LXP Industrial Trust (LXP) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you four your patience and please continue to stand by. The Lexington third quarter 2004 earnings conference call will begin momentarily. Good afternoon, ladies and gentlemen. And welcome to the Lexington third 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 0. As a reminder, this conference is being recorded today, Thursday, October 28th of 2004. I would now like to turn the conference over to Diane Hettwer with Financial Relations Board. Please go ahead, ma'am.

Thank you. Good afternoon, everyone. And thanks for joining us on Lexington Corporate Properties Trust third quarter earnings call. The press release and supplemental packet of information were distributed this morning. If anyone did not receive a company, they're available on the company's website at www.lxp.com. Additionally, we are hosting a live webcast for today's call, which can also be accessed on the Company's website.

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 statement are based on reasonable assumptions, it can give no assurance that its expectations will be obtained. 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 filing with the SEC.

Having said that, I'd like to turn the call over to management. With us today we have Will Eglin, Chief Executive Officer and President; Pat Carroll, Chief Financial Officer; Paul Wood, Chief Accounting Officer; and Joe Bonzontry (ph), General Counsel. With that I'll turn the call over to Will. Will, you can go ahead.

Thanks, Diane and welcome to everyone. Thank you for joining our third quarter conference call. Today Lexington announced funds from operations of 44 cents per spare compared to 43 cents per share in the previous quarter and 45 per share in the third quarter last year. Results in the quarter included 2 cents per share of unusual expenses. First a 1 cent impairment charge relating primarily to the sale of our properties in Marlborough, Massachusetts, and Milford, Connecticut. And second, a 1 cent per share expense relating to the departure of William Cinnamond, formerly Senior Vice-President of Asset Management.

Absent those expense items, funds from operations would have been 46 cents per share, which we believe it good performance relative to third quarter last year, in view of losing than a little more than 1 cent of quarterly revenue due to our two vacancies and at a time when we've seen our cash position increase by $94 million over the last 12 months. So, net, net, we believe we have an earnings improvement, with a net increase in cash on our balance sheet of 94 million.

The third quarter was another very active quarter for us on the acquisition side. We made new investments of 257.5 million, obtained 79.2 million in new mortgage financing, sold two properties for 13.7 million, and contributed 2 properties to an existing joint venture, and recovered the costs associated with holding those assets in our taxable subsidiary. In addition we signed 3 new leases and, shortly after the quarter ended, we expanded our joint venture with the Lion Fund. So far this quarter, we've brought 1 property, which brings our investment volume for the year to 673 million.

Our acquisition pipeline continues to be very active and we can expect, with some certainty, the total volume for the year will exceed $800 million. As our cash balances are invested in income-producing real estate during the fourth quarter, we believe that funds from operations in fourth quarter will be in the range of 45 to 47 cents per share. And, as a result, we are raising the bottom end of our guidance range from $1.73 to $1.76 per share of funds from operations before the 5 cents of property impairment charges. We're leaving the top end of our guidance unchanged to the $1.78 per share, again before the impact of the property impairment charges. And that's because of additional cash generated by joint venture contributions in the third quarter, combined with greater G&A than budgeted, principally for the reason I cited in my opening remarks.

During the quarter we closed on new nonrecourse financings totaling 79.2 million at a weighted averaged fixed rate of 5.21% and with maturities of 5 to 15 year. So far, in 2004, we have closed on 263.7 million of new permanent financing at a fixed rate of 5.51%. Today we posted our supplement disclosure package to our website and we encourage you to review the supplemental, especially the 3 pages containing our transaction summaries for the first 3 quarters, which provide detail on acquisitions, financings, dispositions, and leasing activity.

Looking at the quarter, my first comment relates to the impairment charge. About half of that was from the Marlborough, Massachusetts, sale which we discussed on previous conference calls. The other major portion was from selling our Milford, Connecticut, property, which would have become vacant in January of 2005. The lower sales price in Marlborough reflected the time that it took to close the sale and much of the building value is in the lease, so we had a modest purchase price adjustment.

Our G&A for the quarter was 3.9 million, which included the severance expense and about $250,000 of Sarbannes Oxley compliance costs associated with implementing testing and internal controls. Our G&A has ramped up in recent years due to our growth and our desire to strengthen our organization, especially in the asset management area. Nevertheless, at this point, we would expect our asset growth going forward to far exceed our growth in G&A.

Our interest coverage was 2.8 times for quarter which we think is a strong number in view of the substantial cash balances we continue to have. And our fee income totalled $1.4 million in the quarter compared to $184,000 in third quarter last year, reflecting strong asset growth and acquisition activity in our 3 joint venture programs.

Looking at the balance sheet, our balance sheet continues to be in very good shape. Our cash position remains strong even after investing $137 million into reel estate investments this year. And we continue to have balance sheet strength as a result of cash that's come into the Company from property sales and loan proceeds and also, from joint venture contributions. Our cash balance is 106 million and we expect to draw down quite a bit of that to invest in property in the fourth quarter. But unless our acquisition volume total is more than a billion dollars for the year, we still expect to have fairly significant cash balances at year end, above what we would expect to have normally.

At quarter end we had 725.8 million of debt outstanding at an average rate of 6.61%. 98% of our debt was fixed rate at quarter end and that's a 65 basis point improvement on our fixed rate financing costs compared to last year at this time. The Company has very little exposure to floating rate debt and all of our debts are nonrecourse. We have no liabilities of any significance maturing until 2008.

Overall, our balance sheet debt was 36.8% of total capitalization at quarter end and that continues to be quite low for us. We're also continuing to work off our debt very quickly and, just from our regularly scheduled payments, we'll amortize about 97 million of debt through 2008. In addition we are retaining about $9.7 million through our dividend reinvestment plan so we are, certainly, generating a fairly significant amount of internal capital to fund our growth plans. We believe that we still have a high degree of financial flexibility and capacity for growth and we have no need for capital in order to execute our projected growth plans next year. Our hundred million dollar bank line is fully available and we also have a large pool of assets that are unencumbered by mortgage debt.

On the acquisitions side, we've had a great year so far. Our volume through September was 641 million at a GAAP cap rate on average of 8.96%. Cap rates were higher on properties acquired in quarter 1 and quarter 2 and that's primarily because we brought properties that had in-place debt, where the interest rate was substantially higher than current market rates. Of our volume in quarter 3, of 257.5 million, 161 million was acquired into joint ventures and now we expect that our 2004 volume will likely exceed 800 million.

We have today on the deal sheet over 2.1 billion of investment opportunities. Going-in cap rates are generally between 7 and 8% and GAAP cap rates are between 8 and 9%. And really, the market hasn't changed much during the course of the year and there continues to be a very good supply of investment opportunities, but the market continues to be fairly competitive.

The one property that we bought in quarter 4 so far was a $31.8 million acquisition made by a joint venture of a property in Sacramento leased to Progressive Insurance. And what we think are real transactions in the quarter for pipeline about 75% today are allocated to joint ventures.

On the leasing front we signed 3 new leases during the quarter and we expect to have signed 3 leases in quarter 4 on buildings that have rollover in 2005. We have nothing knew to report on our vacancies in Phoenix, Arizona and Hebron, Kentucky, which now represent less than 1% of the total square footage in our portfolio. Our occupancy forecast for 2005 in the core portfolio remains unchanged and, as we've said on previous calls, in 2005 we expect to have vacancies in Marshall, Michigan, which is a 53,000 square foot warehouse; Milpitas, California, which is 100,000 square feet of office and R&D space; in Mansfield, Ohio, which is 269,000 square feet of warehouse. Those 3 properties represent 3.4 million of annual revenue, the bulk of which is from the Milpitas asset, which rolls off lease in fourth quarter next year.

On the other properties, we believe that Bull Information Systems will stay in 50% of their building in Phoenix and that SBC Communications and Hartford will extend their leases, although at reduced rates. So that's it on our 6 leases expiring in 2005.

We're not forecasting that any of the current and anticipated vacancies will be revenue generating in 2005. So our 2005 FFO guidance assumes no upside from occupancy gains in the core portfolio and we are working diligently on our vacancies, so any leasing activity that comes on line next year could potentially lead to better FFO that we're giving guidance to.

If we finish what we're working on in the leasing front this year, lease extensions will total 12 and, taken together, our near term lease rollover exposure is being mitigated. Lease revenue, subject to leases expiring through 2007, has been reduced to 18.5% of our total revenue, compared to 30.5% of our total revenue at the same time last year. We believe that this is good progress but nevertheless, the leasing environment remains very challenging.

Overall credit quality has improved during the year with 48% of trailing 9 months revenue from investment grade rated tenants and, more importantly, 51.5% of our third quarter revenue was derived from investment grade rated tenants. Nevertheless, VarTec Telecom remains at the top of our watch list. This company has seen its dial around long distance business suffer this year. Revenues have declined from 1.3 billion to around 900 million and the company's lease obligation to us is very large, in relation to its cash flow. The company is in the process of restructuring and our property is presently being shown to other potential users. And we will be monitoring the situation closely and working with VarTec to find alternative users for the building. VarTec Is our 10th largest tenant and we generate approximately 3.5 million from the property, which is about 6 cents a share.

Before we go to Q&A, I'd just wrap things up in summary by saying that we believe we are in a very, very good position to execute our growth plan for the Company. And we believe that the pressure on FFO that's being created by running the Company with significant cash balances is easing and will ease further in the fourth quarter. We think we've made really good progress on the leasing front. We expect more leasing activity in quarter 4. And with our joint venture strategy and selective dispositions and the use of leverage, we've continued to maintain very high financial flexibility so that we can execute a growth plan for the Company at least through next year and probably beyond, without needing to raise any equity capital. So for those of you who are concerned about Lexington selling more stock, you can continue to rest easy. There's nothing on the horizon that would cause us to have a need for any equity capital at this time.

Our guidance of 8 to 10% growth in FFO per share next year assumes 400 million of acquisition activity with 60 to 70% in joint ventures and, of course, the timely collection of rents from our tenants. With no upside built in for leasing, our growth will continue to be dependent on acquisitions, but our pipeline is very, very active. And hopefully we'll be able to exceed our volume targets for the year. And obviously, if we another year of significant volume next year, like we're having this year, we would expect to increase our guidance, if and when we see that acquisition volume will exceed our current expectation.

With that operator, will turn it over to you for 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 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 tone prompt acknowledging your selection. If you are using speaker phone equipment , you will need to lift the hand set before pressing the numbers. One moment please for the first question.

Once again if you would like to ask a question, please press the star followed by the 1 at this time. Our first question is from Steve Tabbs (ph) from (indiscernible) Please go ahead.

You know, you go through these lease figures, you know, very fast and I can't digest them all. It seems that -- like from what I understand, you have these properties in Kentucky and Phoenix that represent 1% of the revenues, the rental income represents of revenues.

Well, we were collecting from the 2 assets together about 2.9 million of annual rental revenue before they went vacant. And they're both nonrevenue generating right now. That's where the 717,000 of quarterly revenue decline comes from.

Well, so that's over 1% as I gather it, then. I mean, the rental income.

Well, yeah. By revenue, yes, because they're both office buildings that rent for higher rents per square foot. But in terms of total square footage in the portfolio, it would be less than 1%.

Yeah. But I'm interested in overall and then -- so if it's 2.9 million and your rental should be about 140 million for the year, 136 million. That would represent you know about 2 1/4%.

But remember, Steven, the $35 million of rental income -- 35.7 million of rental income in the third quarter, there's no rent in there from Bank One and Fidelity because they're both vacant. Bank One is not in the numbers, at all, for the 9 months. Because they went vacant in November of last year and Fidelity went vacant in April of this year, so in our $101 million -- $101.6 million of rental income for the 9 months, Fidelity is only $322,000 of it.

Uh-huh.

There's been no impact on -- the 2004 numbers don't reflect hardly any revenue from our 2 vacancies. In total, it's only 322. Last year's numbers though, both properties were in there for the full period, so Will's comment of about 717,000 rental stream is a difference of what was in revenue last year compared to revenue this year and there is no revenue this year for those properties in the quarter.

Is -- the Phoenix property you have no more of (indiscernible), right?

That's correct.

And the Fidelity property, what is it the situation there with them? What the net investment of the Company in the Fidelity property?

The mortgage on the building is about $5.3 million.

And so what is carried on the books for?

I don't have the real estate -- hold on a second, Steve.

And then I'm interested in the same figures for the -- you have a Marshall, Michigan and Milpitas, California and the Mansfield -- where is Mansfield?

Ohio.

Ohio is that?

Yeah. I -- go to the 10K and look that basis.

Steve, we have to pull the 10K out because it's -- the basis is disclosed in schedule 3 of the 10K. Property by property. So, as of December of last year, Kentucky --

Let me just find it. We've got to go through 104 properties here. Hebron, Kentucky.

Here it is. Hebron, Kentucky had a basis -- a capitalized asset cost of about $7 million.

Uh-huh. And the mortgage was 5.3?

The mortgage last year was 5.3 -- exactly right.

And what about these other 3 properties that you said now have developed into vacancies?

Marshall, Michigan -- the basis is about $900,000 -- not even $500,000.

Uh-huh.

No mortgage. Milpitas is about $20 million and that's the one that has the variable rate mortgage outstanding of September 30th that's due in 2005. And Mansfield --

Wait. Wait a minute that is mortgage in Milpitas - is that nonrecourse or that?

All of ours are nonrecourse.

How much is that mortgage in Milpitas?

As of June, excuse me, as of September 30th, it was 14.1 million.

And where is that Mansfield, Ohio?

No Mansfield has no debt. Milpitas, California, the mortgage is 14.1 million.

Yeah. I got that. Now, Mansfield, what state is that in?

Ohio.

And how much is that on the books for?

Mansfield's on the books for about $4 million.

And it has no mortgage?

No. That's correct.

Now, looking at these properties, is it realistic to think that you're going to rent them at -- you're going to have to come down in the rent probably, right?

Well, especially in California, we've been very candid about having above market rent exposure in Milpitas.

Uh-huh. Is the likelihood that you will rent them and then be able to exceed the fixed mortgage obligation?

That remains to be seen on on Milpitas. I mean, you know, the loan balance there is $140 a foot in a market where market rents are probably 8. So we're not -- we're working hard to find a new tenant for the building. We still have, you know, roughly a year to go before the building comes off lease. But that market continues to be very tough. And if you look at our debts, we have one floating rate mortgage and, it's in Milpitas. We've left it outstanding with that in mind. We wouldn't -- we wouldn't commit more capital to that property right now just to take the mortgage out.

And the Hebron, that's vacant now -- that's Fidelity, right?

Correct.

Uh-huh. Well, I mean, I guess it's -- what you said you renewed 3 leases -- did you lease any property that was vacant?

No.

Uh-huh.

No. There were extensions with existing tenants.

Uh-huh. So the only 2 properties you have vacant at the moment are the Kentucky and Phoenix?

Correct.

Okay. Now, the -- you have on your supplement information that you -- dispositions and it shows that, on page 3, that the sales price was 13.6 -- that was in Marlborough and Milford. And the book value was 16.2.

That's right. That was impairment charges that we've taken year to date. It's been reflected on the P&L as an impairment charge.

Yea -- earlier in the year, we took a substantial impairment charge on Marlborough already.

Impairment charges -- where are they under?

They're on the income statement, if you go to discontinued operations net of minority interests --

Oh, yeah. Uh-huh. Charge. Impairment charge was only -- oh, that's the 277.5.

And it's net of minority interest.

Uh-huh. So you didn't take it as a loss on sale.

No. GAAP makes you record it as an impairment charge a second before the sale occurs so you'll never have a loss on sale anymore. You'll have impairment charges.

I guess I'm out of touch now. Now, the tenant reimbursements on the income -- you know, on the gross income of the Company --

Uh-huh.

What do those represent again?

We have, of the 143 leases in the portfolio, there's about 26 leases in which we provide really the management of the property. So the tenant pays us operating costs and we make the payments on their behalf. Since it runs through our accounting system and it's covered in the lease, GAAP requires us to show it as a tenant reimbursement and as a property operating expense. It's just a P&L gross-up. It has no impact on our bottom line. We're not exposed on those properties, to the extent of the tenant reimbursements. If you look at tenant reimbursements and compare it to property operating, that's the net expense that's Lexington's exposure.

Uh-huh. Yeah, I see. Now, I don't know whether you can comment on why this executive left and you paid him (inaudible).

Chip was subject to an employment agreement with us and he made valuable contributions to us over the years that he was here. We hired John Vander Zwaag to be senior to him last year as Executive VP of Portfolio Management and so we had some redundancy in the senior management ranks. We felt like the amount that we paid was a fair settlement -- fair and amicable settlement of the contract and some restricted stock vesting.

Now. The lease that's are coming up in the next 15 months -- these 3 leases that you mentioned -- in Marshall, Michigan, Milpitas, and Mansfield -- are there any other leases coming up between now and the end of '05.

Now, as I said, we have 6 leases expiring in '05.

And how much do they -- including these 3, right?

Correct.

And how much was the total income? Probably three -- yeah. Total of 7.3 million, 3.4 of which comes from the buildings that, you know, we will -- believe will be fully vacant. Uh-huh.

You know the balance comes from the others. Obviously.

The 3.4 million was that from -- that was from all 3, wasn't it?

Yes.

So you said the total is 7.3?

Yes.

And you have a total of 6, so the other 3 are pretty substantial too, right?

Yes they are. The most significant one is our lease with Hartford Fire Insurance Company that expires on last day of the year next year.

Uh-huh. Now, -- now, here's what I'm -- maybe you can give me some color. You're running into a situation where you have more lease expirations and more important vacancies probably coming up. And yet you plan -- you expect that your cash flow is going to increase by 8 to 10%. Could you give me the dynamics of how this is achieved?

Well, it's funds from operations that we're talking about 8 to 10% growth and the biggest factor will be drawing down cash, which is earning virtually nothing, and investing that in income producing real estate. And then also getting a full year of funds from operations out of investments made during this year.

Uh-huh. I see. All right. Well, thank you very much.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star followed by the 1 at this time. Our next question is from Anthony Paolone with J.P. Morgan. Please go ahead.

Hi guys this is actually Joe (indiscernible) speaking for Tony. A quick question. With respect to cap rates over the past couple of quarters, can you talk generally about, I guess where cap rates are now with respect to the kind of deals you were seeing a few quarters ago and how that's trending with respect to rates and stuff?

I would say, for the most part, it's been, you know, fairly flat for the year, certainly within a 50 basis point band. You know, when rates rose earlier in the year, we thought that if they stayed high that cap rates would probably trend higher over the course of the year. With bond yields having fallen back down to fairly low levels, we didn't really see that.

So -- you know, GAAP cap rates on what we bought in third quarter were lower than quarters 1 and 2, but it's mostly a function of having bought properties in quarters 1 and 2 that were encumbered by debt that was fairly significantly higher than where we could finance today.

Okay. And the last question I had was, with respect to the 6 lease expirations in '05, can you give a sense of what the quarterly breakdown is for those?

Well, the big one is last day of the year -- that's Hartford Fire. Bull is October next year. That's the second biggest one. And then -- yeah, Milpitas is December.

That's all towards the end of the year. We'll have -- for the most part, we'll have the revenue in for the entire year.

Yeah. It won't have that much --

It won't have an effect in '05.

Okay. Thank you.

Thank you. If there are any further questions, please press the star, followed by the 1 at this time. Our next question is from Paul Wifeges (ph) with Advest. Please go ahead.

Hi. Thank you. Could you, just one more time, review the large tenant that's in some financial difficulty. I didn't quite get the name.

VarTec. It's a private telecom company that's been a market leader in the dial around services -- 10/10 services. And it's business has been, you know, hit by the proliferation of cell phones. And so, you know, that's certainly a situation where we have a tenant that's had its operating results, you know, certainly from a revenue standpoint, decline fairly significantly this year.

Okay. Thank you.

Thank you. Gentlemen, we have no additional questions at this time.

Well, thank you all for listening in on the call today and we'll look forward to communicating our results to you next quarter. Thank you.

Thank you. This concludes the Lexington third quarter 2004 earnings 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 11009845. Once again we thank you for your participation. You may now disconnect.