LXP Industrial Trust (LXP) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Lexington Corporate Properties Trust first quarter, 2006 conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star, followed by the zero. As a reminder, this conference is being recorded today, Thursday, April 27th, 2006.

I would now like to turn the conference over to miss Chris Ann Casaburri for Lexington Corporate Properties Trust. Please go ahead.

Good afternoon and welcome to Lexington Corporate Properties Trust first quarter conference call.

The press release and supplemental disclosure package were distributed this morning and will be furnished on form Form 8-K to provide access to the widest possible audience. In the supplemental disclosure package, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available on our 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 substitute 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 by forward-looking statements are detailed in today's press release and from time to time in our filings with the SEC. The Company does not undertake a duty to update any forward-looking statements.

With us today from management are Will Eglin, CEO and President; Robert Roskind, Chairman; Dick Rouse, Vice Chairman and Chief Investment Officer; 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 Will Eglin for his opening remarks.

Thanks, Chris, and welcome to all of you and thank you for attending our first quarter conference call.

Today Lexington announced funds from operations of $0.45 per share for the first quarter 2006. Our funds from operations per share were reduced by nonrecurring debt satisfaction charges of approximately $1 million which primarily related to a refinancing of a recently expanded property. Adjusted for these items, funds from operation per share were $0.47, which was the low end of our guidance range, due to slower acquisition activity.

We believe these are good results compared to the first quarter last year, when funds from operations per share were $0.39. So we had roughly 21% growth year-to-year. And our growth was driven by investment activity, which as we've mentioned before, totaled about $1.1 billion in 2005.

In the first quarter, we acquired two properties for an aggregate purchase price of $44.1 million, and our only disappointment continues to be in how difficult it is to make acquisitions. Also during the quarter, we obtained $74.4 million of non-recourse mortgage financing at a weighted average fixed rate of approximately 5.59%.

Of the two acquisitions, one of the properties was acquired by Lexington Strategic Asset Corp, which brings the LSAC portfolio to about $87 million currently.

The main theme we talked about last year was the competitive state of the acquisition market and the acquisition market remains highly competitive, with continuing low cap rates and narrow spreads because cap rates have not budged this year, even as interest rates have risen. Disposition opportunities continue to be very attractive and we sold two properties during the quarter for approximately $28.3 million, generating gains of approximately $2.3 million.

One of the properties we sold was the Dial headquarters in Scottsdale, Arizona, which we bought in the Wells acquisition last year, and we sold it for about a 6% cap rate, even though it's a short-term lease, with the prospect of occupancy by Dial beyond the lease term doubtful.

Subsequent to the end of the first quarter, we sold our Associated Grocers property for $29 million and that's a building that we bought just over four years ago for $19.1 million. So we continue to see very, very good opportunities to realize value in the portfolio, and our portfolio's appreciated tremendously in value over the last several years.

John vander Zwaag will go into detail on the leasing front, but obviously it's great news that during this past quarter we got our first tenant in our vacant Dallas, Texas property, and also K-Mart has indicated their desire to either purchase our Warren, Ohio, property, or extend the lease. So that's also very good news relating to our largest 2007 lease rollover. So now I would like to turn the call over to Pat Carroll, our Chief Financial Officer, to discuss our financial results and balance sheet.

Thanks very much, Will.

First I'll talk about the income statement. During the quarter the Company had gross revenues of approximately $54 million, which is an increase of 46% over the first quarter 2005. Fee income was approximately $1.1 million, and this compares to $634,000 in the same quarter last year, and all the fees in both quarters related to asset management fees. There were no acquisition fees recognized because we didn't buy any properties in joint ventures in either quarter in which we earned fees. And this really was one of the main reasons we came in at the low end of our expectations from an FFO standpoint.

Quarterly, G&A increased by about 29.2% to approximately $5.6 million, due to an increase in assets under management.

The main one-time item on the income statement is the debt satisfaction charge, which we incurred relating to the financing -- the refinancing, excuse me, of our Harbor Freight property, where we borrowed about $23.8 million, repaid an existing mortgage of about $11.4 million, and reduced our equity investment in the property just to about $5.5 million. We believe this property now has a market value of around $40 million, compared to our all-in cost of about $29.3 million.

When you net out this debt satisfaction charge, FFO per share was consistent with our expectations for results in a quarter where we earned no acquisition fees and where we operate the Company with fairly significant cash balances. Still, year-over-year growth is very good.

I would also like to point out that we spoke about it on the last call that we are in the process of handing back the property in Milpitas, California, to the lender. That did not close in the first quarter. So under GAAP, we're still required to recognize interest expense on the mortgage, although we're never going to pay it. So included in interest expense is about $250,000 of interest on that mortgage, that when we hand the keys back to the lender, we'll reverse it and it will be part of a debt satisfaction gain in the quarter in which it occurs. And including that, interest coverage for the first quarter was still good at about 2.4 times.

Now turning to our 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, which had a weighted average interest rate of about 5.98%, all of which is fixed when you remove the Milpitas, California, variable rate debt that I just spoke about.

Of our mortgage debt, approximately $314 million amortizes over time, so our balance sheet does deleverage significantly due to our monthly debt service payments.

We had about $61.3 million of cash at quarter end and we had nothing outstanding on our $200 million bank line. The cash balances are due to property sales, mortgage financings, and about $8.9 million of cash that we collected due to prepaid rents.

At quarter end, balance sheet debt was about 45% of total capitalization and we are comfortable operating the Company within a range of 45 to 50. For the remainder of the year, we have about 18.4 million of scheduled debt amortization.

So we believe that we have sufficient cash line availability and disposition proceeds to execute our growth plans for the foreseeable future and we currently have no plans or needs to access the capital markets, with the exception of LSAC, where we have filed an initial filing with the SEC to register shares for a potential initial public offering.

Continuing in the balance sheet, included in Intangibles is the allocation of purchase price to in-place leases, customer relationships, and above- and below-market leases in accordance with FAS 141. The impact of the above- or below-market lease had an FFO. It was approximately a net negative of $0.5 million for the quarter.

The straight line rent impact for the quarter was about $1 million positive, and for '06 and '07 we expect straight line rent to have a positive impact of about $4.2 million in '06 and $2.4 million in '07, while in '06 and '07, the negative impact of the above- or below-market rents will be about $2 million per annum.

Included in property held for sale is the carrying cost of five properties. They are located in Henderson, North Carolina; Columbia, South Carolina; Voorhees, New Jersey; Ocala, Florida; and Phoenix, Arizona. These properties meet the definition of held for sale in accordance with FAS 144.

Looking at the other assets, the significant components are loan escrows of about $15.9 million; construction in progress of about $11.2 million; real estate and rate lock deposits of about $3.9 million; a note receivable from a sale of a property in the prior year of about $11.1 million; and prepaid and deferred income taxes of about $5.1 million.

The liabilities from discontinued operations are the mortgages on those properties that are classified as held for sale, and the significant components of other liabilities are accrued interest of about $2.8 million; deferred revenue of about $6.2 million -- and that relates almost entirely to below-market leases -- payables relating to our CIP of about $3.7 million; subordinated notes payable of about $3 million; and prepaid rent, as I mentioned earlier, of about $8.9 million.

That summarizes the income statement and balance sheet and Will, I would like to turn it back to you.

Thanks, Pat. Now I would like for John vander Zwaag, Executive Vice President and Head of Portfolio Management, to give an update on our capital recycling plans and our leasing activity.

Thank you.

I will begin by reviewing our disposition activities. We are targeting for-sale properties in slower growth markets where we think the investment market valuations are particularly attractive for sellers. On the last call, we mentioned that we have identified 15 properties for sale. We've since sold four of those properties for $63.7 million. The remaining 11 assets have a market value of about $95 million and we will continue to work on these disposition opportunities over the course of the year.

With respect to leasing activity, we are very pleased to have entered into a ten-year lease on 48,000 square feet of space at the property 1600 Viceroy in Dallas, Texas. This was the first lease since the previous tenant, VarTec, went out of business. We have several other large users who are considerable taking space in the building and we're optimistic about the possibility of entering into another significant lease in this building this year.

In addition to 1600 Viceroy, we have four other properties with unleased space that we are addressing. I-17 Center in Phoenix has been vacant since November of 2003. We had the property under contract for sale in -- two separate sales for a combined gross purchase price of $7.6 million, which is about double what we valued the property at two years ago. A key to this outcome was buying a 7-acre adjacent parcel of land, which in and of itself has tripled in value.

As for other unleased space, we are 35% vacant at Black Canyon Office Center in Phoenix; we are 60% vacant at Airport Center West in Hebron, Kentucky, which is the Cincinnati market; and 21% vacant in our property in Memphis, Tennessee.

Moving on to our expiring leases, we have two leases that expire in 2006 and one lease which expires in 2007, where the tenants have already vacated the properties and where we have directly engaged leasing agents to retenant the space.

We have a 184,000 square foot industrial building leased to Leer in Auburn Hills, Michigan, on which the lease expires this July. This building will be a challenge to lease due to what's happening in the automotive industry and, by extension, the real estate market in Detroit.

We have a 179,000 square foot warehouse in the Harrisburg, Pennsylvania, market, with a lease to excel logistics that expires in November of this year. We are actively marketing the property and we are optimistic about the leasing prospects for this building.

In addition, we have a 68,550 square foot office building in Richmond, Virginia that was occupied by Capital One with a lease guarantee from the developer, Highwood Properties, that expires in November of 2007. We are optimistic about the leasing prospects for this building and would also note that we own this property in a joint venture where we have a 30% ownership.

As to our other 2006 renewals, we have an office and R&D facility leased to Honeywell through July in Glendale, Arizona, which is the Phoenix area. We have preliminarily agreed on a five-year extension of this lease at an approximately 20% increase in rent. The documentation on this is just beginning and the documents will also provide for the release of 14 acres of excess land from the lease, which we will either sell or develop.

We have a 330,000 square foot warehouse in the Harrisburg area leased to Excel, which expires in November. We are talking to them about a one-year extension on this lease while they seek to extend the contracts that they service in this building. If they extend that contract, we expect that they will extend the lease for an additional five years in November of 2007.

Finally, for 2006 we have two leases with Johnson Controls that expire in December. We are discussing a three-year renewal on the larger facility which is in Plymouth, Michigan, and that would match the term of the contract for the work that Johnson Controls performs at the property. And we are discussing a one-year extension of the lease in Oberlin, Ohio, and during that one year they will make a decision as to whether they have a long-term requirement for the property.

Our 2007 renewals are a 252,000 square foot warehouse leased to Excel in Harrisburg. We are in the beginning stages of discussions for a five-year extension of this lease. We have a 148,000 square foot industrial building leased to Dana through August of 2007 in Gordonsville, Tennessee, where we are optimistic about an extension of the lease.

The lease on our large K-Mart distribution center in Warren, Ohio expires in December 2007. We have, as Will noted, begun discussions on either an extension of this lease or a sale of the property to K-Mart.

And we have a lease with Allied Holdings on 112,000 square feet, it's an office building in Decatur, Georgia, which expires in December of 2007. Allied is operating in bankruptcy and we expect them to reject this lease in the next couple of months. We are considering giving Allied a new lease on up to 50% of the building, although this submarket of Atlanta is a strong one and we may prefer not to enter into a new lease with Allied. The building is already 25% occupied by subtenants, who we expect to retain after Allied's rejection of their current lease. We have been approached by several parties who are interested in buying the building, but we are not inclined to sell it at this time.

We have been approached by several parties who have an interest in further development of this site for a variety of uses: as an office building, retail space, apartments, condominiums, a hotel, and combinations of these. We are evaluating the development potential of the balance of the site at this time, while we begin the process of upgrading and filling the existing office building.

In addition to Allied we have three other tenants in bankruptcy that are paying currently. They are Federal Mogul, Owens Corning, and Tower Automotive.

Our final tenant in bankruptcy is Dana. In March, Dana rejected its lease on a 677,000 square foot industrial building in suburban Nashville that we own in a joint venture. We are documenting an agreement for a new 15-year lease on one half of this building with an existing subtenant at the property, and we have a proposal out to another potential tenant for a lease of an additional 150,000 square feet. Although it's too early to tell if this proposal will materialize into a lease, I think it's indicative of the demand for larger spaces in this market.

We expect Dana to reject the lease on an office and industrial building in Farmington Hills, Michigan, around the end of May. We expect to retain Dana as a long-term tenant in the other buildings that they lease from us.

In discussing the Allied property, we've touched upon the value creation opportunity that this lease rejection will unlock for us. In discussing the new lease with Honeywell in Glendale, Arizona, we've provided an example of a property with additional land that can be developed in what has become something of an in-fill location over the 20 years that Lexington and its predecessors have owned the property.

There are a number of other value creation opportunities that we are actively working on at this time, and I will briefly mention a few of these which are representative of the types of opportunities that are embedded in the portfolio.

We have a 149,500 square foot refrigerated warehouse in Danville, Illinois that is leased to Sysco Corporation. We are in the process of documenting an agreement to expand this facility by about 100,000 square feet and extend the lease on the entire facility to 15 years.

We also have a 125,000 square foot building in the triangle area of North Carolina that is leased to Lucent. Adjacent to this site is a 16-acre parcel of land, which we can sell at an attractive price today for possible residential development, or we can hold it for development of an additional office building, and we have seen a recent uptick in demand for office in this location.

At Airport West Center, where we are continuing to lease space in our existing building -- this is in the suburban Cincinnati market -- we have the ability to construct approximately 100,000 square feet of additional office or industrial space. We are putting in place a program to actively market this as a build-to-suit opportunity while we continue with the lease-up of the existing building.

So in summary, it's a good market for sellers and we are taking advantage of this to improve the portfolio by disposing of assets at very good prices that we think are declining benefit to the portfolio.

Our leasing activity in the few places where we have space available continues to strengthen. We are looking at a high percentage of renewals over the next 24 months.

Where we have pending vacancies, we generally like the leasing environment we are in, with the exception of the two properties in the Detroit market which will be depressed over the next few years due to difficulties in the automotive sector.

The balance of our property leased to the automotive industry, which represents the vast majority of our exposure to the sector, look very strong in terms of continued use by the existing tenants.

Finally, with the strengthening of the economy and improving real estate market fundamentals, we are beginning to unlock some of the growth potential that's embedded in the existing portfolio in the form of land sales, development of additional buildings, and expansions of existing facilities.

Will?

Thanks, John.

I just have my ending comments before we go to Q&A and we'll touch on some things that we hope to accomplish over the balance of the year.

Clearly we think there's very, very good opportunity to upgrade our portfolio and realize significant value by selling non-core holdings this year and I think we are off to a really good start. We've said it before, but we view real estate as a highly cyclical business and it requires that properties be sold from time to time, and we are really in an exceptional time, in terms of being able to sell some assets. And keep in mind that the properties that we are selling don't represent the strongest assets in the portfolio.

We do expect some of the properties that we have sold will be at cap rates above where we could reinvest on a free and clear basis. But so far, the average cap rate on what we disposed of is about 7.1%, so I think we're doing very well. Any earnings dilution that results from that can be mitigated by utilizing greater leverage on whatever we buy and also by redeploying capital into joint ventures, including Lexington Strategic Asset Corp, which continues to be a key part of our 2006 business plan. But our only quarterly acquisition so far is in a joint venture and it continues to be highly competitive. I do think over the balance of the year there's a good case that cap rates could start to inch up again, but they've been static so far, even though interest rates have risen.

We do have a share repurchase authorization of 2 million shares and as we've said before, we are not averse at all to distributing capital gains to shareholders if we find that we have no good alternative investment use as the year progresses.

We believe the cap rates have compressed to an extreme relative to interest rates and so we think we should continue to be very patient and disciplined in evaluating new acquisitions. That doesn't mean that the world is completely without opportunity, but we just think we're at a point in the valuation cycle where we need to be quite patient.

Until spreads widen and acquisitions become more attractive, our focus is on running the Company to maximize net asset value per share and our shares continue to trade at a discount to net asset value in spite of what we have seen with really significant appreciation in most of our portfolios over last few years.

Other than that, this was, I think, a very good quarter for Lexington from an operations standpoint and in comparison to the first quarter of last year. Our balance sheet remains in very good shape. We certainly have sufficient resources to execute any growth opportunities that are likely to come up over the balance of the year.

As John mentioned, we believe that the leasing environment is steadily improving. We still, in some of our 2006 rollovers, will be lowering rents, the main exception being the Honeywell facility in Glendale, where we have not only a chance to raise rents fairly significantly but where we can get a piece of land released from the lease which has a good value to us.

And our two main leasing challenges in 2006 are utilized by tenants in the automotive sector, but beyond that, I think the prognosis for improving market rents and high tenant retention over the next couple of years is very, very good.

With that, Operator, that ends our comments and we will turn it over to you for our question-and-answer session.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is from John Guinee with Stifel Nicklaus. Please go ahead.

Hi, how are you? A handful of questions. First, is debt satisfaction the same as a prepayment charge or something different?

It was -- part of it was a yield maintenance penalty and part of it was the writeoff of capitalized deferred financing costs. I think like 250,000 of it was the writeoff of what we had capitalized and the rest was cash prepayment penalties.

Okay.

Second, on the Associated Grocers building in, I think it was Ocala, Florida, you bought it for 19 and sold it for 29. Did the lease change in the period at all? Did you sell it on a levered or an unlevered basis? Do a blend and extend? What caused the $10 million increase in value?

Nothing changed with respect to the lease. We sold it subject to the debt, but with the understanding that immediately upon closing, the buyer was going to recapitalize the property. So the pricing reflected a free and clear price after repayment of the existing loan.

So they were just acquiring it with a lease term that was four or five years shorter than when you acquired it?

Correct.

Okay.

And third and last question, Will, when you are looking at your competitors in the acquisition game, how many -- is your typical competitor a highly leveraged, 70, 80%-plus investor or is your typical investor someone who might be more moderately levered, between, say, 0 and 60%?

I would say for the most part, investors are utilizing greater amounts of leverage in the net lease area right now, but it really depends on the type of building it is and what market. So competition isn't limited to any one class of investor in our core business of general use office and industrial buildings.

Perfect. Okay.

And then the last question: which acquisition was an LSAC acquisition?

The Dana building.

Okay. So the capitalized cost of $4.7 million, is that just your portion, or is that the full --

That's the full purchase price.

Perfect. All right. Thank you.

Our next question is from Tony Paolone with JP Morgan. Please go ahead.

Okay, thank you. Will, can you just address guidance?

We are leaving -- we gave guidance to the first quarter. We are not giving guidance for further periods during the year. Clearly, the pace at which we redeploy capital into acquisitions is unclear, given the way cap rates are in relation to interest rates. And we'll have to see how the market develops on the acquisition side and the other alternative, of course is to repurchase stock or dividend absent cash. If we go through -- if we get late in the year and nothing has changed on the acquisition side, obviously, special distribution is something that we would consider if the market stays so competitive.

But it's very -- we have been a little bit surprised at how sticky cap rates have been even though interest rates have gone up a lot, and our belief is that either we'll see some relief there or we'll continue to have what I think are very, very good opportunities to realize value at the asset level.

Okay. In terms of just the deal environment, and you talk about how competitive it is, are there any categories that are more or less attractive, whether it's office versus warehouses versus retail, or whether it's properties that you are looking at to own 100% versus the JV versus LSAC. I mean, is there any delineation between those things?

The most significant portions of -- in terms of volume with what we are looking at tend to be transactions that fit the criteria of LSAC, i.e., credits in the single-B area and more special use types of property.

Beyond that, I don't think either office industrial or retail is really priced much at -- in terms of asset-to-asset at any compelling yield differential. So the continued thrust of our acquisition activities is going to be in the LSAC area.

Okay. Thank you.

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

Hey, guys, I have a couple of quick questions. Your gain on sale from the two assets you sold of $2.3 million, is that GAAP or cash?

It's really both. There's a de minimis amount of GAAP assets that we netted against it. So the cash is -- gain on sale is always non-cash. The proceeds of the sale is on page -- it's on the summary page in the supplement. So the proceeds from the sale are about $28.3 million, and the gain on sale, with the acception of maybe about $100,000 of GAAP capitalized. Of course, I would say then the [inaudible] is all cash.

Okay. So -- I guess what I'm asking is what was your fully capitalized basis, undepreciated book value of what you sold.

Well, depreciated was 25.6, and there wasn't that much depreciation taken on it. One of them, in fact, the Dial property, we didn't depreciate at all because it was always held for sale. And the Countryside, Illinois property, which we've owned for a while, had maybe 4, 5, or 600,000 of depreciation built in.

Okay. Thanks.

Stimulating.

I've been getting questions about your LSAC IPO that's pending and I don't know how much of this you can answer, but what are your capital -- what do you anticipate to be LSAC's capital needs out of the blocks? When do you expect them to come back to the market? Another way of asking that is, what is the acquisition and growth expectations for LSAC?

You know, Stephanie, since we are in the quiet period in advance of the IPO, we have a filing that we can refer you too.

Okay.

We've said that we hope to invest a few hundred million dollars a year. For LSAC that would be consistent with the initial amount of capital that we raised in the 144-A transaction, when we raised the money last year.

You're going to make me do that reading thing, aren't you?

Yes.

All right.

It'll be a great education for you.

Let's see, one other question, on your discontinued ops number on your income statement: what's a good assumption for the carry-forward income from discontinued ops that we should assume? Just for the next couple of quarters.

Let me think here. I would --

Or, alternatively, could you list out the assets again more slowly and I can probably vector into it, given your disclosure?

The assets that included in held-for-sale at the end of -- as of March 31st is the Corporate Express in Henderson, North Carolina; the Stone Container in Columbia, South Carolina; the Associated Grocers, which we already have sold, and that was in Ocala, Florida; the Bally's in Voorhees, New Jersey, and that sold -- that has been subsequently sold after year end also; and the final property is -- oh, it's the vacant Bank One -- the former Bank One property that's vacant in Phoenix, Arizona that John talked about earlier.

Okay.

From a recurring standpoint, Steph, you just really need to look at the Corporate Express, the Stone Container --

And that's it.

And that's really it.

Okay. Thank you. Great quarter, guys.

[OPERATOR INSTRUCTIONS] At this time, there are no further questions. I'll go ahead and turn the call back over to management for any closing comments.

Once again, thanks to all of you for tuning into the call today. We'll look forward to updating you on Lexington's business plans as the year progresses. And as we always say, if any questions do come up, please don't hesitate to call any one of us directly. Thank you.

Ladies and gentlemen, this concludes today's Lexington Corporate Properties Trust first quarter 2006 conference call. We thank you again for your participation. You may now disconnect.