LXP Industrial Trust (LXP) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Lexington Corporate Properties Trust fourth-quarter 2005 conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded today,Thursday, February 16, 2006. I would now like to turn the conference over to Chris Ann Casaburri with Lexington.

Hello and welcome to Lexington Corporate Properties fourth-quarter year-end conference call. The press release and supplemental disclosure package were distributed this morning, as well as furnished on Form 8-K to provide access to the widest possible audience. In the supplemental disclosure package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If if you did not receive a copy, these documents are available on the Company's website at www.lxp.com in the Investor Relations section. Additionally, we are hosting a live webcast of today's call which you can access in the same section.

At this time, management would like me to inform you that certain statements made during this conference call which are not historical may constitute 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 attained. Factors and risks that could cause actual results to differ materially from those expressed or implied from forward-looking statements are detailed in today's press release, from time to time in the Company's filings with the SEC. The Company does not undertake a duty to update any forward-looking statements.

With us today from management are Wil Eglin, CEO and President; Patrick Carroll, Chief Financial Officer; John Vander Zwaag, Executive Vice President; and other members of management. I would like to turn the call over to to Wil for his opening remarks.

Thanks, Chris. And welcome to all of you. Thank you for attending our fourth-quarter and year-end conference call. Today Lexington announced funds from operations of $0.27 per share for fourth quarter of 2005. Funds from operations per share was reduced by several items disclosed in a press release we issued in early January detailing transaction activity during the quarter. These items are, first, an approximately $12 million impairment loss related to our Milpitas, California property. Second, debt satisfaction charges of approximately $900,000, 700,000 of which related to a property sale. And third, severance cost of approximately 400,000 related to headcount reduction of the Company of about 10%. Adjusted for these items, funds from operations per share were $0.48, which represented the midpoint of the guidance range that we gave on the last quarter's call.

We believe this is a good result compared to the previous year when our normalized number was $0.46 per share, so on a normalized basis we had roughly 5% growth year-over-year. Our growth was driven primarily by investment activity which totaled about 1.1 billion in 2005, and in the fourth quarter we acquired five properties for an aggregate purchase price of 76.5 million, 57.4 million of which were bought into joint ventures including two for Lexington Strategic Asset Corp. We also invested approximately $23 million to acquire an interest in five mortgage notes secured by five properties that we leased to Dana Corporation. This represented a 23.3% discount of the $30 million face amount of the mortgage notes which were originated in August 2005. Also during the quarter, we obtained approximately 73.9 million of nonrecourse, mortgage financing at a weighted average fixed rate of approximately 5.46%. GAAP cap rates on acquisitions in fourth quarter were approximately 8.5%, so our spreads continued to be attractive just on less volume than in prior periods in 2005. That's consistent with the main theme that we talked about last quarter.

The acquisition market remains highly competitive with low cap rates and narrow spreads. Disposition opportunities continue to be very attractive to us and we sold three properties during the quarter for approximately 21.5 million generating gains of approximately $4.9 million. Also during the quarter, Lexington Strategic Asset Corp. was capitalized with 100 million of equity with Lexington earning about 32%. This is consistent with our overall strategy of forming joint ventures to target specific parts of our acquisition pipeline and Lexington strategic targets properties leased to tenants which are unrated or below investment grade and will also acquire special purpose real estate. We believe this continues to be an area where spreads have not compressed as dramatically and competition is less severe. In Lexington Strategic we are targeting overall leverage of 70% which will allow us to be competitive with private market buyers. We also chose to structure Lexington strategic as a C Corp. because we think combined with the leverage that we're targeting and the depreciation of the property types that we buy we believe that we can virtually eliminate the tax at the Corporate level at least initially and perhaps as long as six years.

Lexington's Strategic presently owns seven properties at a cost of $85 million. We hope to acquire about 300 million for this program this year which will be the main sort of focus of our growth in 2006. This is a particularly advantageous joint venture structure for us because it's a perpetual life entity with a fee structure that's more attractive than our typical institutional joint venture programs, and it also expands our acquisition opportunities. Now I would like to turn the call over to Patrick Carroll, our Chief Financial Officer to discuss our financial results and balance sheet.

Thanks, will. First I will talk about the P&L. During the quarter the Company had gross revenues of $53.9 million which is a 42% increase over fourth quarter '04. Fee income was approximately 1.2 million compared to 1.7 million in the same quarter last year. Annually for '05 fee income was up about 10% to 5.4 million and this offset about 30% of our G&A. Components of fee income for the quarter was asset management fees of 1 million and acquisition fees of about 200,000. For the year the breakout of fees was asset management fees of about 2.7 million, financing fees of about 300,000 and acquisition fees of 2.4 million.

Quarterly G&A increased by 14.5% to $4.4 million. For the year, G&A was 17.6 million, an increase of 27% in a year when our assets under management increased by about 32%. We believe that shareholders should focus on G&A net of fee income. This number was about 12.2 million in 2005, was slightly less than the 0.5% of our total market capitalization at year end. As Wil mentioned earlier, we did take an impairment charge in our Milpitas, California property and this is the difference between the book value of 17.2 million and estimate of fair value, $ 5.2 million. The lease on this property expired in December '05 and as we pointed out in previous conference calls we believe the property has a market value well below the nonrecourse mortgage balance of $11.9 million. We expect to convey this property to the lender in '06 and record a debt satisfaction gain of about $5.9 million.

Other one-time items include a severance charge of $400,000 and prepayment penalties on debt satisfaction totaling $900,000 related to a refinancing and a sale. 200,000 was incurred in connection with a McGraw-Hill property where we borrowed approximately 10.9 million and repaid the existing mortgage of 7 million and this reduced our equity investment in the property to just over $800,000. With the substantial increase in property values, attractive interest rates, and a flat yield curve, refinancing such as this have become possible. The other approximately 700,000 related to a sale of our property in San Diego, California, where we had a gain of about $3.7 million.

Netting out these one-time items, FFO per share was right in line with our expectation even as we operate the Company with fairly significant cash balances. Still we believe 5% growth is good. For the year FFO per share adjusted for these one-time items was $1.87 this is compared to $1.78 per share last year. Interest coverage for the fourth quarter '05 was about 2.4 times and for the year was about 2.5 times.

Now I would like to talk a little bit about balance sheet. We believe our balance sheet continues to be in good shape. At quarter end we had about 1.2 billion of debt outstanding, including debt on properties held for sale. And this debt had a weighted average interest rate of about 6% and 99% of our debt is fixed rate. The only variable rate debt we had is the debt on our Milpitas, California property. Although mortgage had approximately 300 million amortizes over time so our balance sheet deleverages significantly.

We had about 53.5 million of cash at quarter end and nothing outstanding on our $200 million bank line. The cash balances we have are due to property sales, mortgage and refinancings, and 10 million of prepaid rents that we collected from our tenants. Balance sheet debt was 44% of total capitalization, and we are comfortable operating the Company within a range of 45 to 50%. 28 million of our debt is scheduled to amortize this year alone, 2006, and the properties that we are planning to sell are encumbered by mortgage debt at about a 40% loan-to-value. Our plan would be to leverage more against this equity as we reinvest the sales proceeds. We believe that we have sufficient cash, line availability, and disposition proceeds to execute our growth plans for this year, and we currently have no plans to access the capital markets with the exception of LSAC where we hope to have an initial public offering later this year.

Now I will highlight some of the significant balance sheet accounts. Included in the line item intangibles is the allocation of the purchase price of properties acquired to in place leases, customer relationships, and above and below market leases in accordance with FAS 141. The impact on the P&L of above and below market leases and what it had on FFO was approximately a net negative of $300,000 for the quarter and a net negative about $1million for the year.

Going down the balance sheet included in properties held for sale is the carrying cost of three properties, which means the definition of held for sale in accordance with FAS 144. These properties are located in Ocala, Florida, Henderson, North Carolina, and Scottsdale, Arizona. Continuing down the significant components of other assets, our loan escrows of 16.2 million, CIP of 9.3 million, real estate and rate lock deposits of 2.2 million, deferred and prepaid taxes of 2.5 million, and the note receivable from the purchaser of our Hollywood Entertainment Property of about $11.1 million.

On the liability side, liabilities from discontinued ops are primarily the mortgages on those properties that meet the criteria of properties held for sale, and finally the significant components of other liabilities are accrued interest of 5.9 million, deferred revenue and below market leases of 6.3 million, CIP payable of 5.4 million, bonus and severance accruals of 1.3 million, and a no payable to the -- a partner in one of our partnerships of $3 million. That was structured as a note for tax purposes. It's really no different than minority interests. That sums up mine and Will, back to you.

Thanks, Pat. Now I would like for John Vander Zwaag, Executive Vice President and Head of Portfolio Management to discuss our capital recycling plans and leasing activity. John.

Thank you. I will start by focusing on just the vision. In 2005 we sold eight properties for gross proceeds totaling 74.7 million, which generated total gains of about 16.7 million. For this year, we are targeting sales of properties in slower growth markets or where we think the investment market valuations are especially attractive for sellers. We currently think that 15 properties fit these descriptions. The properties have a market value of about 150 million, and they are encumbered by mortgage debt of 59 million. So they are deep underleveraged relative to what is achievable in the market today. At this point in the cycle we view pairing noncore holdings and recycling the capital as prudent and essential.

On the leasing front, we had a busy and I think successful year in 2005. We signed 14 new leases and we finished the year with occupancy of 98.3%. We have five properties with full or significant vacancies that we are addressing. One of them is the I-17 Center in Phoenix which has been vacant since November of 2003. We currently have the property under a a nonbinding letter of intent and a contract for sale in two parts to separate buyers for a combined gross purchase price of 7.6 million. And that's about double what we thought the value off the property was two years ago. A key component of this was -- of achieving this was our ability to buy an adjacent seven-acre parcel of land which the land itself has tripled in value since we bought it.

Another vacancy that we are addressing is at 1600 Viceroy in Dallas which was formally leased to VarTec. We believe we are very close to signing our first lease for the space since VarTec left the property, that lease will be approximately 48,000 square feet. We think that is a very good accomplishment in the market in Dallas right now and we also believe that it is going to lead to greater velocity in leasing.

Our other vacancies are less significant. A 35% vacancy at Black Canyon Office Center in Phoenix. 60% at Airport Center West in Hebron, Kentucky. And 21% in Memphis, Tennessee. For 2006 on the renewal front, we have a property in Glendale, Arizona leased to Honeywell with a July rollover and we expect to be able to renew that lease. We have a property that was -- that is leased to Lear in Auburn Hills Michigan. As has been stated on previous calls, we know we will have a vacancy here in July. It's a challenging leasing environment in the auto industry right now, and we are working it.

Excel Logistics, our two warehouses in Harrisburg, Pennsylvania. We expect a renewal on one and a vacancy on the other in November. We feel optimistic about the leasing market there. Likewise, we have two leases with Johnson Controls that expire in December. The first is on a larger facility in Plymouth, Michigan where we expect to extend the lease. The second is on a property in Overland, Ohio where we expect a vacancy. Overall, we think we have made good progress on the leasing front. We are excited by the opportunity to finally sell the vacant buildings in Phoenix, especially when we've been carrying those at about $700,000 a year in carrying costs. And we are excited to begin leasing up the building in Dallas.

We continue to have four tenants in bankruptcy. Those are Federal Mogul, Allied Holdings, Tower Automotive, and Owens Corning and all are currently paying rent. We expect that Allied will want to reduce its occupancy in its building, but it is a well-located office property in the Atlanta area which is already 25% subleased. Wil?

Thanks, John. Just to move on and touch on some elements of our 2006 business plan. We clearly think there is an opportunity right now to upgrade our portfolio and realize significant value by selling noncore holdings this year. We view real estate as being a cyclical business and it requires that properties be sold from time to time. We do expect some of these properties will be sold at cap rates above what we would expect to reinvest, but we believe that earnings dilution can be mitigated by using greater leverage as we have discussed. The properties we are trying to sell this year are encumbered by about 40% leverage. We would expect to utilize more leverage against the equity that we are pulling out of those properties and we also expect that the opportunity to redeploy capital from wholly owned properties into joint ventures, especially Lexington Strategic Asset Corp. where our return on equity is highest. So investing in Lexington Strategic is our best use of capital right now and including our base fees we expect on our equity to be achieving return there in excess of 20%. So growing Lexington Strategic is the key part of our business plan.

In addition at the beginning of year we announced that we had put into place an authorization of 2 million shares to repurchase, and we are certainly not averse to distributing capital gains if we believe we have no good alternate investment use. The acquisition market continues to be competitive, but not without opportunity. And we are hopeful of total acquisition activity in 2006 of 4 to 500 million, with most of that in Lexington Strategic which is the part of our business where there continue to be good spreads that could be made. Again, that's a great opportunity for Lexington because it's a good way for us to enhance our fee business for every 100 million of equity we raise there our base fee income increases by about $0.03 a share and that will help us continue to offset G&A at the Corporate level.

So in summary this was a very good quarter for Lexington and a great year where we exceeded all of our objectives in our business plan. Our balance sheet continues to be in good shape, we certainly have sufficient financial resources to execute our business plan this year. We note that we believe that the leasing environment is improving significantly. But we still expect to lower rents on 2006 expirations with one exception. And the two main rollover challenges in 2006 that John mentioned one in Auburn Hills and one in Overland, Ohio are utilized by tenants in the automotive sector. So those vacancies will be ones that we will need to work hard to get through.

In terms of our guidance, we will give guidance for first quarter of 2006 of a range of $0.47 to $0.49 of FFO per share. Before unusual items. And we know in the quarter that we are going to have two unusual items, one is a prepayment penalty of approximately 900,000 associated with a cash-out refinancing of our our Harbor Freight facility following an expansion of that building, and also we will have the roughly $5.9 million gain of discharge of indebtedness related to the Milpitas, California property where we do expect to convey that this quarter. And finally on March 21, this year, we will be holding a luncheon presentation at the New York Stock Exchange for investors, analysts, and other interested parties where we will be providing a detailed presentation about our business and our plans going forward. We hope that you'll take the time to attend this event and please contact us if you are interested and did not receive a notice of that. That ends our formal comments. We'd be delighted to answer any questions that you have.

[OPERATOR INSTRUCTIONS] Our first question is with Anthony Paolone with J.P. Morgan.

Thank you. Good afternoon. The assets that you have held for sale, did I kind of hear you right to back into a roughly $80 million type number in terms of what the gross sales would likely be? I think you mentioned it was about 40% loan-to-value and just kind of looking at the debt associated with it. Am I looking at that right?

That sounds reasonable, Tony.

Okay. And what do you think timing of those sales will be?

Okay. Ocala will probably be early in the second quarter. Henderson, North Carolina, is probably mid to late second quarter. Scottsdale, we may get done at the end of this quarter or at the early part of next quarter.

Okay. Do any of the proposed sales change leasing exposure in, say, '07 or just near term?

No.

Okay. Can you talk a little bit about cap rates and just the variety of product that you are looking at in Lexington Strategic?

Sure. Most of what we are looking for in Lexington Strategic falls into the types of properties that we bought in the past, office, some more specialized use, manufacturing, data processing facilities and the like. The credit profile there is really more in the B area and while we have been active there, most of what we have done is pretended to be in the BB, and investment-grade area which has been characterized by our other joint ventures, with New York Common, Lion, and Utah. We still think that that part of the market is an area that we can achieve going in. Cap rates of 8% or better with escalations. And we can continue to get very, very good leverage against those properties. We do pay a little bit more than where we have better credit strength. But not that much more when you consider the sort of cap rate premium that you get in that space.

Okay. Is there any difference in just overall deal flow relative to your core product? Or is it just different -- a different part of the risk spectrum?

We characterize it more as a different part of the risk spectrum. We have been more focused on generating transaction flow in that area. And, again, it's a huge market in all parts of our business. It is just that in the core right now, pricing is so extreme it is really hard to make any investments that we view as being accretive, not just a current period earnings but to value over the long haul.

Okay. And, Pat, you talked about the fees in '05. Any sense as to what we can model out for '06 fee income?

Well, the the recurring asset management fees were about 1 million for the quarter and that's a sustainable number. Acquisition fees and financing fees are just based upon activity levels that we have with our joint venture. That's kind of choppy.

Yes, it is very, very difficult to forecast with any certainty what volume in those programs will be this year.

I think we talked about 300 million being purchased through strategic where we don't actually earn acquisition or financing fees. So the rest of it, how you break it up between joint ventures and our own account would really impact that calculation. But the $1 million recurring is a pretty good number.

Okay. Great, thanks.

[OPERATOR INSTRUCTIONS] The next question comes from Ken Avalos with Raymond James. Please go ahead.

Hey, guys.

Ken.

Can you talk for a quick minute about the departure of the five employees that you took the severance charge for.

Yes, certainly. We -- last year we opened regional asset management offices in Chicago and Dallas, and one of the decisions was made that we wanted to run our West Coast properties from locations that were closer to those markets, and so we made a decision. We had our people in New York who were in charge of asset managing our West Coast operations and it wasn't that efficient. But beyond that, we let a couple of people go, which I just view as normal course of business.

Sure. Any -- have you conveyed to the Street any sort of price levels where you guys would be, I guess, active in the market of buying back shares?

We have not.

Thanks.

[OPERATOR INSTRUCTIONS] And it looks like we have no further questions in queue. I would like to turn the conference back to management for any concluding comments. Please go ahead.

Once again, thank you all for your interest in Lexington. We appreciate you attending today's call. And if you have any other questions that come up subsequent to the call please do not hesitate to call us directly. And we will look forward to communicating our results to you either on our quarterly call next quarter or hopefully some of you will come and attend our Analyst Day presentation at March 21, at the New York Stock Exchange. Thank you.

Ladies and gentlemen, that does conclude the Lexington Corporate Properties Trust fourth-quarter 2005 conference. If you would like to listen to a replay of today's conference you may dial 1-800-405-2236 or 303-590-3000, using passcode 11050477 pound. Thank you again for your participation in today's conference and you may now disconnect.