LXP Industrial Trust (LXP) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Lexington Realty Trust first quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Carol Merriman, Vice President, Investor Relations and Corporate Development for Lexington Realty Trust. Thank you, Ms. Merriman, you may begin.

Hello, and welcome to the Lexington Realty Trust first quarter conference call. The earnings press release was distributed over the wire this morning, and the release and supplemental disclosure package will be furnished on 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 that expectations reflected in any forward-looking statements are based on reasonable assumptions, Lexington 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 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 and Director of Strategic Acquisitions; Robert Roskind, Vice Chairman; Patrick Carroll, Chief Financial Officer; John Vander Zwaag, Executive Vice President of Portfolio Management; and other members of management. I'd like to turn the call over to Wil for his opening remarks.

Thanks, Carol, and welcome to all of you. Thank you for attending our first quarter conference call. We're very pleased to report our results for the first quarter of 2007, which was an exceptional quarter for the Company in which we accomplished the initial elements of our business plan for 2007. Our first priority for the year was to restructure our balance sheet after the Newkirk merger, and we did this by raising $805 million, which allowed us to replace short-term debt with longer-term fixed rate capital at a lower coupon. As a result, our bank line is fully available, we have no floating rate debt, and we have an unencumbered asset pool worth more than $1 billion. We are also very pleased to have executed 23 new leases in the quarter and completed $78.9 million of acquisitions. With the property market generally remaining quite competitive overall, we became a more active buyer of our own stock during the quarter, as we viewed this as a better investment than most one-off acquisition opportunities that we looked at. As a result, we bought back 4.1 million common shares at an average price of $20.40 per share.

For the first quarter, the Company's total FFO was $48.7 million or $0.42 per share. We had a few notable expense items that reduced our FFO per share, including $700,000 to unwind a swap we inherited from the Newkirk merger, a $1.3 million write-off of an intangible relating to a lease termination, $400,000 of costs written off relating to the abandoned Lexington Strategic Asset Corp. IPO, and $200,000 of merger-related costs that had not been capitalized. In addition, we expensed all of the fixed annual trustee compensation in the first quarter which adds about $700,000 to our G&A in the first quarter compared to the balance of the year. In our press release today, we reaffirmed our 2007 FFO guidance of $1.75 to $1.85 per share. During the first quarter of 2007, we increased our dividend to $0.375 per quarter, or $1.50 on an annualized basis, the 14th consecutive year of dividend increases. The regular dividend payout ratio for the first quarter was 89.3%, and at the midpoint of our 2007 guidance, our payout ratio is 83.3%. And we expect it to improve in 2008, as we forecast that FFO growth next year will be in excess of our dividend growth.

Turning to investments, in the first quarter we acquired four properties for an aggregate of $78.9 million at a GAAP cap rate of 7.6%, and we are very pleased with this activity in such a highly competitive market. In addition, our investment in Concord Debt Holdings, our joint venture with Winthrop Realty Trust, continued to perform very strongly, and Concord is executing its business plan ahead of schedule. In addition, during the quarter we raised our ownership in Lexington Strategic Asset Corp. to 90% from 77%. LSAC is a consolidated subsidiary of Lexington. At present, LSAC has offered to repurchase its shares not owned by Lexington for $10 per share, which is equal to the initial offering price.

As you recall, last year we continued to capitalize on the strong buyer demand for properties by disposing of eight non-core properties generating $94 million in proceeds. During the first quarter, we completed a thorough review of our portfolio and plan to become more active on the dispositions front than previously expected. We are marketing all of our retail properties for sale, in addition to other non-core properties, in an effort to exit the retail asset class. The sale of our retail properties will allow us to become much more efficient from an asset management standpoint. The value of these buildings is less than 7% of our enterprise value, but represents 33.5% by number of properties, and we see no current compelling opportunities to grow our retail business. The retail assets we are marketing for sale have a value of about $325 million to $350 million, and mortgage debt of just $28 million. So it's a very underleveraged portfolio and as a result, it's an inefficient use of equity capital for us. We expect the bulk of sale proceeds from retail assets in the fourth quarter this year, and we intend to redeploy the capital to reinvest in property, repurchase more stock, or perhaps pay another special dividend.

Subsequent to the end of the quarter, we announced that we have acquired the interest of one of our joint venture partners in 15 net lease properties for $82.7 million in cash, plus the assumption of nonrecourse versus mortgage financing. This value is the joint venture's assets at about an 8.3% cap rate. And although the assets we acquired control of include six smaller retail properties, we're pleased to have had the opportunity to add office and industrial assets to our wholly owned core portfolio of office and industrial properties in a negotiated off-market transaction at a time when acquisitions are difficult to come by at attractive yields. Now I'll turn the call over to Pat Carroll, who will take you through our results in more detail.

Thanks, Wil. Results of operations in the first quarter include the impact of the Newkirk merger, which occurred on December 31st, 2006, and is the primary driver of all fluctuations between the periods. During the quarter, Lexington had gross revenues of $95.2 million. Fee income was approximately $800,000 compared to $1.1 million in the same quarter last year, and all of the fee income in the quarter was comprised of asset management fees. When looking at the rental revenue line, under GAAP we were required to recognize revenue on a straightline basis over the noncancellable lease term, plus any periods covered by a bargain renewal option. In addition, the amortization of above and below-market leases are included, either as an increase or a decrease directly in the rental revenue line. In this quarter, cash rents were in excess of GAAP rent by about $12.9 million, of which $2.4 million related to the minority interests in consolidated joint ventures. For the remainder of 2007, estimated cash rents are projected to be $26.9 million in excess of GAAP rent, with $6.9 million relating to the minority interests. The unwinding of the Newkirk hedge charge of $700,000 that Wil spoke about earlier, is included in the nonoperating income line on our income statement. Quarterly G&A was up about $3.2 million compared to the same quarter last year, and this relates primarily to the expensing of the LSAC offering costs, professional fees, the trustees fees that Wil has mentioned, and additional personnel costs due to the Newkirk merger.

Our balance sheet, we believe our balance sheet continues to be in good shape. At quarter end, we had about $2.2 billion of debt outstanding, including debt on properties held for sale, which had a weighted average interest rate of about 5.9%. Of our consolidated mortgage debt, approximately $385 million amortizes over time, so our balance sheet deleverages significantly. We had $200.1 million of cash at quarter end. Cash balances are primarily due to the capital transactions we completed in late first quarter. Cash balances have been since utilized to acquire the 70% interest in the joint venture,, repurchase additional common shares, and to make the dividend payment. Balance sheet debt was 45% of total capitalization, and we are comfortable operating the Company within a range of 50% to 55%. $42.6 million of debt is expected to amortize over the remainder of the year.

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. Also, we have approximately $326 million in below-market lease liability relating to FAS 141. On page 22 of the supplement, we have included how much of the below-market and above-market leases that are estimated to amortize for the remainder of '07 through 2011 on a consolidated basis. Included in properties held for sale is the carrying cost of our Kmart property, plus six other properties that meet the definition of held for sale. The significant components of other assets are loan escrows of about $8.8 million, Section 1031 deposits and debt securities of $43.6 million, construction in process of $9.9 million, deposits for future acquisitions of $2.5 million, and prepaid and deferred taxes of about $5.6 million.

Liabilities from discontinued operations are primarily the mortgages on properties held for sale, plus a below-market lease liability for a property held for sale. The significant components of the Other Liability line are construction in progress payments of about $7.1 million, operating cost payments of $3 million, TI and cap reserves of about $1 million, a note payable of $3 million, offering costs relating to the capital transactions that we did in the first quarter of about $1.7 million, and taxes, [majorly] state taxes of about $1 million. Now I would like for John Vander Zwaag, Executive Vice President and Head of Portfolio Management, to discuss our leasing and expansion activity. John?

Thank you, Pat. We have a portfolio of 59 million square feet, and as expected, we finished the quarter 98% leased. We signed 23 leases in the quarter, covering 1.1 million square feet. Ten of these were new leases, accounting for about 700 ,000 square feet, and 13 were renewals or extensions totaling about 450,000 square feet. Two leases expired which were not renewed, totaling 200,000 square feet. Thus on a net basis, we added 950,000 square feet of leases in the quarter, excluding acquisitions. In addition to our leasing activity, we see growth in the portfolio from our existing tenants. We have a total of 250,000 square feet of expansion space under construction at four locations, and have four other potential expansion projects in discussion, estimated at 225,000 square feet. We have three sites that are being held for future development, and we are trying to acquire one land parcel, which we currently lease for this same purpose.

The second quarter is off to a good start, with 12 leases executed totaling 880,000 square feet. Six of these were new leases for 180,000 square feet, and six were renewals or extensions for 700,000 square feet. We believe we have a strong pipeline of leases under negotiation, and we expect leasing to remain strong through the second quarter and the balance of the year. Now I'll turn it back to Wil.

Thanks, John. In summary, I would just like to say that overall, we believe we're very well-positioned to execute our business plan over the balance of the year. Our leasing activity has been great, and the opportunity in that part of our portfolio so far exceeded our expectations this year. Our lease rollover schedule continues to be more front loaded than it has been in several years, so leasing activity continues to be especially important to us. Our balance sheet remains in very good shape, with moderate leverage, significant bank line availability, and liquidity. While the acquisition market remains competitive and we've seen in the market cap rates compress about 50 basis points since the beginning of last year, we think the right thing to be is continue to be selective on the acquisition front, although we were pleased to have the opportunity to purchase one of our joint venture portfolios in an off-market opportunity. And we felt like we did very well repurchasing our own stock as an alternative use of our capital during the first quarter.

So to sum it up, our immediate priorities post-merger were first, to restructure the balance sheet to lower our immediate costs and create a significant unencumbered property pool to enhance our financial flexibility. Second, to execute on leasing opportunities in the portfolio. Third, deploy capital accretively while staying disciplined.. And four, strengthen the portfolio by selling non-core assets. And I'm pleased to report today that we have executed, or are executing, or will continue to execute these aspects of our business plan, and we look forward to reporting our operating results next quarter. So that ends our formal remarks. Operator, we'll turn it over to you for a question-and-answer session.

(OPERATOR INSTRUCTIONS) John Guinee, Stifel Nicolaus.

John Guinee, here. Nice job, guys.

Thanks, John.

Quick question, and maybe this is not a good time to ask and we can go over this next quarter, and just say so if that's the case. Are you in a position to review the four or five biggest challenges that you see in the next 12 to 24 months, similar to Kmart last year?

Honestly, I think the biggest challenge for us has been on the acquisition side of the business, John. Leasing is coming together a little bit better than we thought. I don't see any situation like Kmart, with them exercising their purchase option last year and at other times with their credit, sort of hanging over our share price. But the biggest challenge has been finding accretive uses of capital . I think we did well in first quarter. I think we did well so far this quarter, although I expect that the volume of one-off acquisitions in quarter two will be less than in first

Okay, thank you.

Anthony Paolone, JPMorgan Securities.

On the leasing side, the $1.1 million in the quarter, and then it looks like you guys had good activity after the quarter end, how much of that is '07 expirations versus addressing things that are coming up in the out years?

Most of it was '07 expirations.

Okay. And then when those are addressed or those are signed, as you mentioned, are they coming out of the expiration schedule?

Yes. Although obviously we do have some inventory of available space where you'll also see leasing activity, although I think not much -- most of this was expirations.

Okay. I'm just trying to get a sense as to, like in your supplemental, the 6.4% that you have left expiring over the balance of the year. Like how much of that -- how much you know has been addressed at this point or how much -- ?

A large part of that, John -- Tony, is Kmart's still in there.

Okay, okay.

That's a big part of it.

Got it. And when you look out like the balance of this year and going out into '08, '09 with a lot of Newkirk expirations, how much of that, or do you have a sense as to how much you think will just get renewed under their options versus you having to go out and find new tenants, and potentially what the downtime might be in those instances?

Well there's going to be a wide range of downtimes. But in general looking at the schedule rolling forward, I wouldn't expect that on a net basis our vacancy would fluctuate much. So based upon what we see in the pipeline versus what's rolling and where we think we're pretty certain of renewals, and where maybe there may be a question, you really won't see any material increase in vacant space on a square footage basis, at least that's my belief.

Okay. And then Wil, did I catch you right, did you mention that cap rates, you say 50 bips of compression in the last year?

Yes. Yes, I think that's about right.

Have you seen any type of buyer not active in the market anymore? Have you seen any relief at all? Or is it just the same as it's been for the last several quarters?

I think it's largely unchanged right now. One of the reasons why we're taking a little bit of a wait-and-see attitude is given some of the challenges in the CMBS market, maybe there will be a little bit of cap rate back up here in some parts of the market. But it's been -- there's still been pretty, pretty strong demand and a high degree of competition on most acquisition opportunities.

Okay. And then on -- with respect to Concord, how should we go about finding that on your financial statements, and how that should be tracked, and what the contribution might be quarter to quarter?

The result of Concord included in the investment and joint venture lines in the equity and earnings line, when we file our Q, I will separately state the Concord joint venture information and not blend it in with the rest of the traditional real estate holding -- property holding joint ventures.

Okay. What were originations in that venture in the quarter, and what are the expectations for the year?

Do you want me to answer that, Wil?

Yes, I think you l probably have a little bit better insight into that, Michael.

It's hard for me to give you the exact number. We're running -- it's better for me to tell you what we're running on a monthly basis. On an annualized monthly basis, I would say it's about $100 million, close to $100 million a month right now. The process is you commit, then you circle, then you buy. I suspect that we committed, circled, and bought at least $270 million in the first quarter, so we're well -- slightly -- we're ahead of our targets right now.

Okay.

And Tony, when you look at the income statement line, the equity and earnings in joint ventures, the delta between the quarters is almost all Concord.

Okay, that's helpful. Thank you.

[Greg Korandy], LaSalle Investment Management.

I was a little late hopping on the call here, and just wanted to see if you addressed what's going on at 100 Light Street, the Legg Mason building?

Well, we're continuing to --

Would you like me to answer that, John? John?

-- had a couple of tenants who have executed leases that will extend beyond the term of the current master lease. And we are actively engaged in marketing the balance of the building for lease, although we've got obviously some time before we can offer anyone occupancy. And we feel that that's a strong asset in the market, and that we'll be able to fill it when the time comes.

How big's the -- when's the master lease end? And how big is -- ?

Can I be helpful here, John?

That would be very helpful, Michael.

Okay. The lease, I think, ends in 2009. Legg Mason has indicated obviously that they're not going to renew. I think the bottom four to six floors are already subleased. We've engaged -- we're in the process of either engaging one of three major brokerage firms in the city to release the remainder of it, and they're relatively confident that we should be able to bring it to 90% occupancy prior to the expiration of the Legg Mason lease. Obviously, there's an issue that whether or not Legg Mason gets out in time, but I'm not too concerned about that. It is, as you may know, the premier asset -- one of the premier assets in Baltimore, and we're probably going to be enhancing the overall importance of the asset by way of construction of a 12-story parking garage.

And how much space is coming back?

500 -- well, it's 560,000 square feet of leasable space, and I believe 32 floors. So we already have, I believe six floors leased. So figure it out.

Okay.

(inaudible) we're even.

All right. Thank you.

(OPERATOR INSTRUCTIONS) It appears there are no further questions. Do you have any closing comments?

Just to say once again, thanks to all of you for joining the call today. And we'll look forward to communicating our operating results next quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.