LXP Industrial Trust (LXP) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Lexington Realty Trust fourth quarter 2006 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [OPERATOR INSTRUCTIONS] This conference is being recorded, Thursday, February, 22nd, 2007.

I would now like to turn the conference over to Carol Merriman, Director of Investor Relations. Please go ahead, Ms. Merriman.

Thank you, and welcome to Lexington Realty Trust fourth quarter and year-end conference call. The press release and supplemental disclosure package was distributed over the Newswire this morning, and we will be furnishing a Form 8-K. In the press release and supplemental disclosure package, Lexington has 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 Lexington'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, Lexington can give no assurance that its expectations will be obtained. 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 Lexington's filings with the SEC. Lexington does not undertake a duty to update any forward-looking statements.

With me today from management are Wil Eglin, CEO and President; Michael Ashner, Executive Chairman; 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 Wil for his opening remarks.

Thanks, Carol. And welcome to all of you. And thank you for attending our fourth quarter and year-end conference call. We are very pleased with what we accomplished in 2006. It was an exceptional year of growth for our Company in which we greatly expanded and enhanced the quality of our real estate portfolio. We continued to successfully execute our investment program, acquiring interest in a total of 185 properties during 2006, including the properties that were brought into Lexington in connection with our year-end merger with Newkirk Realty Trust. For the fourth quarter, the Company's total funds from operations were $15.1 million or $0.24 a share. For the quarter, we had some one-time items that, in our view, decreased FFO by about $0.21 per share. These included an impairment charge on our Farmington Hills, Michigan, property, a gain on discharge of indebtedness from repaying the mortgage on that property at a discount, a charge for the acceleration of shares subject to time-based vesting, and several million of other expenses that we view as being related to the strategic review process that we went through last year, and which culminated in our merger with Newkirk.

Adjusted for these items, FFO per share would have been $0.45 for the quarter, which is about the same as third quarter 2006. So our view is that core operating performance remains steady in our fourth quarter. Our general and administrative costs in the fourth quarter were not reflective of our current expected quarterly run rate of $7 million to $7.5 million. During 2006, we increased our dividend to $0.365 per share per quarter, or $1.46 on an annualized basis. And we announced our intention to increase the dividend to $1.50 on annualized basis, although this is subject to formal Board approval. The regular dividend payout ratio for the fourth quarter was 81.1%, again, adjusted for what we view as one-time items.

Turning to investments, before giving effect to the Newkirk merger, in our fourth quarter we acquired six properties for $118.1 million at a GAAP cap rate of 7.7%, and that volume represented our busiest quarter since third quarter of 2005. Also during the quarter, we raised our ownership in Lexington Strategic Asset Corp. to 77% from 32%. LSAC is now a consolidated subsidiary of Lexington. In addition to the registration of LSAC shares, we are exploring opportunities to raise joint venture capital to continue growing this part of our business. Taken together, these investments, combined with the Newkirk merger, brought our total volume for the year to $2.3 billion. Based on our current pipeline, we expect acquisition volume of $75 million to $100 million for the first quarter of 2007. So we believe we are off to a good start in terms of reaching our business plan objectives this year. In addition, we believe our debt platform with Winthrop is also executing ahead of schedule, with our next CDO targeted for April.

During the fourth quarter, we also obtained approximately $59.2 million of non-recourse mortgage financing at a weighted average fixed rate of approximately 6.03%. And in addition, we assumed $835.1 million in debt relating to the Newkirk merger, $547 million of which has been, or will be, refinanced in order to lower our borrowing costs. Also in 2006, we continued to capitalize on the strong buyer demand for properties by disposing of eight non-core properties, generating $94 million in proceeds. John Vander Zwaag will go into detail on the leasing front. But, we are very pleased to have completed a total of 13 leases during the quarter, including six leases in the Newkirk portfolio, and we ended the year with roughly 98% occupancy. We are also pleased that we have signed 14 new leases or extensions so far in the first quarter of 2007, representing about 850,000 square feet.

One of the attractions behind the Newkirk merger is that we viewed it as being an underleveraged portfolio. And we believe that adding that to ours would position our Company post-merger to enhance our performance by accessing capital markets transactions on more advantageous terms. For example, Newkirk had at closing $547.2 million of debt at LIBOR plus 175. First, we paid that debt down by approximately $349 million, with proceeds from the 5.45% exchangeable notes offerings -- offering and other financings completed. Second, we used the proceeds from our perpetual preferred offering to completely pay down Lexington's own credit line, and we intend to use a portion of the balance to further reduce Newkirk's secured line by approximately $40 million. Third, we are now in the process of obtaining about $250 million of long-term fixed rate non-recourse mortgage debt on specific Newkirk properties to fund growth opportunities and fully retire the Newkirk secured line.

So, overall, we will have replaced expensive short-term debt with lower cost long-term capital, taken out all of our floating rate exposure, significantly increased our financial flexibility, because we have a free and clear pool of properties valued at approximately $1 billion, and positioned Lexington to obtain bank lines on more favorable terms going forward. So overall, capitalizing on this refinancing opportunity and redeploying equity from the Newkirk transaction is a key element in our 2007 business plan.

In addition, we have identified a pool of non-core assets of $100 million to $200 million that we believe would be eligible for sale, but we are in the process of determining how we want to go about selling these properties. Any disposition proceeds could be used to repurchase stock. And as you will see in the press release, in the fourth quarter, we bought back approximately 450,000 shares of common stock at an average cost of $21.36 per share. During 2007 we expect to maintain our occupancy level in the 98% range. And our investment volume target for the year on a net basis is expected to be about $500 million on the property front, and at least $400 million in debt investments. So as we look at the year ahead, we've got a lot of momentum coming off of our fourth quarter in terms of adding to our total assets. So we believe we have got a lot of momentum as we start the year. There continues to be a robust amount of acquisition activity and deal flow across our markets, as we have said before. The market of single user real estate in the U.S. is enormous. But that being said, we continue to be cautious and disciplined in our underwriting approach, and are only allocating capital to opportunities where we believe we can earn a leveraged internal rate of return of 11.5% or better.

In addition, we expect to run the Company this year without significant cash balances on our balance sheet. And as many of you know, there have been times in the past two years when cash balances have weighed heavily on our earnings. With all of this in mind, we expect to generate Company FFO per share for 2007 in the range of $1.75 to $1.85 per share, and for adjusted funds from operations in the range of $2.10 to $2.20 per share. Now, I will turn the call over to Pat, who will take you through our results in more detail.

Thanks, Wil. First, I will discuss the P&L for the quarter, before turning to the balance sheet. During the quarter, Lexington had gross revenues of $55.2 million. Included in that was fee income of approximately $1 million, compared to about $1.2 million in the same quarter last year. Fee income for the quarter was comprised entirely of asset management fees. As Wil mentioned, quarterly G&A was up. It was up approximately $15.2 million compared to the same quarter last year. And this does relate primarily to the acceleration of vesting for certain shares, that was about a $10.8 million charge, other noncash compensation charges, and costs associated with the Newkirk merger and the strategic review process undertaken by Lexington last year.

There are a few unusual items reflected in the quarterly P&L. There was an impairment charge relating to our Farmington Hills facility, previously leased to Dana. That was about a $6.1 million charge. And there were net debt satisfaction gains of about $6.1 million relating to the extinguishment of the Farmington Hills debt, for an amount below its carrying value, offset by a charge relating to the satisfaction of the debt on the Kirkland's property, which we sold. Interest coverage for the quarter was about 2.2 times.

Now focusing on the balance sheet. We believe our balance sheet continues to be in very good shape. At quarter end, we had about $2.1 billion of debt outstanding, including debt on properties held for sale, which had a weighted average interest rate of about 6.1%. Our consolidated mortgage debt amortized at about $415 million over time, so our balance sheet deleverages significantly. At year end, we had about $98 million of cash on hand. And cash balances are due to property sales, mortgage financings, and the merger with Newkirk. Subsequent to year end, cash balance has been drawn to -- has been used to substantially draw down on and retire our debt. The balance sheet debt was about 44% of total capitalization, and we are comfortable operating the Company within a range of 50% to 55%. And $73 million of our debt is expected to amortize in 2007.

Included in intangibles is the allocation of the purchase price of properties to in-place leases, customer relationships and above market leases in accordance with FAS 141. The Newkirk merger was completed on December 31st, so our balance sheet reflects all the assets and liabilities of Newkirk, stepped up to their estimated fair values. For the real estate purchase accounting allocations, we did retain a third party to perform evaluations necessary under GAAP. As a result of the valuation process, the purchase price allocated to real estate was about $1.8 billion, and approximately $318 million was allocated to intangibles. Included in that intangible amount is approximately $86 million of above market leases. Also, we have allocated approximately 370 -- $357 million in below market leases to deferred revenue, which is a liability on our balance sheet. On page 34 of the supplement, we have included how much of the below market and above market leases that are estimated to amortize in the years 2007 through 2011 on a consolidated basis. For the quarter ended December 31st, '06, for which no operations of Newkirk are included in our P&L, the impact that above and below market lease amortization had on FFO was a net negative of about $400,000.

Continuing with the balance sheet, included in properties held for sale is the carrying cost of our K-Mart property and eight properties that were acquired from the Newkirk portfolio. The significant components of other assets are loan escrows of about $9.1 million and cash deposits and long-term debt securities of about $57 million. Turning to the liability side, liabilities from discontinued operations are primarily the mortgages on properties held for sale, which is just the K-Mart facility. And a significant component of other liabilities are accrued interest of about $11 million, and CIP and tenant improvement liabilities of about $6.3 million. Now I would like for John Vander Zwaag, Executive Vice President and head of Portfolio Management, to discuss our leasing and expansion activities. John?

Thanks, Pat. Our portfolio under management currently stands at just under 59 million square feet. At year-end we were just under 98% leased and expect to remain at or above the 97% range through 2007. Looking back at the Company pre-merger in the fourth quarter, Lexington Corporate Properties Trust ended 2006 with about 40.2 million square feet under management, which was 98% leased. Two leases were signed in the quarter, and six expiring leases were extended, for a total of 1 million square feet leased. No leases expired without a renewal. We did sell the one property in the quarter for $18.4 million. Newkirk ended 2006 97% leased on a portfolio of 18.6 million square feet. Four new leases were signed in the quarter, two were extended, and four leases expired without a renewal. The net result of this activity in the Newkirk portfolio was an increase of 150,000 square feet under lease.

Leasing activity for Lexington Realty Trust year-to-date has been strong. Five new leases have been signed and nine leases have been extended, for a total of 850,000 square feet leased. Just under 2,000 square feet of space has expired without a lease renewal, but 180,000 square feet of this expiring space was immediately leased to a new tenant, and is included in the 850,000 square feet leased year-to-date. Thus, our net increase in leased space has been 650,000 square feet since January 1. In addition to our strong leasing activity, we see growth in the portfolio from our existing tenants. We have a total of 355,000 square feet of expansion space under construction at four locations, and have six other potential expansion projects in discussion, for an estimated 450,000 square feet. We have three sights that are being held for future development and we expect to acquire one land parcel, which we currently lease, for the same purpose. In accordance with our pre-merger expectations, we sold a four building complex this year, pursuant to the tenant's exercise of its purchase options, for a total of $41.9 million.

In conclusion, I would like to reemphasize how pleased we are with our leasing success in the fourth quarter and the early part of 2007. Over this time period, we have signed a total of 11 new leases on 994,000 square feet, representing just under one half of our inventory of unleased space. We have also extended seven leases covering 1.6 million square feet. We have strong leasing prospects and good activity on much of our remaining available space. Now, I will turn the call back over to Wil.

Thanks, John. Overall, we believe we are very well positioned to execute our business plan as we get going this year. Leasing activity has been brisk. As we enter into new leases, we are creating opportunities to leverage our properties and generate capital for growth. And in addition, our lease rollover schedule post-merger is a little bit more front loaded than it has been. So being active on the leasing front and extending maturities is especially important. Balance sheet continues to be in very good shape, with what we think is fairly modest leverage. And we have significant liquidity, both in our bank line and in our pool of free and clear assets that we can finance.

In general, the acquisition market continues to be competitive. We would say over the last year that cap rates have compressed about 50 basis points. But, still, we believe that the market is not without opportunity, although it will require a little bit greater degree of leverage to generate attractive returns. So in general, in connection with acquisitions, we are obtaining higher loan-to-value mortgage financing, and as a result we expect to increase our overall leverage during the balance of the year at the corporate level. I think it's important to look in the supplemental disclosure package that Pat referenced. The schedule that shows our cash and GAAP rents for both the Lexington and Newkirk portfolios. I believe if people look closely at these schedules, that it will provide much higher degree of clarity with respect to our cash flows than has been available in our disclosure up to now. We're very much looking forward this year to reporting our first and second quarter results, which we believe will provide the market with a view of the Company's initial and comparative operating results following the merger, and add a great deal of transparency to our operating results.

So in summation, 2006 was a year of change and growth for Lexington, which dramatically expanded our market depth and diversified our portfolio further into many new markets. We believe we firmly established Lexington as a dominant REIT in the U.S. focused on single tenant real estate investments. In summary, as we look back, we are very pleased with our accomplishments, and very excited about the momentum that we have heading into 2007. So that ends our formal remarks. Operator, we will turn it back over to you for our question-and-answer session.

Thank you, sir. [OPERATOR INSTRUCTIONS] John Guinee, Stifel Nicolaus.

Key component of this merger strategy with Newkirk was to reduce the cost of debt. Can you walk through the strategy on the 7.55% cumulative preferred, which is about a seven-eight all in cost? And then also walk through the strategy on your $300 million of exchangeable notes?

Yes, I mean, I think the strategy with respect to replacing the Newkirk secured line, I would like to address that outside of the perpetual preferred issuance. There's a secured financing structure there, LIBOR plus about 175. We did the exchangeable notes at a coupon of 5.45%. So obviously, we are making an interim spread there between our cost on the Newkirk secured facility. The exchange price is $25.25. So obviously, the cost of that capital would get more expensive to the extent the share price appreciates over that. But I think between now and five years from now, in order to get to that conversion price, if you will, we would have to have a total return on the stock of about 11. And if it's less than that, that debt just cost us the 5.45% coupon, which is only like 10 basis points over LIBOR. So that was an important piece of the puzzle. The next piece of puzzle is looking at the assets in the portfolio that can support stand alone fixed rate financing, and we are in the market for a magnitude $250 million of that. That will all go off, I would expect, at fixed rates of 100 basis points or tighter, above ten-year treasuries. So call that, say, an average cost of like 5.75% today. And so we will -- taking advantage of the yield curve, John, and gotten cheaper debt and locked it in longer term.

Well, here's what I can't understand on the $300 million of exchangeable notes. Your all-in is about 5.60%, but you just said you can invest, or you can borrow off of ten-year treasuries at 5.75%. So what you have done is you have given up a conversion right at $25.25, which is basically below last year's high, in order to save 15 or 20 basis points.

Well, it's actually not below last year's high, I don't believe. I think the high closing price for the stock was $25.19.

Okay.

And I view the exchange price as being above net asset value presently. So I wouldn't ;'t necessarily convert -- compare the 5.45% to what we can borrow at fixed in the secured market, because we can't borrow secured indefinitely. We run out of assets to pledge. So my view, is whether we can take that money and earn a spread on it over time.

What is your loan to value on your $250 million of stand alone -- ?

Depending on the asset, it would probably range between 65% and 75%.

So if you are going to run your Company at 55% debt-to-total market cap, could you do it all just by asset-specific debt.

Well, the only issue there, John, is we have secured financing in place that is subject to prepayment penalties. So it would be very -- it would be expensive for us to unwind our existing debt structure and replace it. So it's hard to get all the way there.

All right. How about the cumulative preferreds? Was that [inaudible] 175, or how much?

I'm sorry?

How much did you raise including -- ?

We raised $155 million. We believe that the perpetual preferred market was just very attractive right now. And 755 -- the all-in cost there is about 780 with deal costs.

Yes.

And I'm highly confident that we can earn more of that -- more than that over time.

Well, you just bought all of your assets in the fourth quarter at about a 7.5 cash cap rate and a 7.7 gap. You can't make that up in volume, can you?

Well, John, if you buy something at a 7.70 cap rate and leverage that at the asset level at like 5.70, you are earning a lot more in your equity than 7.80. So the proper way to look at that slice of preferred, is as a piece of our capital stack, not that we are taking that money and investing on an unleveraged basis. We don't invest in real estate on an unlevered basis.

All right. Expensive debt. Thanks.

Anthony Paolone, JPMorgan Securities.

It's Joe Dazio here with Tony. Two questions. One, can you provide, I guess, an early read on the '08, '09 Newkirk lease expirations? I know you have done a really good job of making leasing progress in the last two quarters. But wondering if there's anything there you could update us on?

It's difficult because of -- there's a number of them to give you specifics. In general, I think what you will see is that we are going to maintain through those rollovers pretty much what we have done. So I don't expect it to have any negative impact on our percentage leased, and we will be retaining the vast majority of those tenants.

Okay. And then I guess a question for Pat. It looks like there's about a $0.35 delta between the AFFO and the FFO guidance. But if you look on page 34, I guess I'm maybe looking at it wrong. The $20.5 million amortization, that's like half of the $0.35? Am I just missing something, or looking at that incorrectly?

On page -- well, there's also -- what's not in here is the difference between GAAP and cash rents in the Newkirk portfolio, too.

Oh, the straight line impact then?

Exactly.

Okay. I thought that was part of that. All right. Thank you.

Stephanie Krewson, BB&T.

Pat, you are going to hate me. I have got a nudge question. In fact, I have got two of them. The first one is on page 31 of your supplement. You are showing 375 assets. But if I do a physical count, I come up with 372 assets.

372 assets?

Yes. You don't have to answer this now, but could someone circle back to me on that?

Yes.

And then secondly, and this is where you are really going to hate me. Historically, you have always -- you have been providing a rollover schedule on page 32, that -- that has -- actually let me see that, Dan. Sorry. Historically, page -- I'm sorry, historically, page 19 of your supplement is the rollover schedule that I and probably other people on the sell side have their core model for modeling your rolldown based on, which is a square foot calculation instead of a per lease calculation. Can you -- Dan, this is not the right -- I'm sorry. I'm sorry. I've got the wrong supplement in front of me.

Can you look on 32, Stephanie?

Yes, we have the cash rollover by properties on page 32. That's a combined Lexington and Newkirk portfolio into one schedule.

Right. But what I'm asking for is, can you break out Newkirk in the same way? Or is it not going to be meaningful? I would think it would be, since they still have some rolldown.

I guess I'm not following the question. Break out Newkirk how?

In the same way -- break Newkirk out of page 32? Because I know that you provide information on page 33 and 34, but that is on a different basis. That's based on of number of expiring leases versus square footage, and the two analyses or not comparable in terms of -- .

We obviously have Lexington and Newkirk stand alone. We combined them on page 32 to have one Lexington Realty Trust. I guess we could always -- .

Could you just provide the square footage associated with the leases expiring on pages 33 and 34 for five years out? And once again, you can circle back to me. And I'm not trying to be a pain in the [expletive]. I just don't want to have to recreate my entire model.

Yes, Stephanie. Give me a call offline. And if you go through the property chart and add up all the properties, you should have eight properties less than what's on the property chart that you referenced. And the eight properties are the ones we sold. We did that -- maybe you should have Dan recount.

Okay.

Thanks.

All right. Sorry, guys. Thanks.

[OPERATOR INSTRUCTIONS] At this time, I'm showing no additional questions in the queue. I would like to turn the call back to management for any closing remarks they may have.

Thank you all again for joining us this afternoon. As always, we appreciate your participation and support. If you would like to receive our quarterly supplemental package, please contact Carol Merriman, or you can find additional information on the Company on our website, at www.lxp.com. In addition, you may contact me or any other member of senior management with any questions. Thank you.

Ladies and gentlemen, this does conclude the Lexington Realty Trust fourth quarter 2006 conference call. If would you like to listen to a replay of this call, you may do so by dialing 800-405-2236, or internationally at 303-590-3000, and entering pass code 11080978, followed by the pound sign. Once again, those numbers are 800-405-2236, or internationally at 303-590-3000, and entering pass code 11080978, followed by the pound sign. You may now disconnect. Thank you for using ACT teleconferencing.