LXP Industrial Trust (LXP) 2007 Q2 法說會逐字稿

Greetings, ladies and gentleman. Welcome to the Lexington Realty Trust second quarter earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce your host, Ms. Carol Merriman, VP-Investor Relations. Thank you. You may begin.

Hello and welcome to the Lexington Realty Trust second 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 the 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 us today from management are Wil Eglin, CEO and President; Michael Ashner, Executive Chairman; Robert Roskind, Vice Chairman; Pat Carroll, Chief Financial Officer; Natasha Roberts, Executive Vice President and Director of Real Estate; 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 second quarter conference call. We're pleased today to report our results for the second quarter of 2007, which was an exceptional quarter for the Company, in which we achieved stronger operating results compared to our first quarter. During the quarter, we announced the strategic restructuring plan and we have already executed significant elements toward this restructure.

To that end, we purchased interest in 48 properties, foreign investment of about $367 million and acquired the remaining outstanding stock of Lexington's Strategic Asset Corp. These investments were immediately accretive and were a significant step towards focusing our business mainly on, wholly on our portfolios of core office and industrial assets.

We also announced during the quarter that we intend to form an institutional joint venture investment program to invest in specialty single-tenant real estate. Which will be seeded with up to $1 billion of assets from our current portfolio, including most of the properties owned by Lexington Strategic. In addition, we announced that we would be marketing for sale 149 core properties, including our entire retail portfolio.

We've started to execute this disposition program during the second quarter by completing six sales for $67.8 million, which generated gains of $12.8 million. Subsequent to quarter end, Lex-Win Acquisition, LLC, a joint venture of which our ownership share is 28% completed tender per shares in the [Well's read] with the Joint Venture acquiring 4.8 million shares.

On the leasing front, we had record activity during the second quarter. With 28 leases executed or extended and this lead to an occupancy level of approximately 98%. Leasing activity in our portfolio remains very active. In addition, we acquired 2.5 million of our common shares which underscores our current belief that repurchasing shares has been a better use of capital than acquiring property. We have 3.9 million shares remaining under our current authorization.

For the second quarter, the Company's total funds from operations were $59.9 million or $0.54 per share. We had a few notable revenue and expense items that increased our overall FFO per share by about $0.07, including the realization of $10.6 million of incentive fees from the Lion and Utah joint ventures; $3 million of lease termination payments, $2.4 million of which came in connection with an asset sale; an $800,000 net expense relating to the LSAC transaction; and $4.5 million in severance costs.

We're very pleased with the quarter and in our press release today, we reaffirmed our 2007 FFO guidance of $1.75 to $1.85 per share. We expect that operating results will be stronger over the balance of the year and if it were not for the potential dilative effects of assets sales later in the year, we would be raising our guidance today.

Turning to investments, the significant transaction activity in the second quarter related to the Joint Venture repurchases. The properties we acquired from the joint ventures were valued at an aggregate capitalized cost of $1.3 billion at a GAAP Cap rate of 8.6%. We are pleased to earn this level of return in what has been a highly competitive market. In addition, our investment in Concord Debt Holdings, our joint venture with Winthrop Realty Trust, continued to perform strongly. Although the marketing the second CDO transaction has been delayed due to current market conditions.

Our activity over the balance of the year, as outlined in our strategic restructuring plan, is expected to create significant liquidity. Which could be used to repurchase our common shares or distributed to shareholders or reinvested in real estate assets, if the recent dislocation in the debt capital markets creates a more favorable environment for us to deploy capital into real estate. 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 second quarter include the impact of the Newkirk merger, which occurred on December 31, 2006, and its the primary driver of all fluctuations between comparable periods.

During the quarter, Lexington had gross revenues of $120.5 million. Included in that amount is advisory and incentive fee income of approximately $11.2 million, compared to $1.3 million in the same quarter last year. The large increase in incentive and advisory fee income related almost entirely to the $10.6 million incentive fee we earned in the quarter on the Joint Venture transaction.

We provided, in our supplement on Page 32, the details of the components of advisory and incentive fees and equity and earnings of joint ventures for the six months ended June 30, 2007. The equity in earnings increase of $37.5 million is almost entirely related to the gains realized on the Lion dissolution. Under GAAP, we are required to recognize revenue in the straight-line basis over the non-cancel lease term of any periods covered by a bargain renewal option.

In addition, the amortization of above and below market leases are included directly into rental revenue. In the quarter, cash rents were in excess of GAAP rents by about $8.4 million, including the effect of above and below market leases. It's also included in the supplement on Page 38, our estimate of both cash and GAAP rents for the remainder of 2007 through 2011.

Quarterly G&A was up about $7.5 million, compared to the same quarter last year. This relates primarily to severance costs Wil mentioned; the expensing of LSAC deferred compensation due to the merger and profession fees.

Now, turning to the balance sheet, we believe it continues to be in good shape. At quarter end, we had about $3.3 billion of debt outstanding, including debt on properties held for sale, which had a weighted average interest rate of about 5.9%. In addition, we had about $75.5 million of cash at quarter end. Balance sheet debt was 56% of total capitalization and we're comfortable operating the Company at this level. However, it should be noted that, net disposition proceeds will be used to retire our $225 million term loan and amounts outstanding under our credit facility. So, we should see some deleveraging of the balance sheet over the remainder of the year.

Included in intangibles is the allocation of the purchase price of properties related to the in-place lease cost, above market leases and customer relationships in accordance with FAS 141. Also, we have approximately $350 million in below market lease liability. Including in properties held for sale is the carrying cost of our K-Mart property, plus four other properties. Significant components of other assets and other liabilities are included on Page 31 of our supplement. Now, I would like for Natasha Roberts, Executive Vice President and Director of Real Estate, to discuss our leasing and expansion activity. Natasha?

Thanks, Pat. Our current portfolio totals approximately 56 million square feet. As expected, we finished the quarter 98% leased. We signed 28 leases in the quarter covering 1.9 million square feet. 14 of these were new leases accounting for about 370,000 square feet and 14 were renewals or extensions totaling about 1.6 million square feet. We did not have any lease expirations.

In addition to our leasing activity, we see growth in the portfolio from our existing tenants. We have a total of 207,000 square feet of expansion space under construction at three locations and have 5 other potential expansion projects in discussions estimated at approximately 166,000 square feet.

The third quarter is off to a good start with 8 leases executed totaling about 184,000 square feet. 5 of these were new leases for approximately 150,000 square feet and 3 were renewals or extensions for about 34,000 square feet. In addition, we sold 6 properties during the quarter for $67.8 million. We believe we have a strong pipeline of leases under negotiation and expect leasing to renew strong through the quarter and the balance of the year. Now I'll turn the call back to Wil.

Thanks, Natasha. Overall, we believe we're very well positioned to execute our business plan and our strategic restructuring plan over the balance of the year. Leasing activity has been strong and has so far exceeded our expectations this year. Our lease roll over schedule continues to be more front loaded than it has been in several years. So, leasing activity continues to be especially important. We believe we have made and will continue to make good progress in this area.

Our balance sheet continues to be in good shape with manageable leverage, limited refinancing exposure, significant bank line availability and liquidity. The acquisition market is in the process of changing due to conditions in the debt market. We hope this is favorable for us from an investment standpoint. At this time, we continue to be very selective about acquisition opportunities and prefer to wait as we believe opportunities are likely to get better over the course of the year.

In general, our decision to be disciplined on the acquisition front during the last two years has been the right one. We have been in a market where cap rates have been too low to make much sense to us. More recently, the opportunity to repurchase our own stock has generally represented a better use of our capital compared to acquiring properties in the auction market.

To sum it up, our immediate priorities post merger were first to restructure our balance sheet to lower our immediate costs and created a significant unencumbered property pool to enhance our financial flexibility. Two, execute on leasing opportunities. Third, deploy capital creatively while staying disciplined and four, strengthen our portfolio by beginning to sell non-core assets. We've executed these steps and are now executing our strategic restructuring plan. I'm pleased to report that we accomplished a lot in the second quarter and we look forward to reporting higher FFO per share in the third quarter that will further improve our dividend coverage and payout ratio. That ends our formal remarks. Operator, we'll turn it back to you for question and answer session.

Thank you. Ladies and gentleman, we will now be conducting a question and answer session. (OPERATOR INSTRUCTIONS). Our first question comes from the line of John Guinee with Stifel Nicolaus. Please proceed with your question.

John Guinee here, how are you?

Hi, John.

Hi. A bunch of little nit questions. Pat, the $8.4 million where cash gross income exceeds GAAP, is that a good run rate for the rest of the year?

You'll see that -- we actually put it on Page 37 of the supplement John or 38 of the supplement. I gave you what the cash and GAAP rent will be for the remainder of 2007 through 2008 to 2011. So, you can actually see what our run rate is.

Gotcha. Okay. Second, Wil, retail properties, do you have 100% of your retail portfolio on the market now?

Yes, except for 2 properties. We're holding on to our property in Honolulu for the time being, which we think will end up being a great repositioning and redevelopment play for us. But, the rest of those properties are all on the market presently.

What's the net proceeds expected or gross less transaction costs expected on those assets? It was 350 a while ago, then you sold some. So, I'm trying to get a new number.

We're probably in the mid-200s on a gross basis and there's very little leverage there John, only about $30 million of debt.

Last time, you were at 350 and you sold 32, so I'm surprised 250 is the number. 250 plus debt?

No. It's 250 with the debt.

Okay. 960,000 square foot retail property --

Just to be clear that the Honolulu super block that we're holding is about a $40 million asset.

Oh, okay.

The 350 should be adjusted downward by that, because we made a decision to hold that.

Gotcha, okay. On Page 37, do you have a sense for what exactly is left as unconsolidated properties? One in Arkansas, one Dallas, Oklahoma, one Summit?

They're all -- Arkansas, Dallas, [inaudible] -- they're all just one off properties with the exception of those last three, John. The [inaudible]. Those are very, very small investments we have each of those. All the other ones are just one off single investments.

Any idea what your sense on valuation for that portfolio as a whole? Is it 100% leveraged and worth $107 million or is it?

Our investment in those partnerships, John, is about $19 million. That's our net investment in all those partnerships combined.

Last question, obviously the debt markets have changed and that's going to significantly impact, not so much the A-Quality Trophy Portfolio market, but the B & C. And, Wil, you guys are selling your D & C, your dogs and cats. Has the strategy changed at all?

Not really, John. I would say that of the properties that we're trying to sell about half are under letter of intent or contract right now. Originally, we were looking at about $1.2 billion. We've sold about $70 million. We may be down in the aggregate maybe 1% to 1.5% from our original expectations, but nothing material at this point. Quite a bit of the property that we're selling has mortgage debt on it that's at favorable rates. So, that's protecting the value somewhat.

Should we still assume, including your office industrial individual asset sales, your retail asset sales and a JV, is that an aggregate of $2 to $2.5 billion number or what is that number now?

In aggregate, there's I would say between remaining sales and joint venturing between $2 and $2.1 billion.

Great. Alright, thank you very much.

Thank you. Our next question comes from the line of Anthony Paolone with JP Morgan. Please proceed with your question.

Hi, this is Sara King here for Tony Paolone. I just wanted to get a clarification on what you think your timeline is going to look like for the dispositions of your non-core assets, more specifically in dollar volume? So, kind of how you think it's going to play out.

This is Michael Ashner. I don't really think there's a timeline. We're not distressed sellers to where we would sell our assets deliberately. To date, we have entered into contracts or sold or letters of intent for more than half the portfolio and we will deliberateness to balance our portfolio. Obviously, the debt markets may have some impact on how fast we execute on that. But, we don't see ourselves either rushing to sell assets over a long period of time or do we think that the current tumult in the debt markets are likely to stretch out the liquidation beyond a reasonable period of time.

Okay and one quick clarification. For the $4.5 million charge in G&A related to severance?

Yes.

I have $4.8 million. Is this related to Mr. Vander Zwaag's departure?

If it was related to John, the 4.5 was considered severance and the other part of it is included in the LSAC transition.

Got it. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Philip Martin with Cantor Fitzgerald. Please proceed with your question.

Yes. Good afternoon everybody. I just had a couple of questions for you Wil and maybe Michael, you as well. The loan portfolio and loans it pertains to potential investments going forward for Lexington. Are you seeing the situation in the debt markets creating any opportunities for you in terms of making investment loans to commercial clients? Where are the spreads today versus a quarter or two ago?

There's two questions. Yes. I can only answer for myself personally. This is Michael Ashner. I do think the current tumult in the debt markets create opportunities. For me, as an investor, I much prefer some level of volatility with respect to that in which is profitable in debt. I do feel strongly that there will be opportunities. Not simply now, but probably over the next 24 months the debt platform.

Spreads, the market is not today an efficient market. I'm sure you're aware of that. It's really a lance bid market. In which, buyers aren't buying. The sellers are selling or only selling in distress. So the last bid does not accurately reflect what the true yield should be. Having said that, obviously, I'm sure you're aware that AAAs, AAs have moved up 30 basis points at least. On the other hand, the base rates have come down somewhat, 20 basis points or whatever. So, there is an increase to the bar of about 40 basis points over what they were borrowing money before. I wouldn't rely on this week, last week or next week. I think the real test of the debt markets will be probably around October 1, 2007.

Okay, thanks for the insight.

Thank you. Our next question comes from the line of Neil Jasper with Jasper Brothers Profit Sharing. Please proceed with your question.

Good afternoon, this is Neil Jasper. I have a question. We were prior investors in Newkirk partnerships. We converted to the Lexington. From an investor in new purchases of Lexington's securities, how would you best describe the difference between Lexington's percentage of assets prior to the Newkirk acquisition and after? What percentage of those assets are Newkirk properties? Are they leveraged differently than other assets in a significant way? That's basically a two-part question.

Today, our total market capitalization is about $5.8 billion.

The exact capitalization of Newkirk was?

So, that's sort of the proportionate share of the portfolio that are Newkirk assets. Generally speaking, the portion of our portfolio that's office properties went up in connection with the merger and the portion of our portfolio that's retail went up even though it's slightly smaller. The Newkirk portfolio was merged into the company with lower leverage than the Lexington portfolio prior to the merger. We've utilized that combined strength to take advantage of capital markets opportunities to increase our leverage a little bit since then. The portfolios for the most part are all single-tenant real estate. There certainly are some differences in the lease structures, for example. But, both companies were quite comparable in terms of leasing and acquisition strategy.

So, therefore, in the manner in which they're encumbered, the Newkirk properties, any encumbrances, debt structure. Does it differ dramatically to Lexington overall?

Most of the Newkirk portfolio was encumbered by a fairly large bank loan of about $550 million at the time of the merger. We have since refinanced that bank line with the proceeds of an exchangeable notes offering that we did in the first quarter and a trust preferred issue and a perpetual preferred issue. We did change the nature of the leverage in the portfolio and we're in the process of putting some more secured mortgage financing on the portfolio right now that would be I guess more consistent with the strategy that Lexington had been employing.

Thank you. Our next question comes from the line of John Guinee with Stifel.

Sorry, I forgot two questions. One is, Wil, you have a property that you have in your retail portfolio in El Segundo, California, 960,000 square feet, leased to Raytheon Corporation.

What exactly is it?

[inaudible]

Yes, Mike, okay, what is it?

It's under Retail -- Other. It's one that the parking structure, with the --.

It's basically an office building with a parking structure.

Okay.

DirecTV. If you've been to the LAX airport, it's the DirecTV/Raytheon buildings which are adjacent to the airport.

Okay. Then the second question and this is probably, Michael, for you, the Wells tender, what's the status of that?

Well, we have, as you well mentioned, we have received 4.8 million shares. We were awaiting our final press release when all the paperwork is done, but I think I can confirm that we have received about 4.8 million shares.

It appears to me and correct me if I'm wrong but, it looked to me from the Wells proxy that it's got a $0.61 annualized FFO and maybe a $0.58 dividend. Which in today's environment, their IPO price would be $6.50, $7.00 a share. Any sense for how this plays out, as Wells couldn't possibly go public in this environment at the $10.00 number they publicized?

John, you and I have known each other for a long time. You know, I rarely if ever discuss what our plans are with respect to a securities investment that we make, but I don't disagree with you. That it would be difficult for them to do an IPO in this market at a price much above that. Nevertheless, we are content with the fact that we are now the second largest shareholder in the company. As a second largest shareholder, we look forward to --.

Good, thank you.

Thank you. Ladies and gentleman, at this time there are no further questions. I would like to turn the floor back over to management.

Thank you, again, for joining us this afternoon. As always, we appreciate your participation and support. If you'd 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 directly or any of the other members of our senior management team with any questions that you have. Thank you and have a good day everyone.

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