease to Honeywell into our joint venture with New York Common for $16.8 million, an office facility in Colorado Springs, 167,000 square feet on a ten-year lease. The GAAP cap rate was 9 3/4 and at closing, we assumed a loan of $11.9 million at 6 1/4%.

We also bought a property in Arlington, Texas, built to suit for Siemen's automatic postal automation for $30.1 million which we contributed to our second joint venture with New York Common in January 2004. This is a 234,000 square foot office and R&D facility with a ten-year lease and the tenant provided a letter of credit securing the full amount of the lease payments over the ten years. The GAAP cap rate was 8.34% and we put financing on the building of $22 million ten-year term with a fixed rate of 5.81%, so, this was a low cap rate transaction but with a letter credit, also made it a very low risk.

Lexington bought for its own account, an office building leased to BellSouth Mobility in Baton Rouge, Louisiana, four story, 70,000 square foot class A office property leased through October, 2012. The GAAP cap rate was 10.1% and we are presently holding that free and clear because we think there could be an expansion play there in which case, we would finance it at that time.

In the large transaction in the quarter was a sale lease-back of two buildings in Kansas City with Employers Reinsurance Corporation which we bought for $79.3 million. E.R.C. is an A rated tenant,. these are 15 years leases with a fairly low cap rate going in of 7.15% but with annual increases equal two times the increase in the consumer price index with the annual increase not to exceed 3%. These are the properties that we expect to leverage right now, which should be $55 million at a fixed rate of about 155 basis points, over the interpolated 15-year treasury.

That would be a fixed rate of less than 6% today and when we close that financing, we'd have a current return of almost 9% with dramatic annual increases in our cash flow since we have it leveraged and if inflation is 1.5% we get annual rent growth of 3% which on leverage basis really compounds out pretty dramatically. Nevertheless, it's not a highly accretive transaction to FFO in the first year because the increases are related to CPI and don't get straight lined into our rental revenue recognition.

We also bought a little property lease to 3M in Wallingford, Connecticut, a double A credit 44,000 square foot facility leased through December of 2010. The GAAP cap rate is 11% in that case.

We also bought an industrial property in Texas leased to James Hardy industries for $32.5 million. This is a sixteen-year lease with a 10.5% cap rate going in. We think this could be a very good opportunity for high loan devalue financing and a potential sale to a 10-31 investor at a nice gain. So, we bought this into a taxable subsidiary expecting that we may ends up reselling the asset this year.

Overall of last of year's volume, $198 million is owned by joint ventures. This includes the Green Point Mortgage property, the Icon Office Solutions property and our Tower Automotive and Siemen's properties that were initially acquired on to our balance sheet. And the E.R C. properties could very well be contributed to our second joint venture with New York Common later this year.

After all this activity, we have about $500 million of capacity in our joint venture with New York Common and $100 million in our Lion joint venture, which we hope will be expanded later this year. Our acquisition pipeline looks good. We are reviewing $1.8 billion of acquisition activities ,which is a very high number, and we are very pleased that we continue to have the opportunity to upgrade the quality of the portfolio, enhance our cash flows, extend our weighted-average lease term and broaden our diversification, as we grow our portfolio.

On the asset management side, we had two significant vacancies this year which we've discussed on previous calls and we continue to be in the environment with poor real estate fundamentals, particularly in the office market, and we expect this to continue for the next couple of years which will impact us as we begin to have heavier lease rollovers and, unless conditions and until conditions dramatically improve and we are watching the employment numbers in the office sector very carefully, of course.

We don't have a need for liquidity on the asset sale side but we are focused on selectively redeploying capital from lower growth assets and we are continuing to work diligently on our disposition list of our retail properties and our smaller sized assets which we are holding free and clear and the sale of our Circuit City store in Las Vegas in fourth quarter is a good example.

As previously discussed, our lease with Bank One in Phoenix expired at the end of November last year and our model for the company this year includes no revenue from this asset and projected carrying costs of about $550,000. The net effect of this vacancy, therefore, is to reduce FFO by $2,450,000, or about 5.5 cents per share on an annualized basis and unfortunately, this hole in our revenue will mask a lot of the accretion from acquisitions made last year.

Our other negative news, which we discussed last quarter, is that Fidelity has exercised an option to terminate its lease in Cabron, Kentucky in March, 2004, with the payment of one year's rent. That's a $900,000 payment and that cushions the vacancy somewhat, but not to our FFO. As we've been recognizing that lease termination payment in our revenue over the life of this lease and our longer occupancy watch list which, again, we talked about previously includes our Bull property in Phoenix, Arizona, in October, 2005, our Milpitas, California property in December of '05 and our Lockheed Martin property in Marlboro, Massachusetts, which is December, 2006. Each of these assets is viewed as a re-tenanting scenario in our business plan model and both Boston and the San Francisco markets continue to be very challenging.

Overall, the company is now entering a 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 together with related capital expenditures We recognize that our greatest operating challenge in the next few years will be on releasing these properties and maintaining the high levels of occupancy that we've enjoyed historically.

In summary, I'd like to say that Lexington continues to be in a very good position. The acquisition environment has been good from a volume standpoint but remains competitive, but we continue to be able to acquire properties on a one off basis that add to our cash available for dividends, are accretive to funds from operations on a leverage basis and which enhance our portfolio by tenant credit strength, lease term, market location and property quality. We are hopeful that our acquisition volume continues to be strong and we have the financial wherewithal to grow our asset base rapidly so our growth is really a matter of when, not if, and will be a function of the acquisition opportunity set.

Diversification continues to be very important to us because it will diminish the effect of any vacancies that may occur and we note that our share count is increased from 26 million to 46 million over the last four years and, just to show how positive we view that from a diversification standpoint, our K-Mart property now represents only six cents per share of our after debt service cash flow compared to 11 cents four years ago. So diversification is a great benefit to owners of single tenant properties.

Based on our current capital structure and acquisition volume of $250 million to $300 million which we either closed or have good visibility on, our guidance for 2004 is funds from operations of between $1.83 and $1.88 per share. Greater volume could mean a reason to increase our guidance as we get into the year but we remain cautious in view of the carrying cost of our vacant buildings, the timing of acquisitions and the earnings impact of switching from floating to fixed rate debt, as we discussed earlier on the call.

Nevertheless, our goals are to run the company to provide long-term stable and growing cash flows and we believe that locking in long-term non-recourse fixed rate financing is a strategy that's very appropriate both to our business and where we are in the interest rate cycle.

And that ends our formal remarks for the call and we'd be delighted to turn it over to you and answer any questions that you have.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the star followed by the 1 on your push button phone. If you would like to decline from the polling process, please press the star, followed by the 2. You will hear a three-toned prompt acknowledging your selection. If you are using speaker phone equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our first question. Our first question comes from Tony Paolone with J.P. Morgan. Please go ahead with your question.

Thank you, good afternoon. Will, I noticed in your package last quarter had you three lease expirations, in '04 now you have two, I think. was there some preleasing done there or?

One of the properties in Palm Beach Gardens actually has two tenants, Wackenhut is the main tenant, there is a tenant that occupies about an 18,000 square foot building that renewed their lease, extended their lease from '04 to '06.

Okay. another question. On your visible pipeline the $224 million, can you talk about cap rate and credit and maybe how it might be different for your core stuff versus the JVs, just add some color to that?

Sure. It's fairly consistent with what we've closed in the last six months. Candidly, there is stuff that we are looking for that would go into our joint venture with New York, 8% or even a little bit below eight, it really depends on length of lease and credit and what the escalations are. The Lion Fund does, tends to, will do a slightly lower credit profile. It doesn't always need as much lease term but that's clearly a north of eight, going in, program. And for direct we are still trying to finds transactions that have a little more yield opportunity which might be 50 basis points or so more in going in cap rate. Or which are just smaller so it doesn't meet the size criteria of the funds.

Okay. Final question, just your G&A, is that a fair run rate, what you had in the fourth quarter?

You know, the run rate on fourth quarter is a half million annually. I think for '04, the right number for the company is probably 11 million.

Okay. Great. Thanks.

Thank you. Our next question is from Stephen Swett with Wachovia Securities.

Hey, Will. I'm sorry to make you do this, but could you go back through your debt assumptions on refinancing the recently acquired properties, I missed a couple of the numbers?

Closed or where we have rate locks right now?

You mentioned the financing that is sort of in the works, some of the secured, you want to put on some of the recently acquired properties?

Yeah, that's right. The only thing that we don't have a commitment on or which we haven't closed or don't have a commitment on is the $55 million that we want to put on the E.R.C. property.

And I'm sorry, you went through a couple of numbers on some things that you either recently placed or were going to place and I don't know whether the connection was bad but I didn't get some of those numbers.

If you were rolling forward the year end balance sheet, you would have $115.2 million of fixed rate debt not all of which is closed right now.

Okay.

But the $115.2, that's at a weighted average interest rate of 5.59, and in addition to that you add $27.5 million which we assumed in connection with the acquisition of the New Jersey Natural Gas.

Okay. I got it. You mentioned that the New York Common one is now completed.

Yes.

A couple of questions on the fees. What is the fee stream, the management fee stream from that? And I assume, you know, it's just a management fee going forward, so it would be pretty consistent from here on out. And also, if I look at the JV contribution that you claimed in Q4, is there anything in that that is a one time, or is that a good run rate into 2004?

The first JV with New York is probably stabilized asset management fees of about $800,000 a year, to answer your first question, and the second question was, what were the acquisition fees that we earned from contributing assets to joint ventures in the fourth quarter?

Yes.

$550,000. Acquisition fees of $550,000 in the fourth quarter.

Okay, and Will, with your recent tenant vacancies and I would include I guess the Fidelity property, what is your occupancy today?

Slightly above 98%.

And if you lose those tenants you are concerned about, what does that get you down to?

95, roughly 95%. You know, we still have almost three years in the case of the Marlboro property, so we will be buying a lot of 100% leased properties between now and then, that's for sure.

And then, one other question on your pipeline or your shadow pipeline or the deals that you feel good about, how does it look in terms of timing of closing that $224 million, is it Q1, is it Q2, is it mid year?

I think on average, mid year is a good assumption because it includes some forward commitments.

Are you approaching the current pipeline or the deals that you're looking to do in 2004, are you going to try to lock in the financing as quick as possible or will you do like you've done with recent acquisitions and close the deal and then come back and finance them?

In many instances we've arranged, you know, we've locked into financing in advance rather than take the risk that rates will run away.

Okay, thanks.

Thank you. Our next question is from Art Havener with A.G. Edwards, please go ahead with your question.

Thank you. The first question has to do with the Bank One lease expiration, Have they physically moved out?

They physically moved out on time.

Okay, so there was no carry over?

No.

Okay. We understand that the K-Mart distribution property in Chicago was bought back by K-Mart, have you had any discussions with K-Mart about your properties?

K-Mart has talked to us about buying the building but not at a price which we think fairly represents the value of the lease that we have in place.

Okay. Has there been any change in the volume of traffic or the goods being stored there?

No.

Okay. Thank you.

Thank you. Our next question comes from Michael Marone with Bear Stearns. Please go ahead with your question.

Thanks. On the acquisition targets for '04 of 250 to 300, I assume it's roughly 50/50 into direct and JVs?

That's about right.

That's about right? Okay. How can we assume you finance the direct stuff, is it going to be 75 million in debt, 75 in equity, or some other breakdown?

I think we would plan to put 65% financing at the property level on each asset and just from our financing program that we are putting in place right now with all this long-term, you know, figured rate mortgage, mortgages that we are closing that should provide sufficient liquidity to give us our equity needs.

I'm sorry, repeat that last part again?

We have enough cash flow coming in from mortgage proceeds to fund our, the equity that we would invest in the pipeline this year. Between financing what we are buying new and proceeds from what we are leveraging now, we can do the volume that we set forth.

Okay. Great. Thank you.

Thank you. Our next question is from Steve Path with Tothville, please go ahead with your question.

Can you refresh my mind? You've had quite a bit of debt retitles expense this year. What debt was retired that this expense was incurred and will there be similar expense in 2004? That's the first question.

The big charge, Steve, related to retiring that Remmick financing which was a May event for us which was a big balloon payment that we would have had two years from now and which was across collateralized pool which bore interest at a little bit more than 8%. Unfortunately with the shorter lease terms in that portfolio, it wouldn't have been easy to refinance that balloon. We've taken the three properties there and we could get good properties specific financing, we've refinanced those this quarter and generated proceeds of about $27 million. So, that was that. We paid off other debts during the year but right now we don't have anything maturing in 2008, until 2008, so it would be very unusual for us to choose to pay yield maintenance penalties on debts that are that far forward.

You should benefit from not having this expense in 2004?

Absolutely. Absolutely.

You have some discontinued properties on the balance sheet?

Yeah, Steve. On the GAAP if you have the intent, there is several criteria but if you have the intent to sell the property you have to take all the operation and collapse it into one line on the P&L and also show the asset as held for sale. Included in that number the biggest portion of it is the James Hardy facility in Texas that Will mentioned. Our intent was to buy it, leverage it up and flip it in 2004 and we hold that into our taxable subsidiary. So, of that balance on the balance sheet, approximately $33 million of it is one property, that's the James Hardy, the recent acquisition.

Yeah, could you just describe it a little bit, what it costs you, what kind of property it is and what the possibilities are at the present time?

Our purchase price there was 32 million change.

32.5 million.

We are working currently on the financing and we expect probably to have that in place win 45 days.

You know, the flip profit could be in the area of $1.5 million, if we can do a quick resale. We're hoping that that's an achievable number.

Okay. Now, you went kind of fast over the leases that are coming up. Could you please review them again, how much the annual revenues were? You said Fidelity and you mentioned another one in Phoenix, I didn't get them all, there were 4, I think.

Bank One property, which is now empty, constituted on an annual basis, $1.9 million in rent. The Fidelity property, which they are terminating early, April 1st, constituted about $900,000 of rent. The Milpitas, California property, which is an '05 expiration is about $2.5 million of revenue, and the Marlboro, Massachusetts property, which is December, '06, is a little bit more than $1.8 million of revenue. The Bull property in Phoenix, where I think they may very well want to extend just not for 100% of the space, is, if I recall, at about $1.3 million of annual revenue.

I see. Well, those are my questions. Thank you very much.

Thank you. Ladies and gentlemen, if there are any additional questions at this time please press the star followed by the one. As a reminder if you are using speaker phone equipment you will need to lift the handset before pressing the numbers. Gentlemen, we appear to have no further questions. Please continue with any closing comments.

Just in closing, I would like to say thank you for participating in the call today and we look forward to communicating our progress to you during the year. And, again, if you do have any questions that come up, please don't hesitate to call anyone here at the company. Thank you.

Ladies and gentlemen, this concludes the Lexington fourth quarter 2003 earnings and year end results conference call. If you would like to listen to a replay of today's conference, you may dial (303)590-3000, or (800)405-2236, followed by access number 566320. Once again, we thank you for your participation and at this time, you may disconnect.