Q2 2020 Lexington Realty Trust Earnings Call

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Good morning, and welcome to the Lexington Realty trusts second quarter 2020 earnings call and webcast.

All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the Starkey followed by zero.

After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one under Touchtone phone to withdraw your question. Please press Star then too.

Please note. This event is being recorded I'd now like turn the conference over to Heather Gentry Investor Relations. Please go ahead.

Thank you operator, welcome to Lexington Realty Trust's second quarter 2020 conference call and webcast. The earnings release is distributed this morning, and but the release and quarterly supplemental are available on our website at www Dot Alex P. Dot com and the Investor section and will be furnished to the assay.

See on a form 8-K.

Certain statements made during this conference call regarding future events unexpected 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 there was describing reports that Lexington files with the FCC from time to time could cause lexingtons actual results to differ materially from those expressed or implied by such statements.

Except as required by law Lexington does not undertake a duty to update any forward looking statements.

In the earnings press release, and quarterly supplemental disclosure package Lexington is reconciled all non-GAAP financial measures to the most directly comparable GAAP measure.

Any references and these documents to adjusted company FFO I'll refer to adjusted company funds from operations available to all equity holders and unit holders on a fully diluted basis.

Operating performance measures of an individual investment or not intended to be viewed as presenting a numerical measure of lexingtons historical or future financial performance financial position or cashless.

On today's call will anglim, chairman and CEO, that's Boulerice CFL and Brendan Mullinax Chief investment Officer will provide a recent business update and commentary on second quarter results Executive Vice Presidents large Johnson and James Dudley will be available during the question and answer portion of our call.

Now I will now I'll turn the call over to will.

Thanks, Heather and good morning, everyone. We had a strong second quarter and have performed very well. Despite the challenges created for many by Cobot 19.

Our focus remains on completing our transition to an industrial <unk> working to mitigate any potential impacts the pandemic on our business and take advantage of external growth opportunities.

The safety and health of our employees continues to be a top priority and we've continued to successfully execute our business plan and a virtual working environment.

Our portfolio operations has fared well with monthly rent collections very strong from the start of the pandemic.

Second quarter cash base rent collections are over 99.5% and approximately 99.4% of July collections have been received to date.

We leased over 3 million square feet during the quarter, raising industrial renewal cash base rents nearly 22%.

Our overall portfolio leased was 97.3% at quarter end up slightly compared to last quarter.

We have continued to stay active on the acquisition front and act as a capital provider to our merchant builder partners during a time of market uncertainty.

As a result, we were able to capitalize on a narrow window a favorable pricing during the quarter.

In the second quarter, we closed on $164 million of new warehouse distribution purchases.

In select target markets of Savannah, and Dallas, among others at average gap and cash cap rates.

5.6% and 5.3% respectively.

These acquisitions brought first half of the year volume to $360 million.

And increased our overall average GAAP and cash cap rates to 5.4% and 5% respectively.

More recently cap rates for quality industrial assets have compressed and appear to be back to pre pandemic pricing in most cases.

That said there continues to be ample opportunity on the investment front.

And we are currently reviewing a considerable amount of existing and build to suit transactions in the marketplace with one property under contract for approximately $29 million.

To support our growth initiatives during the quarter, we raised over $201 million through an equity offering.

And strategic use of our ATM program.

Additionally, we disposed of approximately $45 million of assets.

This capital was used to mainly fund acquisition activity with the remainder used to pay down most of our revolving credit facility.

Reducing leverage from 5.5 times to 5.2 times net debt to adjusted EBITDA.

We expect to continue to access capital markets when appropriate well augmenting our investment initiatives with retained cash flow disposition proceeds and access to credit.

Our disposition plan was somewhat impacted by covert 90 and over the past several months, primarily as a result of uncertainty in the debt markets, which has caused a slowdown in the transactions market.

We're making good progress under the circumstances and dispose the $141 million of consolidated properties year to date, which includes $67 million in July.

These assets generated a combined annualized NOI of $5.4 million.

Additionally, we've disposed of approximately $50 million in joint venture assets year to date.

We remain optimistic that we will make meaningful progress through the remainder of the year.

Our 2020 disposition plan continues to consider disposing of or marketing for sale up to $500 million.

Primarily office properties, but some closings are likely to push into 2021.

The most significant sale would involve our Dow chemical office property in Lake Jackson, Texas.

In addition to office sales, we expect to Opportunistically harvest value in our industrial portfolio from time to time similar to the two industrial assets, we sold during and subsequent to the quarter in Oak Creek, Wisconsin, and Moody, Alabama, and redeploy capital into more modern warehouse distribution process.

Right.

Our second quarter activities improved our portfolio mix, increasing our industrial exposure to almost 85% of our gross real estate assets.

We continue to be well positioned in the current environment with our strong balance sheet favorable liquidity position robust investment pipeline healthy weighted average lease term and conservative payout ratio.

While market factors could affect certain aspects of our 2020 initiatives.

We have made exceptional progress on our long term business plan and remain focused on completing our transition to an industrial <unk>.

As announced this morning, we're tightening our 2020 adjusted company FFO guidance to a range of 74 to 76 cents per common share mainly due to the de leveraging of our balance sheet.

This is subject to change depending on portfolio performance over the balance of the year.

With that I'll turn the call over to Brendan who will provide detailed commentary on our acquisition activity.

Thanks will we acquired warehouse distribution properties during the quarter totaling 1.9 million square feet.

The weighted average lease term of 7.5 years and an average square footage per property of approximately 322000 square feet.

All of the facility were recently constructed improving the average age of our industrial portfolio to 12.2 years.

We continue to like the Dallas Fort worth industrial market, given the stable presents a large corporate tenants in both strong population and employment growth.

Our recently acquired 121000 square foot Kasay industrial facility is leased to mouser packaging for over 10 years with annual rental bumps of over 2%.

The property is direct access I 45, with close proximity I just want to me I 30 and 35.

Breather properties purchased in the quarter Arent Savannah, Georgia.

This is the port logistics market, we have been adding two in recent months.

Due to its high absorption rate in low market vacancy.

Through the properties where requires a portfolio.

Apprised of the 356000 square foot facility.

And in 89000 square foot facility each lease to logistics company.

The average lease term for the properties because approximately five years.

Both our brand new class a warehouses with attracted annual bumps a 3%.

Separately, we purchased the newly completed 500000 square foot facility, we used to you and has a third party logistics provider for approximately seven years.

Located just three and a half miles from the Bayport container terminal at pork Houston is right size for the market.

This acquisition represents our second investment in the Bayport South Industrial Park.

The second property Athree hundred 25000 square foot facility lease to Mercury paper in Winchester, Virginia is scheduled to close in the third quarter.

Positioned along the I 81 bulk industrial corridor, the Winchester logistics market has experienced positive rental growth with large corporate attendance relocating their in recent years.

We currently own two other distribution facilities within the park.

Both the Houston and Winchester properties are brand new class eight facilities leased on average for four and a half years.

Our most recent purchase was a newly developed class a 617000 square foot facility lease to Amazon for 10 years.

The property is in Ocala, Florida with frontage on high 75, offering easy access to Tampa, and Orlando and supports our strategy of increasing our ecommerce exposure.

Amazon that accounts for over 3% of our overall portfolio revenue.

As will mentioned, we are actively reviewing a number of existing and build to suit opportunities and continue to work on spec development projects to add to our development pipeline.

I will turn the call over to about now to discuss financial results.

Thanks, Brandon adjusted company FFO for the quarter was approximately $51 million or 19 cents per diluted common share and in line with our expectation.

We continue to maintain a very conservative adjusted company FFO payout ratio of 55.3%.

Revenues for the second quarter, where approximately $82 million up 2% when compared to the same time period in 2019.

This increase was after we offset rental revenues with $157000 of bad debt expense related to a tenant accounts receivable and the write off of a deferred rent receivables.

Property operating expenses were about $10 million during the quarter of which approximately 81% were attributable to tenant reimbursements.

DNA expenses were $7.6 million in the corner and our estimated total 2020 DNA is expected to be within a range of $30 million to $32 million.

Year over year same store occupancy was down 1.6%, although same store NOI was down just 0.6%.

As will mentioned, our consolidated cash base rental collections have been strong throughout the pandemic.

Specifically to the second quarter, we received 99.9% of April rent, 99.1% of May rent and 99.6% of June.

Additionally, as of today, we have received 99.4% of July rents.

While our collections have remained solid with minimal impact from Coca 19 historical rent collection should not be considered an indication of expected future rent collection.

Rent relief requests continued to be minimal and currently we are evaluating a request from one small retail tenants in our Philadelphia office building.

Today, we have granted only two tenant rent relief requests and our consolidated portfolio, which were immaterial and we obtained either an extension or favorable renewal terms.

Turning to the balance sheet, our financial position remains strong and we continue to have ample liquidity and borrowing capacity.

At quarter end, we had approximately $84 million with cash, including restricted cash with approximately $560 million available on our unsecured revolving credit facility.

The capital raised during the quarter contributed to paying down our revolving credit facility and supported the decrease in leveraged to 5.2 times net debt to adjusted EBITDA.

Our unsecured debt to unencumbered NOI is 4.5 times, an unencumbered NOI represented about 85% of our portfolio at quarter end.

We have no significant debt maturities before 2023.

At quarter end, our consolidated debt outstanding was approximately $1.3 billion with a weighted average interest rate of approximately 3.7% and a weighted average term of seven years.

With that I'll turn the call back over to wealth.

Thanks, Beth I will now turn the call over to the operator, who will conduct a question and answer portion of the call.

Thank you we will now begin the question answer session to ask a question. You May proceed Star then one on your Touchtone phone fewer using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Craig Mailman with Keybanc. Please go ahead.

Good morning, everyone. This is already Cameron on for quite a just a quick one regarding acquisitions kind of going forward is the $164 million per quarter pace kind of something we can expect for the remainder of the year.

Well the market of opportunity is large, but our existing pipeline right now just as the the $29 million assets under contract. So.

Yeah, we think that we can be quite active in the market over the balance of the year, but as I said, there is only 29 million under contract at the moment.

Got it thank you and I'm just one more on bad debt I remember in the last call. You guys mentioned you had 150 basis points is bad got baked into guidance.

Sorry, if I missed it but did you guys update that I'm here today.

I think I'll turn that over to best Buhler, especially if at all.

He already yeah, we did not put that in the in our prepared remarks, but yes, we do have 150 basis points of bad debt, that's baked into our guidance.

Okay. Thank you.

Okay.

Again, if you would like to ask a question. Please press Star then one.

Our next question comes from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Thank you and good morning, I guess, just can you help us understand or just kind of think through your sources of capital just going forward lets say you where to find.

Larger deals and the 29 million how do we think about the next time you need to raise capital or just how you're thinking about the sources and uses going forward.

Well quite a bit will be derivative of how well we can do on on the disposition front. Jamie you know, we think that we've had quite a bit of success in July and we think we can do well over the balance of the year. So disposition proceeds will be.

You know and an important use of capital for redeployment standpoint.

And you know obviously, our credit line is available to us we may use or ATM program, a little bit, but unless we have a large you're not specified pipeline that we have visibility on we wouldn't expect to use any equity in size.

Okay. And then you had mentioned that 500 million of office sales. Some may get pushed out till next year can you just gave an update.

What's what you know what's in discussion is what gives you.

Confidence, saying that and.

You know why next year, how do we think about that.

Oh, Yeah large Johnson runs our disposition plan. So Laura you may be best suited to answer that one.

Sure good morning so.

With that we have roughly $55 million says assets with an accepted offer or contract. So that would be would be the pipeline at this point.

We do however have a number of assets that are in the market, where we plan to be in the market with <unk> chief among others of course, it could dal asset and we don't have anything definitive conclusions to report on that but we are in discussions on that asset.

And then there are a variety of other office assets that we well we'll have in the market or do you have in the market. The timings just less predictable as the result of kind of Ed. So [noise]. That's why we indicated that they may questions 2021 for closing.

Okay, and you have like a general sense if.

Any moves in pricing, so far, especially in the office side, so what you're trying to sell.

Anyone.

Yeah, our underwriting.

Sure and that's that is as it's obviously an issue that everyone. Every seller is dealing with I think that the indications are that for net lease assets sales first half 220, 20 are down roughly 44% relative to first half 2009.

Team for not lease up of sales it really depends on the nature of the asset investors are being much more selective in terms of credit quality of the tenant term quality of the real estate et cetera, as our lenders. So it really depends on the asset that is more.

Tiffany and the a investor community right now, but we are seeing a renewal of interest among institutional and private investors folks looking to put points on the board and 2020, and though ending community is coming back as well their underwriting standards or are higher.

And sponsorships more important than ever but that's that's what we're saying.

Okay, and you seem points on the board, even on suburban office or office campus acquisitions.

[noise], we yeah, we don't have any campuses or in the market, but yes. We are we are seeing renewed interest on a on the assets where outlet.

Okay.

How do you think about your current cost to capital versus the yields I think you talked about mid fives low to mid fives and the acquisitions.

Yeah, I mean, we see the market opportunity sort of ranging between.

Four and a half and five and a half depending on you know credit at least characteristics location and.

Market.

So you know, what's what's going to drive acquisitions for the most part is Tenthirty one exchange needs from from sales, but are across the capital has improved a lot and made external growth easier.

Alright, thank you.

Again, if you would like to ask a question. Please press Star then one.

Our next question comes from Jon Petersen with Jefferies. Please go ahead.

[noise] great. Thanks.

As of your acquisition pipeline I'm, just curious over the last three or four months a lot of things in a world of change that you guys have.

You know change any of your approach to a you know to where you're trying to acquire properties. There's been a lot to talk about re shoring of supply chain business. It isn't just holding more inventory I just wonder how that works into a into the types of properties in locations, where you're trying to acquire.

Yeah, I think Brendan a joint to take a shot at that one.

Yeah sure Hi, good morning.

Well.

Our investment focus or they just its oriented focus I think.

It is excellent strategy in the current environment, we do expect too.

And at that structural demand drivers of accelerated adoption of E Commerce, Oh by companies to help increase business inventories for their supply chain resiliency and also that potential that you that sense for onshoring or near shoring and <unk>.

When we think about the geography is in the country that are most likely to benefit from those trends. We believe that worked very well position to to benefit we thank our focus and without the super Sunbelt and and the lower Midwest logistics oriented.

Markets will will benefit disproportionately from that that tenant demand because those markets offer very capable access to strong demographics are excellent infrastructure.

And are also very attractive from a cost perspective, and an ROI in generally business friendly environment.

On the I guess I know you on the same free access though.

All right. So to summarize we expect to continue to invest in the markets that we've been active.

Okay.

Alright, then exams in and I mean, I, maybe the same question, but in terms of development pipeline I'm curious if you guys is seen any or that you know the merchant builders that you deal with have you seen any increase in RFP using the mark and the market recently and I guess, if you have kind of what geography is are you seeing those then.

So.

How.

If you look at leasing activity the leasing activity.

For modern bulk distribution has been quite strong across our markets.

And that has.

Absorbed a lot of the logs full distribution space.

So there has been I would say more build to suit inquiries than we were seeing at this point last year, a and that's also that's partly on the demand side as well.

On the supply side, what what you saw in most markets has been a pause in speculative development. So as those spec buildings have been absorbed a in several of these larger companies are larger space me.

Anthony is.

We anticipate will need to look to build to suit in order to to satisfy that.

States today.

Okay, Yeah that makes sense and I'm, sorry, if I missed the but you know if we look at your upcoming or lease maturities schedule.

2020 for industrial you only have one left Yodice and then you've got a number of 21 I mean are you guys expect you named large move outs.

In that list and I guess, the same way with the out with the office portfolio.

I'm sure John up, but ask a James deadlier head of asset management to give his.

View on them.

Yeah sure so visibility of move outs Geo. This is gonna be vacating the property and they'd still very functional property that we anticipate being able to backfill.

And then the other known move out there we have an industrial pipeline for for 21 is Dana and that's kind of a mixed use property. It has a a high amount of office as well as industrial we're working on trying to backfill that space with that said tenant rent roll that's already been established and then the only near term known move out there we have on the office side is.

Schwab and Westlake, Texas, and that's in a great location within the DFW market I'm very affluent area that properties been released to multiple tenants over the years.

Quickly because if it's high parking ratio and it's just the quality asset.

Everything else, we're in discussions with the tenants on at this point and.

We're hopeful for the most part that we're going to be able to keep your tenants.

Okay.

All right. That's all very helpful. Thank you thanks John.

Again, if you would like to ask a question. Please press Star then one.

Our next question comes from Brian Mayor with B. Riley FBR. Please go ahead.

Brian Your line is now lives.

Okay.

It appears Mr. may is having some technical difficulties.

Again, if you would like to ask a question. Please press Star then one.

At this time there are no additional questions I'd like turn the conference back over to will Eglin for any closing remarks.

Yeah. Thanks again for joining us this morning.

Please visit our website or contact Heather gentry, if you'd like to receive our quarterly materials. In addition, as always you may contact me or the other members of senior management with any questions. Thanks, again and have a great day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect [noise].

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