LXP Industrial Trust (LXP) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Lexington second quarter 2004 earnings conference call. 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, July 29, 2004. I would now like to turn the conference over to Miss. Diane Hettwer of Financial Relations Board. Please go ahead ma'am.

Thank you, good afternoon everyone. Thanks for joining us on Lexington Corporate Properties Trust's second quarter 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. Additionally, we are hosting a live web cast 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 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 that, I would like to turn the call over to the management. With us today, we have Wil Eglin, Chief Executive Officer and President; Pat Carroll, Chief Financial Officer; and Paul Wood, Chief Accounting Officer. With that, I will turn the call over to Wil. Go ahead please.

Thank you Diane and welcome everyone. Thank you for joining our second quarter conference call. Today Lexington announced funds from operations of $0.43 per share compared to $0.39 in the first quarter, which included a $0.04 per share impairment charge. Results were in line with our expectations and included a $0.01 per share impairment charge taken against our Jacksonville, Alabama Wal-Mart store, which is under contract for sale.

This is another very active quarter for us. We made new investments of a 123m, obtained 93m in new mortgage financing, sold two retail properties for a 11.1m contributed two properties to a newly formed joint venture and signed five new leases. Consequently, we ended the quarter with cash balances of a 121.7m.

During the third quarter, we've utilized 29m of our cash to complete 80.9m of acquisitions. Our investment volume now totals 493m and that exceeds last year's record level of 414m.

Our acquisition pipeline continues to be very active. And today it stands at about 200m of acquisitions expected to close over the balance of the year, mainly in third quarter. So we can say with some certainty that acquisition volume will exceed our 600m target for the year.

And as our cash balances are invested in income producing real estate, earnings are expected to improve over the balance of this year. Accordingly we are comfortable maintaining our guidance of funds from operations per share of $1.73 to $1.78 before the impairment charges.

During third quarter, we expect to contribute three of our assets to joint ventures. And that will keep our cash balances high and offset some of the accretion from expected greater acquisition volume. And that is certainly a factor in us keeping our guidance where it is.

During the quarter, we closed on new non-recourse mortgage financings totaling 93.1m at a weighted average interest rate of 5.7% with terms of 8 to 15 years. And so far in 2004, we've closed 197.9m of permanent financing at a fixed rate of 5.63%. So we certainly have been very active, taking advantage of the low interest rate environment that we've been in.

We continue to be very well positioned for growth, with our main challenges being investing our capital in properties that meet our underwriting criteria and secondarily working on leases expiring over the next few years. And I think we are demonstrating that we are doing a very good job in both areas.

Leasing activity continues to be pretty good, as reflected in the five leases that we extended during the quarter. And we also have active negotiations going on in other properties. Activity on both our vacancies has exceeded our expectations, but unfortunately we have nothing specific to report at this time.

As Diane mentioned today, we posted our supplemental disclosure package to our website. And we encourage you to review the supplement, especially the two pages which contain our first and second quarter transaction summaries. On those pages, we give very good detail on all of our acquisitions, financings, dispositions and new leases.

A couple of comments looking at the quarter, first the impairment charge we took relates to our Wal-Mart stores in Jacksonville, Alabama. This is a sale that's consistent with our objectives of selling smaller properties in smaller markets, particularly in our retail holdings. Also we want to note that our expense control was much better in second quarter '04, compared to first quarter. And we are maintaining our target for G&A of $12.5m.

Beyond that, in the income statement the changes all reflect the substantial growth in assets over the past year. Obviously with noticeable increases in fee income and returns from joint venture programs, those have become more significant with the passage of time.

Our balance sheet continues to be very strong, and as -- very different from a year ago. We've had a very dramatic transformation from capital markets activities in addition to our property financing and joint venture activity. At quarter end, we had 121.7m of cash, which continues to be well above normal. And we expect to run above normal cash balances for the balance of the year.

We are projecting our cash balances will decline steadily over the balance of the year, from our investing activity. And as I mentioned, we did draw down 29m of cash for investments subsequent to quarter end.

At quarter end, we had 726m of debt outstanding at an average rate of 6.61%. 98% of that was fixed rate. We've taken out of our capital structure virtually all of our exposure to floating rate debt and all of our debts are non-recourse. We've no liabilities of any significance maturing until 2008, so we have no negative refinancing implications from rising interest rates. The average interest rate on our fixed debt is 6.65%. And that's a 10 basis point improvement from first quarter and a 64 basis point improvement from a year ago.

Our balance sheet debt was 38.8% of total capitalization and that continues to be moderate for us. We are continuing to work off our debt quickly and amortizing about 98.3m of debt through 2008. This amortization gives us the ability to continuously re-leverage the balance sheet as we grow. And we note that our debt balances at maturity total 477.3m, which is only 25.5% of our present capitalization.

The positive of amortization is that future interest expense is reduced and debt service payments are also reduced. And these together help offset the impact of vacancies or favorable renewal options held by tenants.

Out of 726m, 248.7m of debt is amortized between now and maturity. And almost all of that is covered by leases in place.

In addition, we are retaining about 9.6m through dividend reinvestment plan participation. And as a result we continue to have a high degree of flexibility and capacity for growth, not just from the cash that we have on balance sheet, but from internally generated sources.

On the acquisition front, we've had a great year so far. Our volume is 493m, and we can say with some certainty that our volume will exceed our $600m target for the year. That assumes almost no activity in fourth quarter. So there is a good chance that we can substantially exceed our objectives if the opportunities are there.

It's very exciting for us. But we continue to have a lot of cash in our balance sheet, so we are not changing our FFO guidance at this time. During the quarter, unleveraged GAAP yields on our investments were 9.4%, which is consistent with the returns we made in the first quarter.

I think that's inconclusive as to the direction of Cap rates, but there does seem to be a good supply of opportunities that we are working on. And as we said before, we have a lot of acquisition capacity, and a rising Cap rate should be a positive for the Company even if our net asset value per share suffered a little bit.

During the quarter, we made seven investments and our supplemental disclosure package provides detailed acquisition information. In addition, our website also contains information about our recent acquisitions.

Of the 123.1m acquired in the second quarter, 53.2% went to joint ventures. Third quarter volume so far is 80.9m, 67.1m of which was for our own account.

Overall on the acquisition front, we are continuing to add assets that are accretive to our cash flows while upgrading the portfolio's tenant credit strength, weighted average lease term, property age and market locations. And we continue to kill and do diligence about the same percentage of acquisitions compared to the previous two years. So, even though we are growing a lot, I think we are still showing good signs of discipline on the acquisition front.

Our pipeline continues to be very active. Of the 200m or so in the pipeline, that breaks down being 35% for own account and 65% for joint ventures. And we certainly have a good chance of having volume that will exceed 700m this year.

On the asset management front, we signed five new leases during the quarter at rents which in the aggregate are about at the current level that we are getting from those assets right now. We do believe the leasing environment is improving. And as a result, we believe that we will have more extensions to announce over the balance of the year.

Unfortunately nothing new to report on our main challenges in Phoenix, or Hebron, Kentucky. But as I have said, activity has been good. We've responded to multiple requests for proposals on both buildings. And activity, to be honest, has been a little bit better than we expected.

Our three other main near-term challenges that we've talked about before are in Milpitas, California; another building in Phoenix, Arizona that we leased to Bull Information Systems; and our property in Marlboro, Massachusetts.

For Milpitas, we will be pursuing a multi-tenant strategy. This is a building that is much easier to lease broken up. And that market is starting to see better activity in the 10,000 to 25,000 square foot user range.

We are in very promising negotiations with Bull for 50% of the building and have a very good leasing strategy for the balance. The Marlboro, Massachusetts property is under contract for sale and we expect that to close in September at this time. And in addition, we have active discussions with Hartford Fire Insurance Company, which is a December expiration next year and Avnet, which is a 2007 expiration. Both of those tenants are very significant to us.

Everything taken together, our near term roll over exposure is being steadily mitigated. And we note that our rollovers between now and the end of 2007 have been reduced to 21% of revenue from 34% a year ago.

Nevertheless, we are prepared to lose more occupancy than we gain over the next two years in our core portfolio. And this includes expected vacancies in 2005 at our properties in Milford, Connecticut; Mansfield, Ohio; and one in Marshall, Michigan. And these three properties together generate about 1.2m of rent.

On the disposition side, we sold a couple of properties at nice gains during the quarter, which is consistent with our long-term repositioning plans. I wouldn't expect us to see heavy activity over the balance of the year in view of our strong liquidity position. But as we do prune the portfolio, we will continue our focus on office and industrial properties that are easy to multi-tenant and in deeper markets than our core portfolio presently is.

In summary, Lexington continues to be in a very good position, notwithstanding the pressure on funds from operations created by operating the Company with significant cash balances. Nevertheless, the prognosis for sequential quarterly growth in funds from operations per share is quite good going forward as our cash is deployed into income producing real estate.

In the last year, we have made some important moves to position the Company to operate in a higher interest rate environment. By locking in long-term fixed rate debt, we have also paid down virtually all of our floating rate debt. We also increased our financial flexibility so that we can execute a growth-oriented business plan for several years without needing to raise equity capital.

So, for those of you who are concerned about us selling more stock, you can rest easy. There is nothing on the horizon that would cause us to have a need for capital. In the last year, we have also dramatically improved our organization, particularly in the asset management area. And as I have said that before, this was an absolute necessity as we transitioned from being a REIT that acts like a corporate bond, i.e. with little rollover, to one that is more sensitive to the real estate market. We have also increased our acquisitions infrastructure substantially, so that we have the capability of much more growth.

On the guidance front, as I mentioned, we are maintaining our guidance for the year of $1.73 to $1.78 per share of FFO before the impairment charges, and are confident that growth in 2005 can be in 8% to 10% range. Based on our pipeline, I anticipate raising the low end of our guidance next quarter, but will not do so until our third quarter acquisitions are closed.

We're quite hopeful that the fourth quarter is busy. It usually is. And that would have a very positive impact on the year, but most particularly on earnings visibility in 2005. That ends my opening remarks. Operator, we will turn it over to the question and answer session.

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 one on your pushbutton phone. If you would like to decline from the polling process, press the star followed by the two. You will hear a three-tone prompt acknowledging your selection. Your questions will be pulled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment please for the first question. And our first question is from Steve Swett with Wachovia Securities. Please go ahead with your question.

Hey, Wil, how are you?

Fine. Thanks.

A couple of questions. First, on the portfolio, these renewals or vacancies discussion, you mentioned three properties that I hadn't heard you talk about before -- the Milford, Mansfield, and Marshal properties. Did you mention that those were the rollovers that were -- that are coming and you are prepared to have vacancies? Or now you expect vacancies in those properties?

No, I would say that in the last few months those have gone from, you know, situations where we might have hoped to keep the tenant to ones where now we are forecasting a specific vacancy.

In Marshall, for example, we have Tenneco Automotive in two buildings. We kept them in the much larger building with a five-year extension completed in the quarter, the little 50,000 square foot building. They have sublet. And you know, we have had some discussions with the tenant that is in there on a sublet basis, but can't with any certainty say that they are going to stay.

The little A-Copy (ph) building in Milford, Connecticut again has been, you know, one where there has been off and on discussions with the tenants for the last year. But at this point, we think they will be out.

And likewise, we have had off and on discussions with Gerstenschlager (ph) in the Mansfield building for the last six or nine months. And they have an occupancy opportunity in that market that is on such cheap terms that we don't want to compete for it. So we are moving now onto one that we expect to have empty when it comes off lease next year.

And did you say that was how much in total rent between all three?

Between – it was 1.2m.

And those were 2005?

Yes.

A- Copy is I think exactly year-end this year, December 31.

Okay, the other ones are some time in 2005?

Yes.

Okay. My next question on the fees, Pat, could you just break down the fees between the management portion and the acquisition financing portion?

Sure, for the three months '04, the asset management fees for the recurring fees were 308,000, and the acquisition fees were 469,000. And for the six months, the asset management fees were 563 and the acquisition fees were 1164.

Okay, and at mid-year or even I guess through this acquisition completed in July, where do you stand in total investment for each of the three ventures now?

Aquaport 1 (ph) is closed. Lyon is almost fully invested. The joint venture where -- we just formed is probably a third of the way through.

And Utah has about 60m of assets in it, out of a projected capacity of about 140m. I think the Lyon acquisition volume is about $215m. There's about a 100m of opportunities that we are working on that are in the pipe for them, that would involve both of us committing more equity capital to the venture, which would be a positive for us over the balance of the year.

Would you do that as an expansion of the existing venture? Or would that be a new venture?

It would be an expansion of the existing.

Okay and then my last question, just on your pipeline. You mentioned 200m I you think you closed sometime in Q3. What's the deal sheet look like beyond that?

It looks pretty good, it being almost August. What you usually see at this time of the year is not a whole lot of new transaction activity coming into the shop, which would probably be a fourth quarter close by the time it got one in due diligence completed, etc. But I can tell you that the Tuesday after Labor Day, things change a lot. And that's generally when you start to get a pretty good picture about what could happen in fourth quarter.

So, right now like I said, of the 200m, most of it is expected to close in Q3. And we're hopeful that - the fourth quarter was very good last year, sometimes you run into sellers who have a desire to complete transactions by year-end. We benefited from that last year. And if it happens again, we could have a really fourth quarter, which would change things.

Okay thanks.

Thank you. Our next question comes from Joshua Bederman with JP Morgan, please go ahead.

Hi guys. I was just wondering if you could add a little more color on the vacancies you were talking about earlier. You said there is little more activity than you thought. Any sense as to when we could be hearing an announcement about that or sort of anything like that?

Every asset is different, Josh. In both cases, in the former Fidelity building in Hebron and the former Bank One facility in Phoenix, those are assets that really are better re-tenanted with a single tenant. And so it is very hard to say, based on absorption, I think that will have at lease in place in six months.

So, we'd much rather wait until we have something absolutely specific to say rather than hint at being able to produce something in a time frame then -- that we couldn't then live up to.

I can say that two RFPs that we have responded to for Hebron would both be occupancy later this year, which would be fantastic. And on the other hand, the most promising RFP in Phoenix which really would be terrific, would involve an investment grade financial institution and a significant redevelopment of that site and a 15-year lease at the end, but a lot of work in the meantime without any cash flow. So, we're working very actively on it, but just rather wait until we have some specifics to talk about.

Okay great. And then last thing, you're seeing on a lot of cash. You said you were going to be seeing a lot of cash for the rest of the year -- anything that could pick up sort of like interest income side in which we see anything there? And can you talk a little bit about the rationale?

There are some promising acquisition opportunities that we're working on that are kind of outside of the pipeline I specified. But again, nothing that I'm willing to bake into our numbers or guidance right now.

And are those more sort of similar one offs? I mean, is there anything else we should be looking for, like -- are you looking at the portfolios or something?

There is a significant portfolio on the market right now. But beyond that, I would characterize it more as one offs.

Okay great, thanks.

Thank you our next question comes from Jim Crop (ph) with Realty Enterprise Fund. Please go ahead.

Hi Wil. Can you give us a little more color on the lease extensions, during the quarter? There were 5 of them. Were they blend and extend? Or just from the term date, was there much of a delta in rents?

I think that the aggregate delta in rents for all five was about $200,000. By order of magnitude -- let's see, I have my notes here. I think that the extension rates are about 3.2m per annum and that's within $200,000 of where they are right now. So just looking at it, for the most part they are just extensions off of the base term without any real blend and extend worked in.

Okay thank you. Second question, did I understand correctly that three of the properties that LXP acquired are going into joint ventures? And is there a delay because of an investment committee process or the formation? Or would it be difficult for you to buy them first and put them into JVs?

The answer is that it takes a while to get the mortgage lender to approve in some cases. That's certainly the case with one of the properties. The other is a property that we've just owned for a while, and we are not -- we will probably contribute it in mid-August at this point. And it's a fairly significant asset for us. And as we've discussed, we would rather -- anytime we can make smaller and smaller equity investments in real estate, we'd like to do that. And this would involve one of our assets where we have a pretty significant portion of our capital invested.

Okay thank you.

Thank you, our next question comes from Steve Tabb (ph) with (technical difficulty), please go ahead.

When putting out these announcements of these acquisitions, you put in the interest rates but you don't put in the constant payment rate with the amortization. What has been the general difference percentage-wise between what you are getting in rent and what you are paying on your mortgages?

It varies; we do have that disclosed in the supplemental disclosure package, which breaks down our debt service. Obviously, every transaction is different. But for the most part going in cash, cash cap rates forgetting about GAAP, exceed our constants on our debt by about 150 to 200 basis points.

And on -- you have non-operating income for the quarter of 649 versus 230,000 of prior year. What does that consist of?

The main delta in that is that the investment we made in Carrollton, Texas for the Carlson Restaurants. That's a mortgage note now, that's convertible into the property at a later date. The main delta in that is the interest we earned on that note. It was about 226,000.

In addition, the properties that we contributed to are joint ventures, to the extent we had holding costs. We got reimbursed for our holding costs. So instead of offsetting them against the expense, we had to recognize them as revenue and recognize the expense. That was about another 200,000. That's the majority of the delta.

I see. So they are all hardball items, is that what you are saying?

For the most part Steve, on a recurring basis it's just going to be bank interest. But in this period and for positive third quarter, as we promote the third quarter, we are going to have note interest on the Carlson note. But that's really - other than that it's going to be bank interest.

Now what is (sic) the intangible assets there? You went from 14.7 to 27, million 7. What do they consist of?

They consist of -- as when you buy a piece of property now that is subject to a lease, GAAP requires you to allocate part of the cost to the lease, to the customer relationship and the cost that you did not incur by putting a tenant in there -- so origination costs.

So we do an as of dark calculation and compare that to what we actually paid to buy the property. And that's what gets allocated to intangibles. Two years ago, Steve, that all would have been up in real estate. It's just a GAAP requirement now.

I see. So you are amortizing it over the length of a lease?

– Life of the lease. So it gets amortized over a shorter period. Exactly right.

Okay and now you had income taxes, provision for income taxes this year and none last year. How does that arise?

That arises because when we do hold property that we are going to contribute to joint ventures we have to up the cash premises. We have to hold them in a taxable resubsidiary which is a C-Corp (ph) and which is subject to taxes. So we have to provide a tax provision for the earnings that we have prior to contribution. That was the holding cost that I talked about that's up in other income. Part of that is the reimbursement of those expenses.

Well, thank you very much.

Thanks Steve.

Thank you. Ladies and gentlemen if you have any additional questions please press the star followed by the one at this time.

As a reminder, if you are using speaker equipment you will need to lift the handset before pressing the numbers. One moment please for the next question. Management, there are no further questions at this time. Please continue with any closing any statements.

Once again we would just like to say thanks for tuning in to our conference call today, and we'll look forward to communicating our results at the end of next quarter. If in the meantime, anybody has any questions or wants to talk us about anything, please don't hesitate to call. Thank you.

Thank you sir. Ladies and gentlemen, this concludes the Lexington second quarter 2004 earnings conference call. If you would like to listen to the replay of today's of the conference call please dial 303-590-3000 or 800-405-2236 with access code 11003326#. Once again if you would like to listen to the replay of today's of the conference call please dial 303-590-3000 or 800-405-2236 with access code 11003326#. You may now disconnect and thank you for using ACP teleconferencing.