LXP Industrial Trust (LXP) 2007 Q4 法說會逐字稿

Greetings and welcome to the Lexington Realty Trust fourth 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. Lisa Soares, Investor Relations, Corporate and Development. Thank you, you may begin.

Thanks. Hello and welcome to the Lexington Realty Trust fourth 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 the 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 Regulation G requirements. If you do 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 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 a reasonable assumptions, Lexington can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to defer 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 Will Eglin, CEO and President, Michael Ashner, Executive Chairman, Robert Roskind, Co-Vice Chairman, Patrick Carroll, Chief Financial Officer, Natasha Roberts, Executive Vice President and Director of Real Estate Operations and other members of management. I'll now turn the call over to Will for his opening remarks.

Thanks, Lisa. And welcome to all of you and thank you for attending our fourth quarter conference call. We are pleased to report our results for 2007 and the fourth quarter which was an exceptional quarter for the Company and a year of great progress for Lexington during a time of tumultuous change in the capital markets. For the fourth quarter, the Company's funds from operations totaled $21.3 million or $0.20 per share. It's a bit miss leading because FFO was reduced by about $0.23 per share due to $5.5 million of debt prepayment penalties on properties that we sold and impairment charge of $17.2 million relating to three properties formally leased to tenants in the automotive sector, $5.5 million of impairment charges relating to several bond investments in Concord debt holdings, $2.3 million of formation costs relating to our joint venture with Inland and these were offset by lease termination and promoted interest receipts of about $5.9 million. So absent these one time items, FFO would have been $0.42 for the quarter and $1.83 for the year and our guidance for 2007 was in the range of 175 to $1.85 per share.

From an investment standpoint, it was a fairly quiet quarter with activity limited to share repurchases, a single property acquisition and a modest increase in our investment in Concord debt holdings which continues to perform in line with our expectations. As previously mentioned, Concord recognized an $11 million impairment charge on its investments as a result of marking several investment grade rated bond investments to market levels even though all payments on these investments are current. Our share of this charge is $5.5 million. We believe that our investment in Concord will improve in 2008 to the extent we redeploy loan pay off proceeds into new investments or make new loans at higher yields.

In the fourth quarter of 2007, we had our first closing with Inland on $408.5 million of specialty single-tenant real estate into our co-investment program and have closing schedules subject to standard closing conditions for $335 million of additional properties that we expect will bring the assets of the co-investment program to roughly $743.5 million. We are very optimistic about our opportunities to grow this program and we and Inland have committed an aggregate of 150 million of equity to make new investments, 15% of which will come from Lexington.

In addition, we continue to execute on our disposition program during the fourth quarter by completing 20 sales for $243.8 million at an average cap rate of 7.6%, which generated gains of $53.1 million. Our total disposition volume for the year was 473 million and we are very pleased with the prices that were obtained during the year when property valuations were for the most part very favorable for sellers and we presently have roughly 156 million of properties under contract to sell. That being said, the market is much different now compared to six months ago and we expect disposition levels to return to a normal annual rate of about 2 to 5% of the portfolio going forward.

On the leasing front, we had very strong activity with 19 leases executed or extended in the quarter and this led to an occupancy level of approximately 96% at quarter-end and we believe that leasing activity remains strong throughout our portfolio. Adjusted for the $2.10 special distribution we acquired 2.6 million of our own common shares at an average net effective price of $15.62 per share which brought our total for the year to 9.8 million shares repurchased at an average net effective price of $17.73 per share. And we presently have 4.8 million shares eligible for purchase under our current authorization.

Assuming a successful second closing with Inland we expect to reposition 1.2 billion of assets out of our portfolio at a cap rate of 7.6% under our strategic restructuring plan. This is a significant accomplishment for us which led to a payment of a special dividend of $2.10 per share and as a result of returning so much to shareholders we reset our dividend to $1.32 per share in an announcement last week.

Overall through the special divide and share repurchases, we have returned over $400 million to our shareholders since the beginning of last year. In our decision to monetize these assets and return capital to shareholders reflected our view that we have been in an extremely favorable valuation environment. These conditions have now passed and we believe that 2008 will be a year characterized by more attractive investment opportunities and it's been several years since we thought that that was the case. As a result of closing a smaller transaction with Inland in 2007, and deferring a portion of the transaction to 2008, the taxable gain relating to the transaction was reduced significantly and this has created an opportunity for Lexington to retain capital and reinvest in joint venture proceeds in properties at a time that we believe prices and yields other becoming more attractive.

As a result, we do not currently believe that there will be any further special distributions at this time and we are very pleased to have financial flexibility in an environment for the first time in several years looks to be very attractive to us. Now I'll turn the call over to Pat, who will take you through our results in more detail.

Thanks, Will. The result of operations in the fourth quarter of '07 include the impact of the Newkirk merger which occurred on December 31, 2006, and the acquisitions of our four co-investment programs in the second quarter of '07 and these are the primary drivers of all fluctuations between the periods. During the quarter, Lexington had gross revenues of 122.3 million. Advisory and incentive fee income was approximately 1.4 million compared to 1.1 million in the same quarter last year. The increase relates to a $1.1 million fee earned on a sale of a property in our Advisory business, offset by a reduction in fees due to the acquisition to the four co-investment programs. We provided in our supplement on page 31 the details of the components of an Advisory incentive fees and equity in earnings for the year-ended December 31, '07. Under GAAP, we are required to recognize revenue on a straight line basis over the non-cancelable lease term plus any periods covered by bargain renewal options. 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 about by 6.7 million including the effect of above and below market leases's. We have also included in the supplement on page 39, our estimates of both cash and GAAP rents for 2008 through 2012.

Quarterly G&A was down about 9 million compared to the same quarter last year and the relates primarily to the acceleration of vesting of common shares in the fourth quarter of '06 of about 10.8 million offset by the incurrence of a $2.2 million fee in the fourth quarter of 2007 relate to our Inland joint venture formation.

Now looking at the balance sheet, we believe it continues to be in good shape. At quarter end we had about 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 412 million of cash at quarter-end and cash balances are primarily due to the capital transactions we completed in late in the fourth quarter. Included in intangibles is the allocation of the purchase price of properties related to in-place and above market leases and customer relationships in accordance with FAZ 141. Also, we have approximately 217 million in below market lease liability.

Included in properties held for sale are three properties that meet the definition of held for sale performs with GAAP and the liabilities and discontinued operations are mortgages of 85.3 million and the remainder is primarily below market leases related to one of the properties. The significant components of other assets and liabilities are included on page 30 of our supplement.

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

Thanks, Pat. As of December 31, 2007, after selling 20 properties for 244 million and acquiring one property for 13.7 million during the fourth quarter and including the 34 properties that are held in joint ventures, our portfolio totaled approximately 51 million square feet. At year-end, 96% leased and we expect to remain at or above 94% leased through 2008. During the fourth quarter, we signed 19 leases covering approximately 1.9 million square feet. Out of the 19 leases, 12 were new and accounted for about 700,000 square feet and seven were renewals extensions, which accounted for about 1.2 million square feet. Seven leases totaling approximately 300,000 square feet expired during the quarter and were not renewed. As of year-end, we had 35 leases in our consolidated portfolio scheduled to expire in 2008. This represents 25.6 million in GAAP revenues and 55 leases scheduled to expire in 2009 representing 48.4 million in GAAP revenues. These amounts represent 6.2% and 11.8% respectfully of our consolidated portfolio GAAP revenues as of December 31, 2007.

Leasing activity has been and continues to be strong. Year to date we have executed eight leases, one new lease for 2000 square feet and seven lease extensions totaling approximately 855,000 square feet. Six leases are scheduled to expire in the first quarter 2008. That will total approximately 690,000 square feet. We have been generating strong interest from alternative users and are optimistic that we will be able to lease these properties.

We are currently expanding approximately 155,000 square feet with our existing tenants at four locations and we are in discussions for two other potential expansion projects that will total an additional 110,000 square feet. 100 Light Street, as many of you know, this property is our most significant asset and is subject to our largest lease. I would like give you an update on the current developments at the building. During the fourth quarter of 2007 we began construction of a 10-story parking garage adjacent to the building. At a cost of approximately $20 million. The garage is slated for completion by the end of the year and it will add approximately 530 parking spaces plus 10,000 square feet of ground floor retail. This will bring the parking ratio of the building to 1.6 per thousand. The additional parking spaces will bring the parking ratio in line with the other Class A office properties in the market and this will ensure our assets competitiveness.

We signed an agreement with Leg that gives us a right to take back space as needed on the lower floor of the building for the purpose of backfilling the office tower prior to lease expiration in October 2009. Our present expectation is that Leg will need to extend their occupancy through the end of 2009. Upon the Leg lease expiration, the property is expected to be 23% leased, assuming no additional leasing prior to expiration. However, with the 20-month head start and releasing the lower floors, we are optimistic that we can get the building to 50% leased. If successful, our vacancy in 2010 will be limited to the desirable upper 18 floors of the building.

In conclusion, we are pleased with our leasing success in the fourth quarter and the early part of 2008. It is over this time period that we have signed a total of 13 new leases on approximately 672,000 square feet and we have extended 14 leases covering approximately 2.7 million square feet. Leasing prospects remain strong and we continue to see good activity on much of our remaining available space. Now I'd like to turn the call back over to Will.

Thanks, Natasha. Over all we are very pleased with 2007 and believe that rush strategic restructuring plan including our disposition program and repositioning of assets was the right strategy for us in view of where property valuations were when we started the year. That being said, since last summer the pace at which capital market conditions have changed from a time of extreme excess liquidity to the polar opposite has been breath taking and in our view that means that we think there will be very good growth opportunities for Lexington as we continue through 2008. So we are very pleased to have cash and financial flexibility as we begin the year.

We believe that our balance sheet continues to be in good shape with manageable leverage, limited near-term refinancing exposure and sufficient liquidity and in fact we now only have 22.5 million of debt maturing in 2008. And this quarter we've paid down about 89.5 million of our exchangeable notes for a total cost of 78.2 million. So in that debt repayment transaction, we increased our net asset value by 11.3 million and will have earned a returned maturity of about 9% as a result of paying off the debt at a discount to it's face amount. We believe that we have strong financial capacity to act on investment opportunities as they arise and this consists of first our cash, second, our $200 million untapped credit facility, third, our joint venture equity commitment from Inland, proceeds from property sales under contract and continuing proceeds expected in the retail area during the balance of the year, and in addition, over the next five years we have about 260 million of mortgage amortization on our debt, so as we're burning off our debt so quickly, we're going to be building up equity in our real estate that we can tap over time via refinancing and use that capital to continue to grow.

With respect to guidance, we do expect disposition volume for 2008 to be less than last year. After closing what is under contract we're going say focused on opportunistic property sales. We are quite price sensitive in this environment and there will be a particular focus on our retail property sales. In the fourth quarter of 2007 we sold nine retail properties. We presently have 94 properties in the portfolio and 13 of them are presently under contract. For the slower pace of sales means that we'll have time to reinvest our sales proceeds and other income producing assets and as we look at the year overall we have a wide variety of alternatives with respect to how we deploy cash, sales procedures and joint venture proceeds and these includes joint venture and direct acquisitions in the net lease area, debt investments, securities, repurchases and debt reduction.

So our guidance that we announced last year for the year for funds from operation per share of $1.56 to $1.64. And that ends our formal remarks. Operator will turn it back to you for question-and-answer session.

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. (OPERATOR INSTRUCTIONS) . One moment please while we poll for questions. Our first question comes from the line of John Guinee with Stifel Nicolaus. Please go ahead with your question.

Thank you. Hey, Pat, is it -- if I look at FFO of $1.66 plus or minus and then go to page 39, is your, for lack of a better term, an adjusted FFO before CapEx and leasing commissions because of your cash exceeding your GAAP rents add another $0.10 per share to that?

That's about right John, yes.

And then second, Will, Natasha, it looks to us as if 2008 and 2009, you're fairly flush with cash and can easily cover and grow the dividend, but 2008 with a loss of about $27 million in rent from the burnoff of the master lease at 100 light looks to us as if you're in a fairly precarious position. Can you comment on that?

Let me look. Our view when we reset the dividend to $1.32 was that she chose a level that we'd be sustainable and growable based on our current outlook with respect to the portfolio and how we hoped to grow it over the next several years. So you're absolutely right. I mean, over the balance of this year and next year is when we work our way through the step down renewal process on the portfolio, but thereafter we think we're in a position where we're going to have very good internal growth in the portfolio as we turn over leases. So you're absolutely right that we're continuing to be on the downslope as we expected from revenue, but our forecast after we get to that point is that we're going to have very -- a very good internal growth dynamic for the portfolio.

So is it safe to say that when you reset your dividend, Pat was using a 5-year model as opposed to a 2-year model?

That's correct.

All right. Thanks.

Our next questioning comes from the line of Anthony Paolone with JPMorgan Chase. Please go ahead with your question.

Thanks. Good morning. Natasha, you went through all of the leasing activity and I'm just trying to tie together, it seems like you've had a lot of activity in the fourth quarter and going into the first quarter here, but you also mentioned the leases, I think that actually expired in the fourth quarter did not, are vacant, I guess at the moment so I'm trying to tie together where this all nets out say from an occupancy and cash flow point of view for the next few quarters.

From an occupancy standpoint, we still expect to be at about 95% leased because we do have a number of lease renewals that were signed and anyone from a cash standpoint, Pat, I'll let you -- someone else comment on that.

The properties that expired in the fourth quarter, although the square footage was high, they weren't -- they didn't generate significant amounts of cash rent, Tony, so honestly the impact of those ex-operations really shouldn't have any type of significant impact on us.

Okay. So, for instance, like the 1.9 million square feet of leasing you did in 4Q, how much of that was -- like, when were those -- how much of that was say empty space that was already existing, vacancy versus doing extensions or renewals for expirations that were further out in, say, 2008, 2009, et cetera?

Let me flip to the page, Tony.

Seven of them were renewal extensions and that was 1.2 million square feet.

And when --

Of the 19.

And when were those originally set to expire?

At the end of the fourth quarter.

Of '07?

Of '07.

Okay. And then looking out to '08, it seems like the big leases are Raytheon, Boeing and Associates and First Capital are fairly large. What are the prospects for those either renewing or finding new tenants for the space?

We have started the marketing of those and with respect to the Raytheon building, it's substantially subleased so we believe that those subtenants will stay in the building and we expect 70% occupancy upon the Raytheon lease expiration.

With respect to Boeing, we expect to have a renewal there.

Again with the subtenant.

And your other one was Associates?

Yes.

That's small. Don't expect --

Yes.

Again there's mostly subtenants in that building so we don't expect that many, that much vacancy.

Okay. What about capital costs relating to this leasing activity? CapEx, tenant improvements, leasing commissions? Is there a number or a level that we should be looking at four, say, '08 and '09?

On a new lease, I'd say we're probably in the 20 to $30 range and on extension, depending on the property, anywhere from 5 to $15 per square foot.

Obviously, that's for office.

Yes.

Right.

And there's almost always leasing commissions.

Okay. Switching gears on Concord, do you plan on making additional contributions to Concord in 2008 in terms of just new equity put into it from pay?

I think we'll take it as it comes. There's certainly opportunity in the debt space. It looks to me like we could put capital out at yields that are maybe four or 600 basis points wider than at this time last year. We do have some financing capacity there and we still have -- we and Winthrop each have about $6 million committed that hasn't been funded yet. So I think our first focus is on utilizing that money and then we'll figure out what our strategy is and that could include, for example, adding third-party capital to that platforms. So we'll have to keep you posted as we make our way through the year.

Okay. And with respect to the (inaudible) assets getting contributed to the joint venture, in the press release you bolded sort of the hedge statement that, there's a number of conditions to get this done. I think financial solvency of the tenants was one cited. Is there something we should be reading into there or --

It was written by an attorney. There's nothing you should be reading into that.

Okay. Great. Thank you.

Ladies and gentlemen, as a reminder, it is star one to ask a question. Our next question comes from the line of Mark [Civvatone] , who is a Private Investor. Please go ahead with your question.

Folks, can you comment on the recent stock price and what the prospects are in the future, please?

Sure. I mean, the stock price certainly was under pressure toward the end of last year. There's a huge, huge trade-off in recent general. I think since the top roughly a year ago, the REIT market is down about 27% and we're obviously not immune to that and one thing I would just remind you about is that we did pay a huge special distribution of $2.10, so I actually looked at our performance over the last 12 months and we're in the top quartile of REITs which pleased me. I think there has been some a little bit of confusion about the Company's strategy because of forming this joint venture and ending up having a special distribution that was smaller than we thought.

So I think I'm optimistic that we're in a position to get rid of any confusion and lack of clarity that's sort of been hanging over the stock now that we've given guidance for this year and are strategic restructuring plans are for the most part largely behind us so we're looking forward to getting out on the road and hopefully introducing the Company to new investors.

Thank you.

Our next question comes from the line of Sheila McGarth with KBW. Please go ahead with your question.

Yes. Thanks. I was wondering if you could repeat what you said about -- I missed some of it on the repurchasing of the debt securities.

Yes. If you recall, about a year ago we did an exchangeable notes offering of $450 million and we effectively repurchased $89.5 million of that debt during the first quarter for a total cost of 78.2 million, so what we really did was we bought back those bonds at an average price of about 80, 87.5 % of PAR value, so that's roughly a discount of $11 million when you factor that discount in, we'll be getting a return on our investment of a little bit over 9% between now and maturity. I guess the comment there is what's happening in the debt capital markets has been problematic for some people but in this case we thought it created a really good opportunity for us to deleverage the balance sheet and make a nice return at the same time.

Okay. Great. And then can you give us, again, the timing of the next Inland closing and what that does to cash balances.

Yes. I mean, I'm expecting it will be between March 15th and March 31st, and how much cash, Pat? About 80 million of cash.

Okay. Thank you.

Our next question comes from the line of Frank Greywitt with RREEF. Please go ahead with your question.

Hey, guys. Could you outline what you're recurring CapEx budget is the base building.

I think that the right way to look at it is to -- I mean, it's going to fluctuate during, depending on how much roll over and the like that we have but taking about $0.15 a foot on the portfolios is probably about the right number.

Okay. And then what was the -- for the quarter, what was the total CapEx amount, the TI plus LC plus recurring CapEx?

In the lease costs -- hold on one second. The lease costs that -- I don't have it for the quarter. For the year we spent about 5.7 million in leasing commissions and we spent -- I don't have the exact number in front of me. We spent a few million dollars on TIs.

Okay. And then going into '08 and '09 with the higher role, I guess you can kind of -- you can do the math, but with all the subtenants in these portfolios when Raytheon rolls out and whatnot, what do you expect the total TI and CapEx budget to be?

In total, we have roughly 6.8% of revenue rolling this year. Natasha, so if you --

Yes.

I think it gets to what we expect with to respect to retention of leases expiring and if we're at the 50% level, I think you've got to take a magnitude $25 a foot on that square footage and 10 on the balance.

Okay. And then typically is that what you renew at, around 50%?

No. Typically we renew at about 85%.

Okay.

But when you get to this point in the year and you still have these leases yet to expire you're down well below that.

And then on the sublease tenants, is that considered a new or renewal CapEx? Are you going to be providing dollars when Raytheon and others expire.

If we need to provide dollars, it would be renewal dollars.

Renewal dollars.

Yes.

And is there a roll down in those rents? I'm assuming there is.

On sublease rents. No.

No. They're pretty much at market.

Okay.

And it generally gets better when they're direct leases.

Great. Thanks.

Our next question comes from the line of Sabinea Batia with Basso Capital.

I apologize if I missed this. Can you please give some details on the impairment charges, the 22.7 million?

Yes, 5.5 million of it related to the Concord loan portfolio where there was an impairment taken on several investment grade rated bonds, even though those bonds are all paying currently, and the balance is attributable to three properties that were formally leased to tenants in the automotive sector. One of those properties in overland Ohio was actually sold in the fourth quarter.

Okay.

But the two others are in the Detroit market and while we've gotten sort of passed automotive from a credit standpoint, our vacancy in that market is -- has been really tough.

Where do you see the vacancy occupancy rates going? Can you give us some color?

I'm sorry. Could you repeat the question?

Where do you see the occupancy rates going as far as automotive industry is concerned in 2009? Do you see it getting any better? Can you give us any color at all?

We're down to those two significant vacancies.

Okay.

And that's really it. We've marked them down to, you know what we think are quite conservative valuations. I'm hopeful that we'll have a chance to sell one of those empty buildings this year.

Okay.

And with any luck, hopefully by the end of this year we will be at a minimum sold one of the buildings and have continued to reduce our exposure to Michigan.

Great. Thank you so much.

Our next question comes from the line of William Siegel with William Siegel Incorporated. Please go ahead with your question.

Thank you, folks. You all are experienced landlords and as you look at your rent rolls, tenants, subtenants, what's your feeling collectively about the credit worthiness, the longevity, delinquencies, et cetera, on your tenants across the board?

It's really good. About 56% of rents comes from investment grade tenants, one of the things that we wanted to do last year was take advantage of the strong valuation market and reposition a bunch of our assets so what we're left with actually is a much stronger portfolio from a credit standpoint and we have no delinquencies. So we're really pleased with how credit quality is in the portfolio.

So 56 credit tenants of the balance, pretty near credit tenants?

I mean, there's a mix of unrated and non-investment grade tenants. Non-investment grade is roughly -- is about 15% of revenue. But the unrated tenants on average are probably in that triple B or triple B minus range. A lot of people look at it just saying it's unrated, that means it's not a good company. But the truth is a lot of them are either small but highly profitable companies or companies that don't have debt to rate so --

But among those that are 60 days or so late on their rent, would that be --

We have none.

That doesn't happen here at all.

Terrific. Thank you.

There are no further questions in the queue. I'd like to hand it back over to management.

Once again, I'd like to just say thank you for joining our call. We look forward to communicating to you our progress over the couple -- over the next few quarters this year. We're very excited about our prospects for 2008 and as always we appreciate your interest in the Company. If you would like to receive our quarterly supplemental package, please contact Lisa Soares or you can find information on the Company on our website, www.LXP.com and in addition you may contact me or any other members of Senior Management with any questions that you may have. Thank you and have a great day, everyone.

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