Q1 2020 Earnings Call
[music].
Good morning, and welcome to the Lexington Realty Trust first quarter 2020, <unk> earnings conference call and webcast.
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I would now like to turn the call over to Heather gentry investor relation.
Please go ahead.
Thank you operator, welcome to Lexington Realty trusts first quarter 2020 conference call and webcast.
Earnings release was distributed this morning, and both are at least in quarterly supplemental are available on our website at www Dot Alex P. dotcom and the Investor section and will be furnished to the FCC on a form 8-K.
Certain statements made during this conference call regarding future events and expected results may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Lexington believes that these statements are based on reasonable assumptions, however, certain factors and risks, including those included in today's earnings press release and those described in reports that Lexington files with the FCC from time to time.
Because lexingtons actual results to differ materially from those expressed or implied by such statements.
Except as required by law Lexington does not undertake no duty to update any forward looking statements.
In the earnings press release in quarterly supplemental disclosure package Lexington has reconciled all non-GAAP financial measure to the most directly comparable GAAP measure.
Quarter, and our overall portfolio was 97.2% least up slightly when compared to last quarter and our weighted average least term of 8.3 years is working in our favor in a defensive climates.
We have minimal lease explorations for the remainder of 2020 with only 2.4% of our overall revenue subject to renewal and our outlook on leasing outcomes in 2021 remain largely unchanged at this time, we will provide updates accordingly as the year progresses.
We continue to focus on our core business objectives, and we are pleased to have completed the bulk of our transition to an industrial read.
While we cannot estimate the full impacted cope with 19 will have on our overall business. We believe our risk is mitigated as a result of this transition.
And our emphasis on warehouse and distribution facilities has generated strong shareholders returns relative to other sectors.
In January and February we purchased $195 million of high quality industrial assets with a robust weighted average least term of nine years in strong sub markets of Chicago Phoenix in Dallas.
Subsequent to quarter N., we acquired an industrial property in Savannah per approximately $35 million.
Which was match funded through a small equity raise off of R.A.T.M.
Fortunately, we did not have substantial investment commitments in place at pre pandemic valuations and we have capital to invest at higher yields as a result.
We believe we are in a more advantageous investment environment than we have been in recent years, the cap rates heavy moved 5% to 10% in our favor.
Accordingly, we're actively engaged and underwriting new investments and we are working to add high quality, well located acquisitions and build the suits to our pipeline with most opportunities at going in cap rates in the 5.25% to 6% range.
View of are retained cash flow financial flexibility anticipated sale proceeds and access to capital markets, we're quite comfortable with our financial approach to our forward pipeline, although ongoing market conditions may change our view in the future.
We believe the longer term industrial opportunity also appears promising as we expect to see continued shift to eat commerce more resilient supply chains that accommodates additional inventory and the potential for more goods to be produced domestically, which bodes well for our business.
We dispose of $43 million office properties during subsequent to quarter end. These assets generated a combined annualized net operating income of $3.2 million.
Although subject to change given the current environment or 2020 disposition plan still contemplates disposing or marketing for sale up to $500 million of primarily off its properties.
While we remain active engaged we have witnessed and expect to continue to see a slow down on the dispositions friends at least for the remainder of the first half the year with the potential pick up in the transaction market in the second half of the year.
Our focus continues to be on our transition to becoming a 100 per cent industrial read by year end 2022, although our progress this year, maybe slower than we anticipated when new year began.
We have been active in both issuing and repurchasing common shares in a volatile market.
Ear today, we have issued approximately 4 million common shares net at an average price of $11 in six cents per share under or A.T.M. program.
Depending on her share price, we will continue to access capital markets to fund acquisitions, supplementing our investment needs with retain cash flow disposition proceeds and utilizing our credit line as needed.
We have a strong balance sheet favorable liquidity position healthy weighted average least term and a conservative pet ratio. We believe we're well position for the current environment.
This time, we are maintained a 2020 adjusted company Fo guidance in the range of 74 cents 77 cents per common share. Although this is subject to change depending on portfolio performance over the balance of the year.
Or business strategy remains largely unchanged and we will continue to capitalize on favorable market opportunities to grow our industrial portfolio.
But that I'll turn to call over the best will provide a financial update.
Thanks, well, starting with first quarter of financial results are just the company wants approximately 19 cents parts on the economy share which was in line with our expectation.
I checked it company F.F.L.P. out ratio, 55.3% and quite around my name's extremely conservative which is particularly important in this current environment.
Property operating expenses of $10 million are down when compared to last quarter, which 80%, which I think at all to tenant reimbursement.
You know expenses on your $8 million in the corridor decrease a $700000 compared to the first quarter of 2019.
Are estimated 2020 G.N.A., it's so far cast into fall within a range of 31 $33 million.
They're in the corner attended actually coffee, Ohio property dissolved, it's tenants entity and he's no longer paying rent.
Able tobacco the majority of the space and sustain around with a subtenants in place.
However, we recorded and non cash preferred meant receivable right off about $600000 relating to the prior to that.
Additionally, we recorded 1.2 million get fired back receivable the dark on one of our property Julie tenant credit card sign.
Year over year things are occupancy with down a little over 1%, although Saint <unk> was down just 0.2% and 0.5% when excluding single kind of vacancy.
Moving on to your rental collection and <unk>, we have done well with our consolidated cash basement collection with all of March and 99.8% of April Pate.
We have also collected 84% of May rent that would do at the beginning of the month, which is a slightly better collection rate as compared to April for the same time period.
Although promising to date information regarding historical event collection should not be considered an indication unexpected future rent collection.
As mentioned, we have received rent really free class from some of our cat.
Event released requests we have received represented 5.5% of our 2019 annual cash base right.
The majority of these requests were in the form of rent deferral request overbearing periods of time.
Yeah, I'm out of that really requests from tenets is operation. We believe have been impacted by the current 10 data to the point of meeting financial assistance represented less than 1% of our 2019 annual cash basement.
13 continues to work diligently with our tenants as we managed to these unprecedented economic conditions and while we are in discussion today, we have not yet granted any rent really.
We evaluate all requests to determine what is the best course of action moving forward.
And all these instances where requesting specific financial information, including any government assistance requested to being a French on relief is warranted.
Parents are chosen not to provide such information and has continued to pay rent.
We do not expect any material impact to our gas rental revenues, resulting from rent really class at this time.
In any material tenant default. However, we can give no assurances on the outcome of any rent really easily class.
Turning to our estimated 2020 adjusted company F.L. guidance, we are maintaining current guidance and the range of 74 277 cents per diluted common share.
Factors driving this decision include our current outlook on investments in this position.
Minimal 2020, remaining least exploration and a potential sale our Dow chemical facility later in the second half of the year among other things.
We also have felt at approximately 150 basis points, a bad debt accent into our guidance for the remainder of the year. We believe it is prudent given the current economic environment.
Keep in mind this guidance ranges forward looking and it's only subject to change we will continue to monitor our guidance closely in light of existing and future market conditions.
Looking at our balance sheet. We believe we entered the pandemic in a position of strong financial strength with ample liquidity and borrowing capacity a quarter and we had approximately $90 million of cash including restricted cash with approximately $470 million available on our on security revolving credit facility.
We remain very comfortable with our leverage is 5.5 times net debt to adjusted EBITDA quarter N. and note that are.
Debt to unencumbered N.Y. is 5.1 time.
Unencumbered N.Y., representing more than 85% of our portfolio a quarter n.
Further we have no significant debt maturities before 2023.
A quarter end, Arkansas today that outstanding with approximately 1.4 billion with a weighted average interest rate of approximately 3.7% and a weighted average term a seven years without altering the call back over to well.
Thanks Beth.
Now turn the call over to the operator, who will conduct a question and answer portion of the call.
We will now began the question and answer session to ask a question. Please popstars that we're working on your tax filing if you're using a speaker phone. Please pick up your hand in fact before pressing the key.
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Our first question today comes from Gamy Feldman with Bank of America.
Good morning. This is Elvis on for Jamie I just had a quick question. So on your commentary and also in the release you mentioned that.
Today's market conditions are a little bit more favorable.
Prayed supplied in a bit in your favor in that 5% to 10% range can you just elaborate on that is bad because cope at 19 and are you seen any transactions out there that are giving you sort of this perspective.
Yeah, I think that that's what we've observed in in the market. So far I think you know quite a bit of it is that that capital hasn't been readily available. So it's if anything.
Our view is that as as debt markets recover over the balance of the year cap rates may very well compress again in this opportunity maybe.
You know somewhat limited so we want to try to take full advantage of that.
And we do have transactions that we're working on and our pipeline that prove the thesis that the tariff rates widened out so.
We think that's a good good opportunity for us and the other thing is is you know fewer buyers or you know able to get through diligence and some transactions are the buyer pool is a little bit.
Limited from that standpoint.
[noise] and would you say these are distrust sellers are cellars that are looking to just exit markets like can you, perhaps give us some indication of the make up but those salaries that your c. lower their pricing. So I I wouldn't think that there will be any real distressed opportunities in our asset class.
But you know generally work you know, we're often buying from merchant builders, who.
Either completed build the suits are built spec real estate that's been least.
And they have an interest in.
You know getting liquidity from their projects to move on to to Whatever's next.
So you know these sales they may be making you know a little bit less money than they thought a few months ago, but.
Yeah, I think it's just the desire for for liquidity in the context, they're overall strategy more than anything else.
Thank you that's helpful. And then maybe just one more on the office side has tenant interest or invest investor interest increased in sort of the suburban second tier city office buildings as you know perhaps people start to think about leaving left then cities and just curious.
Marks there aren't any conversations you're adding.
I I think it's a little early to draw conclusions, but but our view is that in many cases. This will be good for suburban office as as companies look to diversify how their their office, saying there are people. So.
You know we're in terms of the rent relief request that we got it was sort of disproportionately small in office, which you know suggests to me that that thesis may.
May may prove that to be true, but it's it's just a little bit early to tap proof of that.
Alright, thank you.
I like you have a question please press start genuine.
Our next question <unk> Spender with Wells Fargo.
I Hope you will guys.
Next time use maintain guidance, which is rare right now are we see most of the rates, which all guidance. What's included in years, you've got a handful leases still expiring acquisitions that may close and then dispositions like you mentioned just want to see what's what's in there.
Yeah, I mean, the truth is tied their really haven't then you know many moving pieces that that would have changed our outlook you know from from the beginning of the year.
So I think it is if if disposition slow down there's right left deletion from that this year. That's actually you know good for funds from operations.
So the the the parts of the model really haven't changed.
You know in in any way they would've caused us to to revisit guidance.
We don't have much lease roll over and are expected outcomes of on all that stuff is is still consistent with what.
We thought when new year began.
You know acquisition activity, maybe a little less than we thought but libraries come down. So you know we'll pick those some interest savings on on that side of the equation.
And for any deals that you do land is fair to say you'll run up your line of credit at least over the near term just until maybe dead capital comes back your way.
Yeah. We we've you ourselves is having a line capacity and the disposition market is not shot it's just slower but you know knock on wood will have a handful of offer sales in second quarter, we think the transaction market probably functions better in the back half of the year as as the debt markets.
Recover.
And don't forget that given how lower dividend payout ratio is you know we have a lot of retain cash flow as well, but I'm not you know we're not looking at putting any long term debt on the balance sheet.
This time, we think that.
No spreads should tightened over the balance of the year before before we think about a longer term debt.
Oh, that's helpful. How about a tenants have you I.
Looking to your release and supplemental I don't see any tenants mention for the acquisitions can you disclose who some of those are.
Yeah, Brendan I'll, maybe I'll turn it over to you to give a little bit of the sense of who the tenants.
We're in first quarter acquisitions.
Sure.
Let's see it was.
Hello Bugs.
C.N.W.
Stanley Black and Decker. So those are all high investment grade ready credits and the fourth building with these two ball Corporation, which is.
I want to say a double please excuse me double b. plots credit so high on investment right right.
Yeah. That's helpful. Thank you Brennan and then the Phoenix S. It had six years left on the lease.
What cap rate did that quite a so there was a for a I guess a blend cash calf rate how about just that just because of his on the shorter least term side.
Capre was and was was just a little bit south of five cap two is okay.
A brand new class a 40 foot Claribel day, it's about 160000 square feet thick located.
Across the street from a brand new manufacturing facility that fall Corporation.
Constructed.
So we we think that the likelihood of renewal is extremely high there and it's it's just.
Just a first class building and that kind of primary market.
Great. Thank you Brennan.
Hi next question is the follow up from the same he felt maybe like bank of America.
You guys are just one more for me can you give us any sort of or or any color. You can share on the reserve you took in the quarter that would be helpful to us.
Yeah, So let you jumping on that one.
Sure the morning.
Yeah. So we we took a 1.2 million dollar reserves for one tenant that we had quite it concerns about you know every quarter or we go through all of our let me see involved in any accounts for c., although that we haven't we have to you know access bound for probability of collection. So give it. This this kind of.
<unk> had been down weighted by S.N.P.N. was having operational issues as well to do to cope with 19 and their industry was was impacted as well for that reason so given given all of these factors in other factors, we thought that it was.
Not probable that we would be able to collect the full differed that me sealevel and we put them on a cash basis.
Are you able to share with industry that 10 minutes. There's part up and then also is there's an office or industrial tenet.
It was consumer products.
Industry.
And it is industrial.
Okay.
And then just one more big picture question for me as I look at your sort of market concentration Houston is number one on a consolidated basis number one on office and number three on industrial can you just talk about sort of what you're seeing on the ground. There you know potential leave.
Scrolls coming they share an accent, you know sort of any risks to your assets in that market.
[noise] score James you want to Ah for your perspective.
Yeah sure so our our Houston portfolios comprised from seven properties, you know 1.6 million square feet. It's got a weighted average at least from a 15.7 years. So with the exception of one small you know 79000 square foot office building, where we have vacancy we're really not in the market.
And over the the last few years, we've going going back about five years, we've kinda disposed of our direct oil and gas exposure. We do have one turn it into buildings that fabricates piping, but other than that the majority of it is really dal.
So you know without the long weighted average leads term and the types of tenants that are not directly oil and gas related I think we're well positioned in Houston.
That's all for me thanks, guys.
Thanks.
If anyone has any further questions. Please pass star <unk> that's correct.
Our next question comes from John Peter staying with Jeffrey.
Great. Thanks.
Curious if you think there'll be a lot of distressed opportunities. This time around you talked about how you expect maybe some better pricing opportunities you know, but certainly the last 10 years. It seems like the industrial market, especially have become more institutionalized I'm just curious how much money things on the sidelines looking for distressed opportunities and whether or not.
Kind of.
I guess prohibits those opportunities come in the market just because there's so much capital out there looking for properties.
Yeah, I mean, I you know I I, just don't think that are asset type you know we're interested in investing in is is going to see a whole lot of of distress.
You know so I it for us been cap rates have widened out which is appealing on on the investment side, but you know we're not we're not going to you know keep keep capital on the sidelines waiting for for distress or just you know just don't.
I don't see it.
So it's you know time time will tell.
But I I don't I don't see a lot of distressed opportunity coming into our our opportunity set.
Got it and then I guess on a similar line you guys are still trying to sell some properties I think you said and you're prepared remarks that you're you still think you can get Dow chemical done in the second half of the year. I guess you know d. is the pricing on that you think similar to what you were thinking you know a few months ago and then how do we think about maybe some properties that.
I guess had a little more risk on it in terms of near term least maturities like like your office building in downtown Philly you know how how do you know what's behind the market for those sort of buildings right now.
Sure I you know the situation with doubt is is an interesting one you know early in the year when when the 10 year treasury sort of yielding 1.5% there was a market of investors, who could prepare the debt pay the yield maintenance and refinance and make the math work valuations that were very.
Good for us.
The second buyer.
That is you know someone who would want to keep the debt intact. That's mainly at 10 31 exchange and Investor Universe pre you know pre Pandemics, we felt like we had a.
Transaction put together, but with an offshore investor who's no longer traveling to the U.S.
You know we're in negotiations with another buyer like we just can't predict with with certain to win you know when when that transaction might get done.
It may be Laura I'll ask you for your your perspective on the balance of the office sale process.
Sure. Thank fall. So you know that sound marketing needless to say been impacted by the destruction, primarily and that that markets and institutions sidelining themselves to a large extent that being said there are and number of private buyers who are still very act.
I'm looking for opportunities. Some 10, 31 night, a bay that and some not there have been among transactions nationally wreck hard deposits. Some Chrysler research somebody else that have been more often and certainly a slow down on the timing of transactions.
But that there are buyers out there we've been able to access them on a number of assets they have in the market somewhere inactive negotiations.
On a few transactions with private buyers and under contract on a few others. So.
Yeah, It's slimmer group of prospective buyers and transactions are certainly slowed down by the destruction and the debt markets and <unk> logistical issues associated with the pandemic that we're hoping that lover set up in the second half of the air girlfriends.
Right I think <unk>.
Our next question kind of spends Barry <unk>, there with city stable.
Hi, good morning. Thank you so much recorder given every think that's going on quick question for you in terms of a rental differ request is there any specific you know process in place as you examine nan where it seems you <unk>.
And then on on that same thing obviously, there are some of your tenants that will be made per beneficiary of the programs initiated by the fed in the corporate bond market and when you bifurcate that too going forward is is that something you're taking into consideration from folks ask.
For the rental differ.
Jams do you want to.
Jump in an answer that one.
Yeah sure. So we we've put together a list of underwriting criteria that we send out the 10 instead of requested relief. We've established a a rent released committee that reviews that criteria as it comes and some tenants have been forthcoming with that information others have chosen not to provide that information and continue.
To pay rent and part of the process is definitely evaluating other avenues for which the tenants have release it may be available to them. So that's definitely part of the process, but we're we're definitely asking lots of questions and making sure that.
Anything that's granted as a genuine request or advantageous to us from a.
The perspective of getting a a a lease extension or or better credit.
<unk>.
Cottage, Thank you very much.
Okay.
That's concludes that question and answer session, probably like to turn the call back over to well I gleaned for any closing remark.
Separate or.
We appreciate everyone joining us this morning, and we hope that you'll visit our website or contact Heather gentry, she would like to receive or quarterly materials. In addition is always you may contact me or the other members of senior management with any questions. Thanks again for joining us today and have a great day.
[laughter] created thank you for today's presentation, you may now it's killer.