LXP Industrial Trust (LXP) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Lexington Corporate Property Trust Fourth Quarter and Yearend Earnings Conference Call.

[Operator Instructions].

As a reminder, this conference is being recorded today, Tuesday, March the 1st of 2005. I would now like to turn the conference over to Diane Hettwer with the Financial Relations Board. Please go ahead, ma'am.

Thank you. Good afternoon, everyone, and thanks for joining us for the Lexington Corporate Properties Trust fourth quarter and yearend earnings call. The press release and supplemental packet of information were distributed this morning. If anyone did not receive a copy, they are available at the Company's website at www.lxp.com. Additionally, we are hosting a live webcast for today's call, which can also be accessed at 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 would like to turn the call over to management, with us today, we have Wil Eglin, Chief Executive Officer; and Robert Roskind, Chairman of the Board; Dick Rouse, Vice Chairman; and Pat Carroll, Chief Financial Officer.

With that, I'll turn the call over to Wil. Wil, you can go ahead.

Thanks, Diane and welcome, everyone. Thanks to all of you for joining our fourth quarter conference call. Today Lexington announced funds from operations of $0.34 a share compared to $0.45 per share in the fourth quarter last year.

Results in the quarter included, $0.12 per share of unusual expenses; first, a $0.07 impairment charge relating to the agreement to sell our vacant property in Phoenix, Arizona; and second, a $0.05 per share expense relating to the bankruptcy of VarTec Telecom and subsequent rejection of the lease on our property in Dallas, Texas that formerly served as VarTec's headquarters.

Absent those expense items, FFO would have been $0.46 per share, which was the midpoint of our previous guidance. We think that is very good performance relative to fourth quarter last year in view of losing $0.02 of quarterly FFO due to our 2 vacancies, and when we saw our cash position increased by $130 million over the last 12 months.

After adding back the usual items mentioned above, FFO per share would have been $1.79 for the year. Overall, we had an earnings improvement compared to fourth quarter last year with a net increase in cash of 130 million, primarily as a result of the December convertible preferred offering.

Fourth quarter was another very active quarter for us. We made investments of 290.8 million, obtained 106.2 million in new mortgage financing, sold 2 retail properties for 5.7 million, signed one new lease, expanded our joint venture with the state of Utah Retirement System, and raised the total of 155 million in the convertible preferred share offering, including the Greenshoe exercise in January 2005.

Investment volume for the year totaled 935 million, which was excellent, although, acquisition activity lagged capital raising activities with a dilutive effect on funds from preparations for the year.

Today, we posted our supplemental disclosure package to our website, and we encourage you to review the supplemental, especially the 4 pages containing our transaction summaries for all 4 quarters which provide detail on acquisitions, financings, dispositions and leasing activities. We also added new disclosure in the supplemental on which markets we generate revenue from, according to metropolitan statistical areas.

Turning now to look at our quarterly results; we mentioned the two charges, first from the VarTec bankruptcy, which we disclosed in November, and second from the pending sale of the property formerly leased to Bank One, which was put under contract and disclosed in January.

The VarTec bankruptcy was a disappointment to us, but they did pay rent through the end of the year. The Phoenix sale we view very positively toward relative to continuing to carry that asset vacant at a cost of 5 to $600,000 a year, and also making a substantial investment to redevelop that property.

Our G&A for the quarter was 3.9 million, which is about the same as third quarter last year, and certainly has been influenced by Sarbanes-Oxley costs. Our fee income totaled 1.7 million, so net G&A paid by Lexington shareholders was only 2.2 million for the quarter and that is a key number to focus on. In the quarter, fee income offset approximately 43% of our general and administrative expenses, and in a perfect world, some day we will grow our joint venture and advisory business, so that number would be 100%.

Our interest coverage was 2.9 times for the quarter, which we view as the strong number due to the substantial cash on balance sheet. And our convertible perpetual preferred offering, which raised 155 million, had a mildly dilutive impact to the quarterly results, and the dilutive effect will be gone upon closing of the portfolio acquisition that we announced yesterday. We did view that as a very positive opportunistic capital raise for us with the preferred stock carrying a coupon of 6.5% and a conversion price of $26.82 per share.

Turning now to look at the balance sheet. We continue to believe that our balance sheet remains in very good shape. Our cash position was very strong at year end, even after a record year of acquisition activity. Cash balances were 147 million at year end, all of which is expected to be invested in the portfolio acquisition.

At quarter end, we had 765.9 million of debt outstanding at a weighted average rate of 6.56%, 98% of which was fixed rate. And over the last 12 months we saw a 50 basis point improvement in our fixed-rate financing costs. The company has virtually no exposure to floating rate debt at this time, and all of our debts are non-recourse, and we have no liabilities of any significance maturing until 2008.

Our balance sheet debt at year end was about 35% of total market capitalization. That is quite low for us. And it is more likely going forward that we will run the company with 45 to 50% leverage, which is consistent with our historical average and much more appropriate for asset type than where leverage has been in recent years.

In addition, we are continuing to work off our debt quickly. We are amortizing approximately 132.7 million of debt through the year 2009, and 282 million over time, most of which is covered by leases that are presently in place. Balloon payments at maturity totaled just $484.3 million, which is only 22% of our present market capitalization.

In addition, we are retaining about 14.8 million per year through our dividend reinvestment plan and our $100 million credit facility is fully available. We continue to have financial flexibility and are generating close to 40 million annually of capital through debt amortization and participation in dividend reinvestment plan. That internally generated capital gives us the ability to add a 100 to 400 million of acquisitions depending on the mix of own account and joint venture investments, without materially increasing our balance sheet leverage.

On the acquisition front, we had a great year last year. Our volume was 935 million at a GAAP cap rate of 8.9%. Of our fourth quarter volume of 290.8 million, 212 million was in joint ventures. And yesterday, we announced a definitive agreement to acquire 27 properties for $786 million at a going in cap rate of about 7.75% before the adjustment for straight-line rents, and that equates to about 8% on a GAAP basis.

The transaction is great for us, due to the quality of the assets we are acquiring, the substantial earnings accretion and our enhanced portfolio diversification. Most of the revenue from this portfolio comes from investment grade rated tenants and assets that are located in major known markets. 24 of the 27 properties are office buildings and the weighted average lease term on the whole portfolio is about seven years, which matches up quite well with our current weighted average lease term.

Based on the accretive nature of the transaction, we raised our estimates by $0.10 to a range of $1.95 to $2 per share funds from operations this year. This will mean that we are fully invested from a cash standpoint, so we will no longer have any drag on our earnings due to the cash balances that we were carrying in fourth quarter.

We are financing the transaction by borrowing 558.3 million of mortgage financing, 97% of which is fixed rate at 5.2% with a weighted average maturity of a little over 8 years. All the debt is non-recourse and non-cross collateralized. The equity will come 73.6 million from our 3 existing programs and their partners, and a 154.1 million of cash, which approximates what we raised in our convertible preferred offering in December 2004.

Of the assets to be acquired, 6 will be acquired into our existing joint ventures at a cost of approximately 296.1 million, and that includes 196.2 million of debt. These are 6 of the larger buildings, so one of the benefits there is getting a better diversification out of the transaction. Based on this financing plan, we will emerge post transaction with our credit line fully available. And we encourage you to look closely at the press release we put out last night, which provides very extensive detail on the assets being acquired.

Beyond Wells, we have a few deals that we committed to last year and a few more that we are still working on that we were also working on in fourth quarter last year. But other than that the acquisition pipeline, as is typical in the first quarter often, contains today fewer opportunities relative to a few months ago. And cap rates if anything this quarter, have declined modestly compared to last quarter that could very well have reflected the bond market rally that we had for the most part. But recently, we have seen bond yields pick back up, so we may be entering a period of time where there is come cap rate transition going on in the acquisition side.

These factors taken together could very well slow our acquisition activity until conditions change, although, it is too early to tell, because often fourth quarter is very busy and first quarter as a result is kind of slow. Obviously, from the transaction we announced last night, our acquisition volume will exceed the 600 million we previously forecasted, and we are hopeful that we can continue to grow over the balance of the year at our previously indicated pace. But this will largely depend on interest rate levels and returns available in potential new investments that we are looking at.

On the asset management front, during the quarter we signed one new lease and we are continuing to make good progress on several others. Obviously, from the impairment charge we took, we have elected to sell our vacancy in Phoenix, Arizona, rather than invest millions of dollars redeveloping the site. And in addition, we hope to have about a quarter of our Hebron, Kentucky vacancy leased some time during the first 6 months of this year.

Unfortunately, we have nothing specific to report on Dallas, other than we have been in the running for a single tenant for over half of the building. And on the one hand, that could be viewed positively, but on the other hand, Dallas continues to be a weak market and run rates are depressed. Other than Dallas in the potential lease, on Hebron, Kentucky our occupancy forecast is unchanged from last quarter.

Our 2005 vacancies, which we mentioned before, are expected in Marshall, Michigan to the 53,000 square foot warehouse; Milpitas, California, which is a 100,000 square foot R&D facility, and Mansfield, Ohio, which is a 296,000 square feet of warehouse space. Those 3 properties represent approximately 3.4 million of annual revenue.

The good news in the quarter was that Bull Information Systems had signed a new lease for 50% of their building in Phoenix, and we're continuing to work on leasing the balance of that space. We are finalizing lease agreements with SBC Communications and Hartford Fire Insurance Company, although at reduced rates relative to what they're paying right now. So that's it in summary on our five leases expiring in 2005.

On the leasing front, last year we had lease extensions totaling 10, which taken together with our acquisition activity has meant that our near-term lease rollover exposure has been substantially mitigated. Nevertheless, the leasing environment remains challenging but not without some signs of improvement.

And one of the benefits that we know from the Wells acquisition is that it balances our lease rollover very nicely pro-forma for the transaction. We would have no year representing more than 11% of revenue. Both the years 2010 and 2015 would be about 10.5% of rents. But beyond that, the lease rollover schedule looks very balanced and no longer has the front loaded feature that we have seen in the company over the last couple of years.

Overall in the portfolio, our credit quality improved last year with 48% of our trailing 12 months' revenue from investment grade rated tenants. On our watch list, we do have Tower Automotive, which filed for bankruptcy, but we think it is highly likely that they will continue to want to utilize our building. Also, we're watching Bally Fitness Corp., who has been tenant of ours, dating back to 1987 and could very well be that this year we sell out of our health clubs. And the third tenant we are watching is Allied Holdings, which has been on our list for quite some time.

There we have a very good piece of real estate in the sub-market outside Atlanta with very little vacancy. And we think that to the extent that they went out of that building, we wouldn't have great difficulty replacing the rents. Circuit City has been of some concern, but in first quarter 2005, we finished selling out of our retail properties leased to Circuit City, although we continue to own their headquarters.

In summary, we believe the company continues to be in a very good position. We're poised to deliver very strong FFO growth assuming that the Wells transaction closes as expected. And this would allow us to drive our payout ratio down to less than 75% of funds from operations, which we think bodes very well for future dividend increases. We made very good progress on the leasing front and now have the kind of rollover balance that we have been striving for, and we're very, very pleased with how the company is positioned as we begin a new year.

With that, operator, we'll turn it over to you to answer any questions that may be in the audience.

Thank you, sir.

[Operator Instructions].

Our first question comes from Steve Swett with Wachovia Securities. Please go ahead, sir.

Good afternoon, Wil. You mentioned in the discussion on the Wells acquisition that a portion of the capital for the transaction might come from dispositions.

No, the way the 786 million breaks out is 558.3 of debt, 73.6 million of equity from our joint venture partners, and the balance in cash from us. That being said, it still is a market in which the very good price is available on the disposition front. And we definitely have plans over the balance of the year to try to lock in some good prices on assets that we don't expect to be long-term holders of.

And you're still looking at the retail portfolio as your primary potential dispositions?

Principally, retail and some of our smaller market holdings. Although, there might be some other opportunities where we just feel like pricing is so good, that we want to take the capital gain on those assets.

Okay. And then I noticed in the acquisition list that you had a couple of Kmart retail centers.

We did. We bought that in our joint venture with Utah. We wouldn't have bought it for own account, but in that particular program there is an appetite for some retail. And obviously, we know the company pretty well. We think we are able to get into those assets on a very good basis. But that investment is certainly the exception, not the rule going forward as far as acquisitions are concerned.

Okay. The mortgage amounts that you talked about for the Wells acquisition, it also said there were, I think, 5 properties that were not in the pool that were included in the mortgage volume. Have those already closed?

No, those will close simultaneously with the other mortgages. There are 5 properties that we presently hold free and clear, and the loan proceeds on those 5 assets would total 41.5 million.

Okay. And then just a couple of final questions. Is there any material impact to your G&A from the Wells acquisition?

We anticipate that over the course of this year, we will add 4 to 5 professionals, mostly in asset management, but some also in the financial reporting side of the company.

So, for 2005, do you think an increase over your 2004 G&A or --?

Yes. We would expect to run higher as a result of personal growth.

Okay.

And it would be layered in over the course of the year.

All right. And that's -- I mean I think you said in the fourth quarter there were some Sarbanes type costs but your overall additions will lead to increases in G&A over and above where it was last year?

Yes.

Okay. The fourth quarter acquisitions, could you just give a sense whether they were ratably through the quarter or towards the end?

Hold on. Well, the (indiscernible) and Kmart were towards the end of the quarter.

It was loaded in December, Steve.

Okay. And then just the last question, Pat. What portion of the fees for the fourth quarter were recurring versus onetime?

In the fourth quarter, we had asset management fees of about $400,000, which is recurring and which will grow as more assets get into the joint ventures. Acquisition fees are about 1.2 million and debt placement fees are about 100.

Okay. Great. Thanks.

Thank you. Our next question comes from Tony Paolone with JP Morgan. Please go ahead.

My questions have been answered. Thanks.

Okay. Thank you. Our next question comes from Steve Tabb with Tocqueville. Please go ahead.

Hi. On the Wells acquisition, I am not clear on several points. You say that the joint venture was putting up $73.6 million. Are they putting a separate subsidiary, the property that they are acquiring?

Steve, 3 of our joint venture programs will be acquiring the properties and it will hold it in the joint ventures, which when you look at our financial statements, it's in the investment and joint venture line that just represents our equity commitment to it. And our income pick up from it is on the income statement through equity and earnings of joint ventures. So these will be off balance sheet. The assets and debt will be off balance sheet.

Well, so are they putting it -- in other words, when you say you are acquiring $786 million of properties, how much of those properties are going into the joint ventures?

Approximately 296 million of properties go into joint ventures. So, it's 490 for own account, 296 into joint ventures.

Okay. And for the 286, they are putting in 73.6 million in cash, is that it?

And we're putting in about 26.5 million or thereabout.

And you are putting what?

Roughly 26 million -- 26.4 million. It's roughly 100 million that is being invested in the properties that are going into the ventures. Our joint venture partner share of that is 73.6 million.

I see. Are they getting mortgages then on 196 million?

Yes.

I see. And is that part of the 558? I see.

Yes.

I see. Okay. Now you've mentioned -- used the words joint collateralized.

That was probably coming through the speaker, but none of the loans are cross collateralized; they're all non-recourse loans.

Non-course? Yes, that's very important. Okay. Now, by the way, I never got the announcement on the preferred -- you say that it was a 6.5% rate and they're convertible at 2782?

2682.

2682? And was there an over allotment on that or only 375,000 shares issued?

No. There was an over allotment. The initial transaction size was 135 million. Then the 20 was from the over allotment. In other words, we raised 135 million in December and another 20 million in early January.

So, what's the total number of shares, 375,000?

3,100,000.

So 3,100,000?

Right.

Okay. I am sorry. All right. Now, the amortization on -- coming back to the Wells deal -- each property then has separate amortization schedules, is that correct?

That's correct.

And so -- and they mature in what -- 6 to 10 years or something?

With a weighted average of about 8.25. The maturities are, for the most part, designed to match up with the lease terms, although our average debt maturity is about a year longer than the weighted average lease term on the portfolio.

Therefore there are bullets at the end of each one?

Well, yes. There are -- our balloon payment's due, that's correct.

Balloon payments. And what would you say the balloon payments average as a percent of the value of the property or of the mortgage?

Well, it would vary, but it was about 65% loan to value financing; on average at the asset level. And the debt is predominantly 30-year amortization. So there would be some amortization, obviously, depending on term but not...

Not much?

...not a substantial amount.

Now, I noticed on the balance sheet that the intangible assets went up from $27 million at 9-30 to $54 million at the end of the year. Could you tell me what they consist of and why they went up?

Under GAAP now for the acquisition of real estate, you have to allocate your purchase price for land building and intangibles, and the intangibles of the value of the lease, customer relationships and origination costs. All it is, Steve, is allocating purchase price; not just to real estate but it terms of intangibles. There is no soft value in there at all.

Yes. But you say it is lease value, is that the biggest part of that?

Yes. We have to make an estimate of what the value of the lease is. So that would be the biggest intangible.

I see. And is that derived by subtracting the purchase price less the estimated market value of land and buildings?

We do an analysis of the property -- we have to do analysis to save that space. Soon we bought the property dock, and it was docked for a period of time, we incurred expenses and all of that. We ran at through an IRI calculation and determine what the purchase price would be under those assumed facts -- period of downtime and us incurring operating costs, and what we've paid for it in that regard. And the difference to in that number and what we actually paid for it for an occupied building is the value of the lease.

I see. Now, therefore, are you amortization that amount over the life of the leases?

We amortize the intangibles over the lives of the lease. So it's a little shorter period than the real estate.

Okay. Could -- I don't understand -- you've had this for a while, but I don't understand as an asset, rent receivables deferred, what does that represent?

GAAP requires us to recognize rent on a straight-line basis. So it would be the contractual rent bumps throughout the lease term. You'll recognize through revenue what the average rent is throughout the lease term. So that rent receivable dash deferred. There's a difference between the revenue we've recognized from the time we went public to today, and the cash we collected from our tenants. That asset will be realized as we collect rent from our tenants going forward as their rent bumps are greater than the straight-line rent we recognized for GAAP purposes.

Great. For the first time I think you have a due from affiliates, 45 million...

Yes. Two of our joint ventures at the end of the year bought properties. The mortgage weren't in place. So Lexington gave mortgages to the joint ventures of $45.8 million on 2 of the properties. All of the amount have been repaid in January.

All have been repaid. All right. Could I trouble Wil -- he speaks very fast for me, would you go over the properties that are vacant and those that you mentioned 5 properties that are coming up? That may have to be released or maybe vacant -- could I trouble you to do that, please?

Not a problem. If you look in the supplemental at our rollover schedule, it lists 5 leases that expire in 2005. One is a building outside Hartford, Connecticut that we leased to Hartford Fire Insurance Company that we think we're on the verge of signing a new seven-year lease on. We also are close on a small building outside Columbus, leased to SBC Communications; again, where we think we'll have a lease signed there shortly.

The 3 other ones, no surprise, we've talked about them on previous calls. One, the warehouse in Mansfield, Ohio, formerly leased to -- presently leased to Gerstenslager, but that come off lease in May, and we're expecting that to be vacant. Our Milpitas, California property that we've talked about in the past, and...

When does that come off?

...the other one a small building in Marshall, Michigan that is leased to Technical Automotive. There we are having some discussions about extending that term with a different tenants. But, right now, I still put it in the category of expecting to be vacant. Now on top of that, we have our empty building in Dallas, which was formerly the VarTec Telecom building. And we're continuing to work on our building in Hebron, Kentucky, which I mentioned. We hope to have about 25% full sometime in the first half of this year.

All right. Thank you very much. You answered my questions. Good luck with the Wells acquisition.

Thanks Steve.

[Operator Instructions].

Our next question comes from Stephanie Krewson from BB&T. Please go ahead.

Hi guys, great year. Couple quick questions. Net proceeds from your convertible Series C, what was the net -- I know 155 was the gross?

Hold on one second.

Its pre-issue is a little over 131.

Pro issues were about 150.1.

Okay. And then for accounting purposes, do I use an as if converted method for EPS and FFO?

Yes. The standpoint is we have to do -- for a FFO purposes, I think it always be dilutive. That's how we would model it out. The EPS, you know...

Basic dilution test?

Yes, it's the dilution test. Exactly.

Okay. And then, on page 20, your lease expression schedule, could you provide the square footage that's rolling just in aggregate in 2005 through 2009 just year-by-year, so I can project out occupancy a little more sensitively?

Steph, we would have to reverse engineer that by dividing the rent by the square footage.

On page 19.

Yes, which we can easily do. It just isn't available in the supplemental, and we'll change the supplemental going forward to provide the rollover by square footage.

That would be great. Thanks guys. Great year.

Thank you.

Okay sir. I'm showing we do not have any more audio questions. Please continue.

We would like to thank you for your continued interest and support for Lexington. We look forward to communicating our progress to you as we go through the coming year. Thank you.

This concludes the Lexington Corporate Property Trust fourth quarter and yearend earnings conference call. If you would like to listen to a replay of today's conference, you can dial in at 303-590-3000 or 1-800-405-2236, followed by the pass code of 11022822 and followed by the "pound" sign. Once again, that number is 303-590-3000 or 1-800-405-2236 followed by the pass code of 11022822 and followed by the "pound" sign. Thank you for participating in today's conference. You may now disconnect.