LXP Industrial Trust (LXP) 2012 Q4 法說會逐字稿

Good morning, and welcome to the Lexington Realty Trust Fourth Quarter 2012 Earnings Conference Call. At this time, all participants have been placed in a listen only mode, and the floor will be open for your questions following the presentation. Today's conference is being recorded. It is now my pleasure to turn the floor over to your host, Gabriela Reyes, Investor Relations for Lexington Realty Trust. Please go ahead, ma'am.

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 in a form 8-K. In the press release and supplemental disclosure package, Lexington has reconciled all historical non-GAAP financial measures to the most directly comparable GAAP 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, we would like to inform you that certain statements made on 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. Joining me today from management are Will Eglin, Chief Executive Officer, Robert Roskind, Chairman, Dick Rouse, Chief Investment Officer, Patrick Carroll, Chief Financial Officer and other members of management.

Thanks, Gabby. And welcome everyone, and thank you for joining the call todayAs usual, I would like to begin by discussing our operating results and accomplishments for the fourth quarter. For the quarter company funds from operations as adjusted were $0.25 per share.

We executed well in all areas that impact our business. These strong quarterly results led us to reach the top end of our guidance for the full year. Quarter was characterized by very strong leasing activity of approximately 2.4 million square feet of new and renewal leases signed leading to overall occupancy rate approximately of 97.3% at quarter end,which reduced our 2013 rollover to just 3.6% of the single tenant revenue.

Overall, leasing volume was a record was 7.4 million square feet for the year. In addition, we had good execution on the investment front with property investments closed totaling $114.9 million, and we funded $27.1 million on ongoing building [build-to-suit] projects, bringing total investment volume for the year to $247 million,and we believe our pipeline of similar opportunities remains robust.

We also had continuing success on the capital recycling front with $30 million of non-core disposition bringingour total for the year to $181.4 million at a weighted average cap rate of 7.2%. Furthermore, we continued to drive down our cost of capital as we continue to take advantage of the significant refinancing opportunities in our portfolio.

In the fourth quarter of the 2012, we expanded our seven year secured term loan by $40 million, and swapped the floating LIBOR rate into a fixed LIBOR rate of 1.06% for 7 years, so that the interest rate today is fixed at 3.3% on such borrowings. We also issued 4.5 million common shares in connection with the conversion of $31.1 million of the 6% notes.

In addition, we retired $30.1 million of secured debt, which had a weighted average interest rate of 5.6%. Turning to leasing our accomplishments in the fourth quarter of 2012 consisted of 2.4 million square feet of new leases and lease extensions, 1.3 million square feet ofwhich were related to suburban office properties, and we had 280,000 square feet of leases that expired and were not renewed.

Overall, in 2012 we extended 49 leases with annual rents of $47.4 million; adecrease of $2.7 million compared to the previous rents. As of December 31, 2012, we had 2.5 million square feet of space subject to leases that expire in 2013 or which are currently vacant.

We believe that this year we can address roughly 1.2 to 1.6 million square feet of such expiring or vacant square footage through extensions and dispositions. Based on our leasing progress this quarter, currently we have just 3% of single tenant revenue expiring in 2013, so this area of investor concern has been substantially mitigated. We expect our year end occupancy to stay at a high level, and we believe we can address some of our 2014 and 2015 lease rollovers prior to the end of the year.

Although our leasing results have been solid, we remain cautious with respect to suburban office fundamentals in most markets in what continues to be a slow recovery. Supplementing our leasing and refinancing success was ongoing progress on adding value through accretive acquisition. We closed on investments in the fourth quarter for $114.9 million, and we now have four build-to-suit projects underway for atotal commitment of $136.5 million, of which $68.9 million has been invested through December 31, 2012.

The property investments underlying these projects have an initial yield of 8.4%, and 9.4% on a GAAP basis, and our supplemental reporting package contains an estimated funding schedule for these projects. Based on our investment pipeline of good prospects, we will be disappointed if investment activity this year does not total at least $375 million, which would be a 50% increase compared to last year on new origination. We believe these increased investment activity will contribute meaningfully to our funds from operations in 2014.

We believe that these are very attractive opportunities for us, since they are supported by long-term net leases, and an average going in cap rate of about 8% to 8.5%, which generally equates to 9.5% to 10% on a GAAP basis, however, we can give no assurances that these expectations will be realized. Currently, we expect that build-to-suit will have the largest allocation of capital in 2013, but we believe there are attractive opportunities and in sale-leaseback transactions, and in first mortgage lending, as well.

The addition to our portfolio of long-term leases with escalating rents continues to be a priority for us in order to further strengthen our cash flows, extend our weighted average lease term, reduce the average age of our portfolio and support our dividend growth objectives. As a result of our leasing activity and new investments, we now generate approximately 23.1% of revenue from leases of 10 years or longer compared to 15% when 2012 began. Over time our goal is to derive half of our revenue from leases 10 years or longer.

Further, our lease rollover in 2013 to 2017 has been reduced from 48.8% of revenue at year end 2011 to 38.9% as of year end 2012. By any measure, we are making good progress and managing down our exposure to shorter term leases, and extending our weighted average lease term in the portfolio, which is now 7.1 years compared to 6.2 years a year ago.

Our successful assets recycling program helped drive down the cost of capital as it has continued to generate proceeds for accretive acquisitions and debt repayment. We expect to continue to recycle capital with a focus on capturing the value of our multi tenant retail properties. In the fourth quarter of 2012, we completed five dispositions for $30 million, and capital recycling will continue to be a focus of the company in our efforts to further transform our portfolio. We are targeting $100 million to $150 million of disposition activity in 2013, and the net proceeds will be deployed into new investment.

Our balance sheet changed significantly in 2012 in very positive ways. We have included in the supplemental disclosure package, on page 40, additional information showing our credit metrics, both at year end and adjusted for certain events on a pro forma basis. We are very pleased with the progress we have made in this area and are optimistic about further improvements in these measures.

Subsequent to quarter end, we retired $21 million of mortgage debt and converted 35 million of convertible notes into 5 million shares. These shares have always been included in our guidance, and reported company funds from operations, so thistransaction accomplished deleveraging with a modest cash outlay. In addition we obtained 80% loan-to-cost $40 million first mortgage on a property in Lenexa, Kansas, which has a 15 year term at a blended fixed rate of 3.7%.

We obtained also $15.3 million of mortgage financing on a joint venture property in Palm Beach Garden's, Florida. This loan bears interest at 3.7% and matures in five years. While we continue to on encumber assets and shift our debt toward a balance of secured and unsecured financing, from time to time we expect to obtain secured financing it when it is advantageous to do so.

A good example of a situation where it made sense occurred in the fourth quarter with the $59.511 million, 11 year financingof the Palo Alto, California property, which was 180% loan-to-cost non recourse mortgage. This year we have $238.4 million of non recourse debt maturing at a weighted average interest rate of 5.5%. We intend to pay off $137.9 million of these mortgages at par on March 1, 2013.

Earlier this month, we closed on four year, $300 million unsecured credit facility, and $250 million unsecured five-year term loan facility, none of which are currently drawn so we have substantial financial flexibility. All of our corporate borrowings, including our seven-year term loan closed last year are now unsecured. The properties with mortgages we intend to pay off on March 1st have a gross book value of 222.6 million, and our debt is 40.5% of our gross asset value. We expect 41.5% of our gross assets will be unencumbered as of March 1, 2013.

The Company continues to make steady progress on unencumbered ring its portfolio and reducing secured indebtedness. The March 1st paydowns will address 58% of our 2013 debt maturities, and significantly lower our financing costs leaving $641 million of our mortgages maturing through 2015 at a weighted average interest rate of 5.6%. The Company still has a significant opportunity to lower its financing costs and unencumbered assets, which we expect to improve our cash flow and financial flexibility. Now, I will turn the call over to Pat who will take you through our results in more detail.

Thanks, Will. During the quarter, Lexington had gross revenues of $95.5 million comprised primarily and a reimbursement. The increase compared to fourth quarter of 2011. $16 million relates primarily to build-to-suit coming online, the acquisition of NLS and increased occupancy.

In the quarter, GAAP rents were in excess of cash rents by approximately $7.5 million,including the effective above and below market leases. In the year ended December 31, 2012, GAAP rents were in excess of cash rents by $9.6 million. On page 41 of the supplement, we have included our estimates of both cash and GAAP for 2013 through 2017 for leases in place at December 31, 2012.

We've also same-store NLI data in the weighted average lease term of our portfolio as of December 31, 2012 and 2011. In the fourth quarter, we recorded $4.3 million on gains of sales of properties, and then$8.6 million debt satisfaction charge, primarily relating to a non cash charge required under GAP relating to the retirement and conversion of our 6% notes.

On page 38 of the supplement, we have disclosed selected income statement data for our consolidated but non-wholly-owned properties and our joints venture investments. We also have included non cash interest charges recognized in the year ended December 31, 2012 on page 39 of the supplement. In the fourth quarter of 2012 compared to the fourth quarter of 2011, interest expense decreased by $900,000, primarily due to refinancing our debts at lower rates.

This resulted in interest coverage of approximately 2.7 times, fixed charge coverage of approximately 1.9 times, and net debt to EBIDTA of approximately 6 times on a pro forma basis. Non operating income decreased $2.7 million, primarily due to the payoff of mortgages receivable in 2012 and 2011, and the default of a borrower on one of our notes receivable.

Equity decreased and earnings from joint ventures decreased by $9.6 million, primarily due to the collection of a note receivable held in a joint venture in 2011, and a reduction in the equity pickup from NLS due to our acquisition of power partner's interest in 2012. Turning to the balance sheet, we believe it is strong as we have continued to increase our financial flexibility and capacity.

We had $60.8 million of cash at quarter end including cash classified as restricted. The (inaudible) to cash balances relate to money primarily held with lenders as escrow deposits on mortgages. At year end we had about $1.9 billion of consolidated debt outstanding which had a weighted average interest rate of 5.4%, almost all of which is at fixed rates.

The significant components of other assets and liabilities are included on page 39 of the supplement. During the quarter ended December 31, 2012, we paid approximately $5.2 million lease costs, and approximately $8.9 millionin tenant improvementsincluding $2.8 million relating to the Wyndham lease in Orlando, Florida and $5.3 million for the EPA lease in Lenexa, Kansas.

The Lenexa expenditures were essentially covered by the lease termination fee paid by the prior tenants in 2011. In our press release, we have a reconciliation of the Company FFO, company (inaudible). In 2013 we project expected tenant improvement in lease costs $42 million or $0.21 per share.

These amounts total $39 million in 2012, or $0.21 per share. Of the $39 million spent in 2012, $9.9 million was spent on the Lenexa, Kansas property, $9.3 million on the Orlando property, $3.2 million on the Trans America Tower in Baltimore, and $3.1 million on the Palo Alto property. These expenditures reflect the lease rollover profile of our portfolio, and are expected to return to a normalized annual level of $0.10 to $0.15 per share in 2014.

We recovered the $13 million invested in the Lenexa and Palo alto when these properties were refinanced with an aggregate of $99.5 million of first mortgage debt at interest rates below 4%. Starting on page 29 and page 33 of the supplement, we disclose the details of all consolidated mortgages maturing through 2017.

We have also included, on page 16 of the supplement, the funding projections for our four current build-to-suit projects. We have also included, on page 40 of the supplement, a summary of our credit specifics. Now, I would like to turn the call back over to Will.

Thanks, Pat. In summary, we had a great quarter, strong year and we believe we are off to a good start in 2013. We expect to continue to execute proactively on leasing opportunities in order to maintain high levels of occupancy and address lease rollover risks. Two, realized values on non-core properties and certain fully valued properties. Third, capitalize on our substantial refinance opportunities helping us drive down our cost of capital.

Finally, we are going to continue to focus on investing and build-to-suit properties and other accretive investment opportunityWith opportunities to refinance our debt at considerably lower rates, acquisitions that improve cash flow and upgrade the quality of our portfolio, a conservative dividend payout ratio and moderate levels of debt, we believe we are very well positioned to create meaningful value for our shareholders and grow our dividend.

Today we announced guidance for 2013 Company funds from operations as adjusted within a range of $1.01 to $1.04 per share, reflecting our most significant annual growth since the financial crisis of 2008 and 2009. Our guidance is forward looking and reflects the comments on today's call, and a diluted share count of roughly $205 million, which includes 7.1 million shares underlying our 6% convertible guaranteed notes.

We also believe that 2013 will be another successful year for Lexington. We believe we have a good pipeline of acquisition opportunity, and very active discussions with numerous tenants with respect to lease extensions, and a lot of debt maturing with above market interest rates at a time when market conditions are favorable. We believe we can currently obtain 5 to 10 year financing at rates between 3% to 4%. Operator, I have no further consequent of comments at this time, so we are ready for you to conduct the question-and-answer portion of the call.

Thank you, sir. (Operator Instructions). We'll take our first question from Sheila McGrath with Evercore.

Yes, good morning. Will, over the last year or two years, really, your emphasis has really been focused on the forward commitment built-to-suit opportunities. Your commentary seems to indicate much optimistic on acquisition volumes. I'm just wondering is that going tobe a mix of the milk-to-suit and traditional acquisitions?

Yeah, I think it will be, Sheila. Last year the mix between the build-to-suit and other investments was two-thirds in favor of the field-to-suit. You know looking ahead that mix might be 50% build-to-suit. That reflects the fact that our costs of capitol has come down considerably, and we can find some accretive investment opportunities in sale leaseback, which we stayed away from over the last few years. I do think that we can be more active in sale leaseback, which will make it easier for us to act on growth opportunities.

And you close on it over, I think, $200 million of investments last year. Can you give us a sense of what is doable this year?

Excluding the NLS acquisition, new transaction activity was about $247 million last year. That was a 50% increase compared to 2011. We would like to do 50% more this year. We think we have a pretty good visibility on that type of opportunity.

Okay. Could you remind us what the necessary steps for Alex P. to pursue? What is left for you to pursue in investment grade rating, andif that is the strategy, your thoughts on timing.

It is definitely the strategy. I think the main guiding item for us isto continue to I encumber assets as our debt comes due. And, obviously, properties on a free and clear basis would speed that process along. Once we utilize our credit facilities to retire our March 1st debts, we have a lot less debt maturing in the next 12 months, obviously, so I think that we certainly would like to make sure we have got the ratings in place that we want prior to addressing our 2014 maturities, and we would really like to have a favorable rating so that we can access the perpetual preferred market and retire our series D preferred, which currently has a coupon of 7.55%. That would be an obvious refinancing opportunity for us.

Okay. Last question. Could you tell us if you happen to look at the portfolio, the net lease portfolio, that Spirit purchased, and if you did why it wasn't necessarily a good fit, and also if there is any other portfolio opportunities on the horizon?

We did look at the portfolio and we are absolutely thrilled that is market has reacted well to Spirit's purchase. You know the net lease sector is getting bigger and bigger and all of the companies seem to be having a good amount of success. I think that bodes well for everyone in the space. From our standpoint, given that in our mind the weighted average lease term in that portfolio was maybe around nine years. We are very focused on longer term leases to try to extend our weighted average lease term and given the amount of secured debt in that portfolio that would have been, I think, a step away from what we are trying to accomplish. It wasn't a good fit for us, but it seems to fit with Spirit very well, so that is good news for spirit shareholders and everybody who has invested in the net lease sector, as well.

Will, are there any other portfolios that you are looking at or that you think are coming to market this year?

We are not looking at anything of size. You know, the large transactions that have been in the market in the last 12 months, we've looked at. Periodically, we're shown portfolio acquisitions, but there is nothing that we are actively working on.

Okay. All right. Thank you.

We'll take our next question from Tayo Okusanya with Jefferies.

Guess. Good morning, everyone. Couple of questions. First of all, the investment outlook of $275 million. Could you talk about the timing related to that stuff? When you expect to hit your numbers? And just how much of that is actually built into your 2013 guidance?

Well, I guess for modeling purposes, I would show it coming in ratably over the course of the year, and our numbers assume that we will reach that volume objective. I do want to point out, though, that build-to-suit doesn't really show up from an accretion standpoint until later until projects are finished. While we are funding projects it does have a modest drag on earnings.

Okay. That is helpful.

With visibility on that much volume, we are much more confident about our earnings growth prospect looking at 2014 than we otherwise would have been.

Yes. That is helpful. Then on the market to market in the portfolio, just talk a little bit about the marks -- negative marks on the Kelsey-Hayes [Schlumberger] building. Kind of what -- what was there that something unique to those two assets?

Well, Kelsey-Hayes is -- obviously, for -- there is a lot more value in getting a 10 year lease that a 5 year lease. So getting a 10 year extension, and also that reflects the fact those are suburban Detroit properties. The Schlumberger lease really reflects the fact that that was at the end of a very long lease term that was written when interest rates were very high, but again the value there in getting a long term extension would show up with very favorable financing terms and one of the things we are looking at is financing that asset.

So those were a little bit unique, but thevalue of that 10 year term on the Schlumberger property was of great value to us.. We still are in a market cycle where we are marking rents down on suburban office properties. We have been very, very (inaudible) about that plan (Inaudible).

Sorry?

Typically, much would you estimate of the markdown at this point in your portfolio excluding this kind of unique situation?

Well, we have said our suburban rents are above market through 2015, and our focus is on what kind of yield can we sustain in relation to original cost as we mark rents down. And our base assumption is that we mark -- as we mark rents in suburban office, we'll and up with an un-leveraged deal on original cost of about 7.25%. And we think we can refinance the underlying debts at rates of 3.5%to 4%. So from our standpoint, the real question is what kind of yield on equity can we sustain as we go through that process, and we don't view that as a bad outcome.

Okay. That's very helpful. And the markdown implying that announces what? Like roughly about a 5% number?

For the whole portfolio?

Yes.

(Inaudible) that sounds about right.

Okay. That's helpful. And then the debt refinancing in the first quarter of 2013, during that $38 million, could you let us know the interest rate attached to that is? Is that 5.5% average for your portfolio, or is it a little bit higher or lower?

The March 1 maturities?

Yes.

The March 1 maturities are 5.5%.

About 5.5% okay. Thank you very much.

Thank you. We will take next question from John Guinea with Stifel Nicolaus.

Hi. A bunch of questions, but just a quick follow-up. First, someone had asked the question, and you had said the new leases on original cost would yield about a 7.5% and it --

Our base assumption at our '14 and '15 rollover, John, is about 7.25% yield on original cost. Given where cap rates have gone is not a bad outcome for us.

If you did the deal. Let's say you did those deals, Pat, in a different environment at a 10% yield on original cost.

But we weren't. It might have been a percent without going into great detail. It might've been a percent with a mortgage at 6%. I think we are actually generating a wider spread between rents and interest expense than we were before.

Yes. That is sort of the old game of quoting leverage off gross book value, because if your original cost had a 20% step-up for TIs and leasing commissions, isn't that an irrelevant number?

I think the relevant number is what is rent and interest expense.

Okay. Second, how are you handling Palo Alto? What is happening there is you've got a basically, a fully amortizing loan to match the lease term, and then the, my understanding, is the building goes back to the tenant, so it is a cash neutral transaction. But what are you able to generate in terms of GAAP FFO per annum on Palo Alto?

We did that lease in the third quarter. John, we did that lease in the third quarter. It was disclosed in that supplement, and the third quarter supplement, and I don't have it in front of me to be perfectly honest with you.

But is the day -- basically, it is a cash neutral financing, but are you going to be able to book FF any GAAP income off of that asset over the next 10 years?

Yes, because we still own the asset; we still collect the rent which gets straight lined. And we recognize the interest expense from the amortizing mortgage. Yes, it does generate FFO.

Okay. Any idea how much?

Like I said, John, is disclosed in the third quarter supplement. I just don't have it in front of me.

Okay. Great. Then the last -- well, a few more questions. Taxable income, I think, bounced against your dividend in 2012. What exactly was your taxable income in 2012, and what do you expect it to be in 2013?

Taxable income was the same as the dividend in 2012, and weexpect a slight increase in 2013.

Okay. Then also is there any unusual accounting with Palm Beach Gardens where you have that short-term lease -- short-term loan?

No.

And what -- okay.

No. That loan was made at closing, so it was only outstanding a couple of weeks.

And then looking at page 17, Foxborough map 252,000 square feet zero cash income and just a little GAAP. What's is going on at Foxborough.

Which one is this, John?

Oh, it's the Ninzensys systems.

Ninzensys was a NLS property. It has odd lease payments, so we only show the cash rents that we acquired -- that we had collected at Lexington since the NLS acquisition. So it -- the rent gets paid, I believe, in the first and January and either June 30th or July 1 st. So it's an odd payment. So that's why you'll see zero cash rent.

Okay. Thank you very much. Nice job, guys.

Thank you. We'll take a follow-up question from Tayo.

Yes. Just another -- if you do end up with kind of like a $275 million of investment, how do you think about long-term financing associated with that volume of acquisition?

We are assuming roughly 40% leverage, and the balance would be financed through a mix of disposition proceeds and potentially equity. We did run our ATM program earlier this quarter, so we got a good chunk of that out of the way, but our view is that we would utilize a mix of sale proceeds and equity if market conditions are favorable. And we always have a plan to recycle more capital from sales in case the equity market isn't accessible in favorable terms.

Okay. That is helpful. And then just from a CapEx perspective, because of the elevated levels this quarter, your [FAD] was actually below your quarterly dividends. Just kind of curious what your outlook is for CapEx spend in 2013, and whether that continues to put a lot of pressure on FAD relative to FFO?

We project on an [appreciative] basis of 2013, it will be about $0.21.

$0.21.

That is about the same. We do is have good visibility on those expenditures declining in 2014. Although they -- the things that are impacting our cash flow favorably as we look forward to our reduced debt service obligation, less money going out the door on occupancy-related costs and accretion from new acquisitions.

Great. Thank you.

Thank you. We'll take our last question today from Bill.

Thank you, gentlemen. Two questions. You have been continuing to drive FFO by doing a good job of lowering your cost cap on all your borrowing. That all may come to an end here. Your outer stuff. How are rents trending for your renewals on your new properties? You touched a little on suburban office rents but across the portfolio?

Well, rents in retail and industrial are essentially flat and are sort of at market right now, so wedon't view ourselves as having real exposure from a downward mark to market on that. But we are marking suburban office rents down, as we have said. We think that it is still, you know, a two to three year process for most suburban office landlords. The economy is growing and jobs are being created, but corporationsare still focused on generating efficiencies from the real estate. And that's still, in our minds, a several year process. Very good.

Secondly, you, for the first time I may have misunderstood, butI think you mentioned some first mortgage lending opportunities. You have traditionally been thought of as equity [REIT. Are you going to be originating loans out of the portfolio?

We have been originating loans in a relatively small number for several years. It is not a big part of our business, but it is a part of our business and we do see some opportunity in that space.

Very good. Thank you.

Thank you. Ladies and gentlemen this does conclude our question-and-answer session for today. At this time, I'dlike to turn the conference back over to Mr. Will Eglin for closing comments.

Well, thank you all, again, for joining us this morning. We are very excited about our prospects for this year and beyond. As always, we appreciate your participation and support. If you would like to receive our quarterly supplemental package, please contact Gabriela Reyes. Or you can find additional information on our Company at our website, www.lxp.com. In addition, as always, you may contact me or the other members of senior management with any questions. Thanks, again.

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.