LXP Industrial Trust (LXP) 2005 Q1 法說會逐字稿

Ladies and gentlemen welcome to Lexington first quarter 2005 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. [Operator Instructions]

As a reminder, this conference is being recorded today, Thursday May 5th, of 2005. I would now like to turn the conference over to Diane Hettwer with the Financial Relations Board. Please go ahead.

Thank you. Good afternoon, everyone and thanks for joining us for Lexington Corporate Properties Trust first quarter 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 statements 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 filings with the SEC.

Having said that, I would like to turn the call over to management, with us today, we have Will 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 Will. Will, please go ahead.

Thank you, Diane and welcome to everybody. Thanks again for joining our conference call today in which we'll discuss our first quarter results.

Today, Lexington announced funds from operations $0.39 per share, compared to $0.39 per share in the first quarter last year. Funds from operations were at the low end of analyst estimates and $0.03 per share less than consensus estimates.

Results in the quarter were impacted primarily by significant cash balances, and secondarily, by a few items that I would like to discuss up front on today's call.

First, funds from operations were reduced by $400,000 placement fee relating to a joint venture equity commitment. And, second, we had dead deal costs of $140,000 in the quarter, and needless to say, had those acquisitions closed first quarter results would have been better than we've reported.

Third, we earned no acquisition fees in the quarter. So advisory fees were only $0.01 per share compared to $0.03 last quarter and we are expecting $0.04 per share in the second quarter this year.

Fourth, we saw an increase in professional fees of $240,000, representing the new reality of being a public company.

We were disappointed by the lack of investment activity in the quarter but we note had the Wells portfolio closed on March 31st, we would have recognized about 1.6 million in fees. And the good news is that our cash has been fully deployed with the Wells portfolio acquisition being completed on April 13th. This means that we expect to have significant growth in FFO per share over the balance of the year.

We don't usually give quarterly guidance, but in view of first-quarter results we want to state clearly that we're expecting to report FFO per share of approximately $0.50 in the second quarter, and our annual guidance of $1.95 to $2 per share assumed FFO of $0.40 per share in the first quarter.

To us, we were off a penny from where we thought we would be operationally due to the effect of the replacement fees and dead deal costs, and we would have made consensus estimates had we had the same level of fee income that we have last quarter.

Our business plan for the year is still on track, although we note that the acquisition environment has become, if anything, even more competitive. And, it is increasingly difficult to deploy capital in terms that are attractive to us. And we saw in first quarter how that impacts our model with lack of acquisition fees earned in our first quarter.

From the standpoint of transaction activity, first quarter was quite slow. We only closed one $12 million acquisition for our own account. We sold two of our small retail properties for a total of 4.1 million, which is 18% more than we purchased them for about 4 years ago.

On the leasing front, we extended 3 leases. And on the financing front, we obtained 45.8 million of property-level financing for one of our joint ventures. Of course, during the quarter, we were very busy with the underwriting and closing of the acquisition of the Wells portfolio.

Today, we posted on our website our supplemental disclosure package and we encourage you to review the supplemental in detail for color on transaction activity and the status of our portfolio.

Turning to discuss the quarter, I think we discussed the most important points already, but our total G&A for the quarter was 4.4 million compared to 3.9million in the fourth quarter 2004.Our advisory fees were only $634,000, due to low transaction activity. The only 15% of our G&A was offset by fees compared to 43% in the fourth quarter of 2004.

That's a key number that we focus on and that was a key factor and that affected our first quarter results. Our interest coverage was 2.7 times for the quarter, which remains a very comfortable level for us.

Turning now to look at the balance sheet, we think our balance sheet continues to be in a very strong position. First quarter we didn't see any material change compared to what it looks like a year-end 2004. We had significant cash on the balance sheet at the end of the quarter, but that was substantially utilized in the Wells acquisition.

Other balance sheet changes in the second quarter will be an increase in real estate of 490 million, an increase in joint venture investments at 28 million, and an increase in mortgages payable of about 390 million.

At quarter end, we had 758.5 million of debt outstanding at a weighted average interest rate of 6.58%, and 93% of that debt was fixed-rate. So, the company continues to have little exposure to floating rate debt. And all of our debts are non-recourse. And we have no liabilities of any significance maturing until 2008. And thereafter, at least based on today's level of interest rates, we would expect to realize significant refinancing opportunities.

Balance sheet debt was about 34.6% total capitalization -- that's low for us. And as we stated on our last conference call, it's more likely going forward that we will run the company with 45% to 50% leverage. That is consistent with our historical average and we think it's much more appropriate for our asset class.

As we've discussed in previous calls, we are continuing to work off our debt quickly. We expect to amortize about 125 million of principle between now and the end of 2009, and 274.2 million over time. And with the balloon payments totaling just 22% of our market capitalization, we see little reason not to increase our leverage at this time.

On the acquisition front, as I mentioned, we acquired only one property for 12 million in the first quarter, but in the second quarter in the Wells transaction, we acquired 27 properties for a total of about 786 million. On the Wells portfolio, the going-in cap rate was 7.75% and we leveraged at 65% at a weighted average fixed rate of about 5.2%. So, it's a very accretive investment for us and we'll see the benefits of that in second quarter and beyond.

We're pleased with what we bought year-to-date, but that being said, we have to recognize that the pipeline is not nearly as good as it was six months or a year ago. We have about a 100 million in acquisitions that look promising, but if yield pressure continues, we think we'll be likely to become less active on the investment front, and a more active seller than we have been so far this year.

We're also likely to broaden our acquisition parameters to look at some more yield-oriented investments. We would only do this in a joint venture, or fund format, where return on equity is enhanced substantially by fees and where we would get a great benefit of diversification by having a minority ownership interest. We view that as a key objective for the company over the balance of the year to establish and other investment vehicle to complement our existing joint venture programs.

On the asset management front, we're pleased to see some positives in the leasing area. We extended three leases in the quarter and subsequent to quarter end signed a 21,000 square-foot lease on our 82,000 square foot office building in Hebron, Kentucky, that was formally leased to Fidelity.

In addition, we're having what I would characterize as promising discussions with one other tenant in that build, two potential tenants for a portion of our Phoenix, Arizona, where Bull Information Systems now occupies 50% of that property, and also with our tenant in Memphis, Tennessee regarding taking more space. We view these as very good signs and believe we have a chance to pick up some occupancy in the portfolio ahead of plan.

On our vacant Dallas, Texas, building we've had a variety of tenants of 60,000 to 250,000 square feet, looking at the building. Our preference would be to multi-tenant this building, recognizing it has been leased to single tenants 3 times each with an unhappy outcome. Two of those tenants were ours.

If we multi-tenant that building we think it will be one of the best multi-tenant buildings in the stemming sub-market. And, today, we are pleased to report that we paid off the mortgage on the building for 15.5 million, and that was a mortgage that had an outstanding balance of 20.8 million.

This will result in a gain of about $5million in the second quarter, but more importantly, will make our building more competitive in the market and will also demonstrate the value of utilizing non-recourse debt and isolating leverage risk at the asset level.

We continue to be challenged by the leasing environment in Milpitas, California where we will, as we've mentioned on previous conference calls, have a significant vacancy at the end of this year, and also in our repositioning efforts in Phoenix, Arizona, where the sale of our building formerly leased to Bank One did not occur as we had previously anticipated.

We're making good and steady progress continuing to recycle capital out of our retail properties and assets that we have in smaller markets with the two sales that we generated during the quarter. And in the second quarter, we sold our retail property in Columbia, Maryland, for 11.7 million, which is $5 million above what we had invested in the building and that was a property that we bought just a little over six years ago.

So, while we haven't seen that kind of appreciation everywhere in the portfolio, it's clear that there are great opportunities for us to realize value and as a result, this position activity could be more robust over the balance of the year.

So, in summary, I would like to say we are encouraged by improvement in the leasing environment, somewhat frustrated by how far cap rates have compressed, especially this year. But we recognized that that means there are compelling opportunities for us to realize gains by selling some assets and, in general, we don't think the market appreciates how much our portfolio has appreciated over the last couple of years.

I would also like to clearly state that the lack of growth in FFO per share is clearly behind us as a result of deploying our cash in the Wells portfolio acquisition. And we're poised to deliver very strong FFO growth over the balance of the year. That concludes my opening remarks. Operator, I would like to have question and answer session now.

Thank you [Operator Instructions]. Our first question comes from Joseph Tazio with JP Morgan. Please, go ahead.

Hi, guys. How are you doing? Sorry I missed this, but the gain in 2 Q on the mortgage, can you run through that again? I think it was a $5 million gain?

Yeah. We have a non-recourse mortgage on that property, that's our vacant building formerly released to VarTec. It had an outstanding balance of 20.8million. And we negotiated an early discounted payoff with the lender effective this morning.

Is that an FFO gain or...?

I mean answered is we wouldn't consider it an FFO gain it's not in our numbers.

Okay.

It's a non-recurring item.

Right. Okay. Looking at the '05 expirations in the supplemental from Q4 to Q1, looks like it went from 5 to 3. What were the changes there? Maybe VarTec was part of that? I didn't think so. I'm just not sure what...

No. I mean went from 5 to 3? Meaning we had the two leases, one was a VarTec, services and other one Hartford Fire Insurance Company. Those were tenants with 2005 expirations that we extended in the first quarter. It's on page 3 of the supplement.

Okay, Sorry for missing that.

If you want to look at the details.

Okay, and what about, what kind of pattern do you have in terms of acquisitions without, I guess, sort of needing equity? How comfortable are you bringing up leverage? And how much more do you think you can do?

You know, with the equity that we have committed to joint ventures, that's about 500 million of capacity. We're sitting on our bank line fully available. And we're certainly comfortable utilizing, you know, a fair amount of our credit line. And I would also anticipate that it would be very easy for us to increase our credit line capacity.

Okay.

So, equity is a choice, but there's really lack of, a high degree of lack of visibility on the acquisition front.

Okay. And then last question, what happened with the expected sale of the Phoenix property? Is that still help for sale or?

It's still in help for sale, yes.

Okay, was that expected to close in the first quarter? Or something fall through there, or what?

Yeah. It was expected to close in the first quarter, and on the day that due diligence expired the purchaser canceled the contract.

Okay. That's it. Thank you.

Thank you. [Operator Instructions] Your next question comes from Steve Tabb (ph). Please state your company followed by your question.

Yes. Tocqueville Asset Management hi, guys. You go kind of fast in the Wells acquisition, how much real estate -- what did you say? How much was it worth? And how much of it is -- what are the mortgages on it?

786 million was the purchase price.

And was some of that -- did some of that go to a joint venture?

290 million went to joint ventures -- 296 million went to joint ventures with 490 for our own account.

Oh, okay. And so on your own account, how much of that was leveraged? I mean, how much did you have mortgages on?

About 65% loan-to-value.

Mortgages on every property.

Yes. None of them are crossed, Steve. They're all non-recourse, and fixed-rate you know, like we always do.

65% leverage.

That's about, you know, roughly 319 million.

Okay. Now, I didn't understand, you said you would hope to gain a greater yield from certain kinds of investments. It wasn't clear to me, you know, what you were -- what kind of investments you were talking about, would they be leveraged? And who would they be with, I don't know-- could you give me a little color on what you were talking about?

One opportunity might be, you know, doing a little more sale leaseback activity with, I think, it would be single B-type credits. We might look at manufacturing facilities, or some special used facilities. But again, we wouldn't be own account investments who'd only have an interest in making them in a joint venture or fund format where there would be a very attractive fee structure for us.

And, I will say that probably over the last 3 or 4 years about 10% of our transaction activity has been in that asset category. So, it's not like we're branching out into something that we haven't done before.

Well, sale-leasebacks -- isn't that you've been basically doing when you're buying existing buildings from the owners and leasing them back? I thought you've been doing quite a bit of that all along.

A ton of sale leasebacks, but not necessarily with, you know, that credit profile, that actively.

When you're saying, what, with the triple-B, is that what you said?

no. We were discussing more single-B type, and focusing on real estate that's, you know, has a high strategic value to that tenant.

Yeah, but the tenant isn't that good in a single-B. Now, what about the -- I'm not clear, which of the remaining vacancies that you have now, and where do you stand with them? That are currently --

We have our building in Dallas that is fully vacant.

That's the VarTec one?

VarTec.

VarTec, yes.

We have about 70% of our building in Hebron, Kentucky, that's still vacant. We have our building formerly leased to Bank One in Phoenix that's fully vacant. And we have in Phoenix our Bull Information Systems where Bull used to be, you know, fully in occupancy and now they're at 50% there.

Out in Phoenix?

Yes.

So, what is the prognosis for these buildings?

In our --

I mean, active lease activity, or...?

As I mentioned in Hebron, we're having promising discussions with one tenant, and with the Bull building in Phoenix, promising discussions with 2. And there's been, you know, very good traffic in Dallas in terms of users looking at that building but nothing imminent.

And, we're not in our budget this year expecting to have occupancy gains, you know, occupancy gains aren't built into our numbers for the year.

No occupancy gains. All right. Let me ask you this. What about the ones that may come up for the remainder of the year and next year?

Well, as we've discussed previously, we're going to pick up a vacancy in Milpitas, California. 100,000 square foot R&D facility. We're going to pick up a small industrial vacancy in Marshall, Michigan, that's 53,000 square feet. And we're going to pick up a warehouse vacancy in Mansfield, Ohio. Which is about 296,000 feet. So, I'm still expecting vacancy in those 3 buildings.

This year? Those are the remaining leases coming up that expect vacancies this year?

That's correct. 2006 looks to be a much, much better year in terms of retention.

All right. Thank you very much. Good luck.

[Operator Instructions] Our next question comes from Art Taviner with AG Edwards. Please go ahead.

Good afternoon. On your straight-line rent, what are you looking for going forward for the balance of this year? I notice they dropped quite significantly in the first quarter.

Yeah. On the portfolio that was in place as of March 31st, it would be about $1million next quarter, and about 900,000 in the third quarter. Bringing the total for the year about 1.9 million. And, when you roll in the Wells portfolio, we expect about 1.9 million, where GAAP would be greater than cash.

Okay. Why did it fall down in the first quarter so much?

The Baker used properties, the semiannually and arrears in advance, so it makes it very choppy.

Okay, got it. Sticking with the balance sheet, your other assets went up about a little over $50 million. Can you --

Yes, it's almost all of it, the delta is the deposit on the Wells transaction.

Okay, great, thanks.

Okay management I'm showing we do not have any more audio questions. I'll turn it back over to you.

Once again, thanks very much for joining our conference call today. And we look forward to communicating our results with you over the balance of the year. Thank you.

Ladies and gentlemen, that concludes Lexington first quarter 2005 earnings call. If you would like to listen to a replay of today's conference you may dial in at 303-590-3000 or 1-800-405-2236. And then followed by the access code of 11027853 and then followed by the pound sign.

Once again, those numbers are 303-590-3000, or1-800-405-2236 followed by the access code of 11027853. And then followed by the pound sign. Thank you for participating in today's conference. You may now disconnect.