LXP Industrial Trust (LXP) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Lexington Realty Trust third quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to introduce your host, Ms. Carol Merriman. Thank you. You may begin.

Thank you, and welcome to Lexington Realty Trust third 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 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. These documents are available on Lexington's website at 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 finance -- 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, Pat Carroll, Chief Financial Officer, Natasha Roberts, Executive Vice President and Director of Real Estate Operations, 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, and thank you for attending our third quarter conference call.

We're pleased to report our results for the third quarter of 2007, which was an exceptional quarter for the Company, in which we achieved very strong operating results. For the third quarter, the Company's funds from operations totaled $50.4 million, or $0.46 per share. FFO was reduced by $3.6 million due to debt prepayment penalties on properties sold. Absent these charges, funds from operations would have been $0.50 per share, a record amount.

From an investment standpoint, it was a fairly quiet quarter, with activity limited to share repurchases and a modest increase in our investment in Concord Debt Holdings, which continues to perform well. Concord has no monetary defaults in its $1.1 billion loan portfolio, and contributed $0.03 to our FFO per share for the quarter.

Consistent with our strategy, during the quarter we entered into an agreement to form a joint venture investment program to invest in specialty single-tenant real estate, which will be seeded with $940 million of assets from our current portfolio. Although we can make no assurances, we expect the joint venture to be funded and close on the initial assets by the end of this year, and we are actively working on several acquisitions for this new program.

From a capital market standpoint, the major transaction was a $173 million financing secured by three properties added to our portfolio in the Newkirk merger. The financing has a seven-year maturity and fixed interest rate of 6.15%, which we view as very attractive in view of conditions in the mortgage market.

In addition, we continued to execute on our disposition program during the third quarter by completing 23 sales for $119.5 million, which generated gains of approximately $27 million. Again, although we can make no assurances, our current expectation for fourth quarter disposition activity is for sales between $171.5 million and $258.3 million, which would bring our total for the year to roughly between $400 million and $490 million.

We had hoped to complete the sale of our retail portfolio in the fourth quarter, but we have determined to break this portfolio up and sell it in pieces, with proceeds expected in the first and second quarter next year.

On the leasing front, we had record activity, with 39 leases executed or extended, and this led to an occupancy level of approximately 96% at quarter end, and our leasing activity in the portfolio continues to be strong.

We acquired 513,000 shares of common stock, bringing our total for the year to 7.1 million, which underscores our current belief that repurchasing shares has for the most part been a better use of capital than acquiring property.

We have 3.4 million shares remaining under our current authorization. And at the $20 price that we paid in the third quarter, our portfolio is being valued by the market at about an 8.5% cap rate, with very attractive leverage in place. The fixed rate on our mortgage debt is about 5.9%, so overall, the leverage on our balance sheet cannot be replicated in today's market.

Our activity this year and over the balance of the year has and is expected to create significant taxable gains in liquidity which, subject to Board approval, is expected to lead to a special dividend to shareholders. We indicated in our press release today that the amount of such gain is expected to be approximately between $4.75 and $5.50 per share, based upon our estimate of transaction activity over the balance of the year although, again, there can be no assurance that such transactions will all close on a timely basis.

Virtually all of this dividend would be taxable at capital gains rates.

Today, we also reaffirmed our 2007 guidance range of $1.75 to $1.85 per share of funds from operations, and we note that our fourth quarter will have a lot of moving pieces in it, and results will be impacted by the dilution from asset sales and mortgage prepayment penalties on properties sold, and the timing of other transactions, the most significant of which is the joint venture.

With respect to 2008, we wanted to make it clear today that people should adjust their financial models to reflect the likelihood of a special dividend. Obviously, we will no longer be earning a return on this capital, and the market's expectations for funds from operations and regular dividends going forward should be reduced accordingly. We are not giving any guidance for 2008 at this time, principally because we are only part way through the disposition process set forth in our strategic restructuring plan.

Now I'll turn the call over to Pat Carroll, our Chief Financial Officer, who will take you through our results in more detail.

Thanks, Wil. The results of operations in Q3 2007 include the impact of the Newkirk merger, which occurred on December 31st, '06, and the acquisition of our four co-investment programs during the second quarter of '07, and these are the primary drivers of all fluctuations between comparable periods.

During the quarter, Lexington had gross revenues of about $125 million. Advisory and incentive fee income was approximately $200,000 compared to $1.1 million in the same quarter last year. The decrease related to the acquisition of the four co-investment programs during the second quarter.

We have provided in our supplemental page 32 the details and the components of the advisory and incentives fees, and equity and earnings for the nine months ended 9/30/07.

Under GAAP, we were required to recognize revenue on a -basis over the non-[cancelable] lease term, plus any periods covered by a bargain renewal option. In addition, the amortization of above- and below- market leases are included directly into rental income.

In the third quarter, cash rents were in excess of GAAP rent by about $9.8 million, including the effect of above- and below- market leases. We have also included in the supplement on page 40 our estimates of both cash and GAAP rents for the rest of 2007 through 2011. This is based on the properties owned as of September 30th, 2007.

Quarterly, G&A was up about $2.2 million compared to the same quarter last year. This relates primarily to additional personnel due to the Newkirk merger, and professional fees incurred as such.

Turning to the balance sheet, we believe our balance sheet 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%. We had $260 million of cash at quarter end, and cash balances are primarily due to the capital transactions we completed during the third quarter.

Balance sheet debt was approximately 57% of total capitalization and we're comfortable operating the Company at this level.

Included in intangibles is the allocation of the purchase price of properties related to the in-place leases and above-market leases, and customer relationships in accordance with GAAP. Also, we have approximately $264 million in below-market leases recorded as a liability.

Included in properties held for sale are 12 properties that meet the accounting definition for held for sale. Some significant components of other assets and liabilities are included on page 31 of our supplement.

Now I would like Natasha Roberts, Executive Vice President and Director of Real Estate Operations, to discuss our leasing and expansion activity. Natasha?

Thanks, Pat. Our current portfolio totals approximately 51.9 million square feet, and we finished the quarter 95.8% leased. We signed a record 39 leases in the quarter covering 946,000 square feet. Sixteen of these were new leases, accounting for about 300,000 square feet, and 23 were renewals or extensions, totaling about 646,000 square feet.

Four leases expired during the quarter, which were not renewed, totaling 769,000 square feet.

As we are always trying to grow our portfolio by expanding our relationships with our existing tenants, we are currently expanding approximately 205,000 square feet of space at three locations. And we are in discussions for six other potential expansion projects, estimated at 184,000 square feet.

Our disposition program generated 23 sales during the quarter for $119.5 million.

The fourth quarter has started with two lease renewals totaling 237,000 square feet. We have 12 leases scheduled to expire this quarter that will total approximately 624,000 square feet. One of these properties is under contract for sale to a user. Six of these leases are for less than 10,000 square foot each. We are optimistic that we will be able to lease these properties, as we have been generating strong interest from alternative users.

In 2008, excluding our retail properties, we have 20 leases totaling 2.8 million square feet in 18 buildings that are scheduled to expire. Of these 20 leases, six are less than 20,000 square feet. Of the 14 larger leases, ten, or 2.1 million square feet, are expected to renew all or a portion of their space.

Now I'll turn the call back over to Wil.

Thanks, Natasha. Overall, we are very pleased with our quarterly results and what we've accomplished so far this year, and that is reflected in our operating results. Our leasing activity has been very strong and has exceeded our expectations this year. We believe that our balance sheet continues to be in good shape, with manageable leverage, limited refinancing exposure, and sufficient liquidity. And in fact, we only have $31.8 million of debt maturing in 2008.

The acquisition market continues to evolve due to conditions in the debt markets. And as investors, we believe that this may become favorable for us. But we continue to be very selective about acquisition opportunities, and we will continue to wait for the most part, as we believe opportunities are likely to get better over the next few months.

In general, our decision to be disciplined on the acquisition front during the last two years has been the right decision, as we have been in a market where cap rates have been too low to make much sense for us.

More recently, the opportunity to repurchase our stock has generally represented a better use of our capital compared to acquiring properties in the auction market. And keep in mind that when we do buy our stock, we are investing in a portfolio that has long-term financing in place that is more favorable than can be obtained in the current environment.

With respect to next year, we expect dispositions to remain fairly active, with a target of about $350 million to $400 million in the first half of the year. We've had $300 million of assets in our core portfolio that we had originally thought of selling, but my expectation right now is that we will hold these assets, given their strong-credit tenants and locations in major markets.

We've made a big effort to improve our disclosure in our supplemental reporting package, which was posted today. And of particular interest should be our property chart, where we have provided both GAAP and cash revenue for all properties and leases, in addition to specifying the properties encumbered by fixed rate renewal options.

In addition, we've segmented the portfolio by office, industrial, retail, and specialty classifications, all with a view toward helping shareholders better understand our portfolio.

Also of note is the fact that investment-grade rated tenants accounted for 56.4% of our third quarter revenues, and we derived a higher percentage of revenue from major markets than ever before.

So our message today is about record funds from operations per share in both quantity and quality, and much improved clarity with respect to disclosure, and that was long overdue.

The information in the supplemental is beginning to show the impact of our restructuring, which is designed to make the Company easier to understand, with a more focused strategy, and with a core portfolio of general purpose office and industrial properties, with strong tenant credit quality and locations in major markets with good growth prospects.

So in summary, we're pleased with the quarter because it shows we have engineered more earnings from our portfolio than the market expected, and in addition, we're pleased with the prospect of a significant capital gain distribution, because it means that we've acquired properties that have appreciated in value. And of course, the combination of growing cash flow and capital gains are the cornerstones of any successful investment strategy.

Operator, that concludes our formal remarks. We'll turn it over to you for the question and answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Ken Avalos of Raymond James. Please proceed with your question.

Hi. Good morning, Wil. Appreciate all the extra disclosure. It's helpful. My question surrounds, I guess, page 40. And one of the things we've struggled with here is trying to understand the disposition program (technical difficulty) cash and GAAP rent spreads. Do you think the --

I'm sorry?

-- early '08 dispositions will start to close that gap a little bit?

You blacked out there. We couldn't hear your question.

Sorry about that. I'm on speaker. Let me just pick it up. Sorry about that. Can you hear me?

Yes.

Okay. I'm just trying to get a handle on whether or not the dispositions that you have -- or excuse me, slated for the first half of the next year, will start to close or finish closing the gap really between the cash and GAAP rents that you illustrate on page 40?

(Inaudible) is on page 40, as I just said, is the properties we held as of September 30th. So to the extent that we do start -- that the disposition program continues, that gap will be closed. Yes.

Okay. Appreciate it.

Based on the properties that are sold.

Hello?

Thank you. Our next question comes from Frank Greywitt with RREEF. Please proceed with your question.

Hi, guys. A couple of questions for you. The first is the loss -- you had occupancy loss during the quarter. Was that due to the tenant that went dark, or was it more due to product mix?

I think there are two principal things. One was obviously the properties that we've sold have been fully leased. And the other thing is we had a few leases expire in our industrial portfolio, so we had a lot of square footage go vacant. But obviously, industrial rents are much lower than office. So the economic impact of that is not as much as if we'd lost office occupancy.

All right. And did you have any lease termination fees during the quarter?

No.

No.

And finally, the -- could you disclose what your CapEx was, [space], building, [TIM], leasing commissions, all combined, or broken out?

Well, that'll be -- when we do the -- we're filing the 10-Q tomorrow. That'll be in the 10-Q.

Great. Thanks a lot.

Thank you. (OPERATOR INSTRUCTIONS) It appears there are no further questions. Do you have any -- oh, we do have a question from the line of John Guinee with Stifel Nicolaus. Please proceed with your question.

John Guinee. How are you? Are you there? A couple -- two cleanup questions. Cash and GAAP rents, as you've outlined on your property detailed portfolio, is that always net, or is it always gross, or is it sometimes gross and sometimes net?

That's what the contractual rents are. So to the extent that there's an operating expense (inaudible), that's not reflected in that chart. That is the gross rent that would tie out to the revenue line in the P&L.

Okay. (Inaudible) assets, 8.5 -- 8.46 million square feet, is that essentially the portfolio that's being sold to Inland? Or does that not match exactly?

That matches, John. That's the portfolio that's going into the joint venture, save for two properties. One is one building that's not consolidated, that we have a 40% ownership interest in, and one other building that was closed subsequent to quarter end.

Okay. Of your $350 million to $400 million in dispositions in '08, does that include the retail?

That includes the retail.

Okay. So really not much more besides the retail?

No. We have -- retail would constitute the bulk of that number. Sure.

All right. And Inland closing expectation is December or January?

I think first part of December's what we're shooting for right now.

Do they have hard money up yet? Do they have a non-refundable earnest money deposit up yet?

No.

No?

No.

No?

No.

How about not yes? You trust those guys, eh?

But John, in fairness, when you deal with reputable partners, and Inland is our partner, and a joint venture partner, I don't think it was of enormous concern to us as to whether or not our future partner was good for the money. If they -- we had those concerns, we would not have had them as a partner. We would have sold them the real estate.

Got you. And I'd be remiss if I didn't ask my favorite question. 100 Light Street.

What about it?

What are you doing?

Well, you ask me the question -- you call me, you ask me all the time. There are -- there are a -- there are some clean-up issues that have to be done with respect to the existing tenancy. Once those clean-up issues have been completed, and we hope that that will be done within the next three months, we will go forward with a strategic evaluation of what we're going to do with the property.

Canned answer, Michael. [Damn]. Okay.

I'll tell you what we're going to do.

Right.

Once -- as I said, once the issues are resolved with the tenant, we're going to think about selling it. How's that?

Fair enough.

All right?

All right. Last question. Any lease termination fees or one-time items in your third quarter numbers?

No.

No.

All right. Have a nice weekend. Thanks.

You're welcome.

Thank you. Our next question is from the line of Rick Gable with Sun Capital Advisers. Please proceed with your question.

Hi. Wil, in your concluding remarks, you talked about being proud that you generated more earnings I think from your portfolio than the market expected. I was just wondering whether I kind of heard that right, and if you could just elaborate a little on that.

Well, the FFO number before prepayment penalties was $0.50, which in our mind was higher than what was being expected. And that's really a function of what we did in second quarter, with buying in the joint ventures and the likes. We had thwhole full quarterly impact of those investment transactions.

Okay. All right. Thank you.

Thank you. At this time, there are no further questions. Gentlemen, do you have any closing comments?

Once again, thanks for joining us this morning. As always, we appreciate your participation and support. And 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. And in addition, you may contact me or any other members of senior management with any questions you may have. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.