Q3 2021 Lexington Realty Trust Earnings Call
Uh-huh.
Thank you operator, welcome to Lexington reality Trust third quarter of 2021 conference call and webcast. The earnings release with distributed this morning, and both the relief and quarterly supplemental are available on our website any.
Buster section.
It will be furnished to the S E C on a form a cake.
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.
Seem to believe 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 S. C. C from time to time could cause Lexington, the actual results to differ materially from those expressed or <unk>.
Slide by such statements.
Except as required by law Lexington does not undertake a duty to update any forward looking statement.
In the earnings press release, and quarterly supplemental disclosure package Lexington has reconciled all non-GAAP financial measures to give us directly comparable got measure.
Any references and these documents to adjusted company F. F. L refers to adjusted company funds from operations available to all equity holders and unitholders on a fully diluted basis.
Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of Lexington historical our future financial performance financial position or cash flows.
On today's call will Eglin, chairman and CEO, that's bull or S. C F L and Breadnut Bolitics C. I L will provide a recent business update and commentary on third quarter results.
Executive Vice President's, Laura Johnson, and James Dudley it'll be available during the question and answer portion of our call I will now turn the call over to will.
Well I'd, rather good morning, everyone.
Our third quarter results were strong in all areas of our business, we have transformed the company's portfolio deliver revenue and adjusted company apropos above consensus.
Produced strong underlying portfolio performance increase the dividend by 11.6%.
With 95% of our gross assets now industrial we'd have substantially completed our portfolio transformation to a predominantly single tenant industrial route.
In addition, we were executing on a number of value enhancing initiatives, including pursuing prudent external growth active asset management and continuing our discipline capital allocation.
Our portfolio continues to benefit from healthy fundamentals in the industrial sector, including strongly Superman and rental growth.
Kind of loosening velocity is being driven by the need to improve supply chain of Christian C.
Transportation costs rise, resulting in a greater desire for additional space to house inventory.
Demand is still outpacing supply with a vacancy and an all time low leading to rental rates continuing to rise across the country.
[noise] class a warehouse distribution space in our target market is benefiting from all of these trends.
In short it is a great time to be an industrial real estate company with top quality assets.
Are robust third quarter leasing activity, it's certainly reflective of the strength of our target markets.
With 2.6 million square feet of space, we used in the quarter, we raised our stabilized lease portfolio 110 basis points to 98.9% and increased base and cash base industrial rents on extension, new leases, 6.5% and 4.7% respect.
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Further for the nine months ended September 30th we raised space and cash based industrial rent, an extension and new leases, 10.3% and 7% respectively.
Average rent per square foot in our warehouse distribution portfolio is $3.97, which we view as 6% to 8% below market as market rents continue to grow considerably faster than the escalations built into our leashes.
And we note that rents in our target markets have grown on average approximately 8% over the last year.
Our strategy to purchase vacancy to produce higher stabilized yield is proving successful as evidenced by some notable third quarter leasing activity.
We secured a five and a half year lease with a new tenant who will occupy the 195000 square foot vacant property that we reached <unk> purchased and the Greenville Spartanburg market as part of a four property industrial portfolio acquisition.
Lease term includes 2.75% annual rental escalation and the least produces an initial stabilize yield a 5.3% for the property.
Additionally, we least 68000 square feet of available space to a new tenants at our Lakeland, Florida warehouse distribution facility for five years increasingly building's occupancy from 53% to 84%.
The starting rent is $5.70 per square foot with three per cent annual escalations.
Other significant leasing outcomes during the quarter that resulted in an increase to cash base rent over the prior lease term included a five year lease with three per cent annual escalations.
At our 640000 square foot Statesville, North Carolina warehouse distribution facility and a three year lease with 2.25% annual Escalations at our 1.2 million square foot.
Olive branch, Mississippi warehouse distribution facility.
Subsequent to quarter and we had a huge success at are 908000 square foot Spect development facility and Fairburn, Georgia.
Executing seven year lease with 3% annual escalations and bringing the stabilize yield to 7.2%, excluding our partner promote which was well above our underwriting assumptions.
This leaves illustrates the value creation that our development pipeline is now delivering we currently have four expect development projects in process two of which we added during the third quarter with an estimated total project cost of $358 million.
And $270 million left to fund.
Speculative development in the purchase of Nonstabilized properties continue to be a principal focus of our investment strategy and highlight how our platform market presence and warehouse distribution focus or creating shareholder value.
On the purchase front, we acquired $135 million a class a warehouse distribution product during the quarter with an additional $76 million purchased subsequently and we currently have a sizeable pipeline under review.
[noise] Brendan will discuss investment activity in the development pipeline in greater detail shortly.
Moving to dispositions our sales volume as of September 30th totaled $219 million average gap and cash cap rates of 7.6% and 7.9%, respectively. We sold an additional $25 million after quarter and and have two other.
Property under contract to sell for $29 billion.
That's when we focus our strategy on acquiring in developing modern class a warehouse distribution facilities. We continue to view our manufacturing in cold storage portfolio as a potential source of capital for redeployment.
With the sale of our Nonindustrial property is substantially complete our board announced a dividend increase that brings our payout ratio more in line with our peers. After several years of focusing more on retaining cash flow and maintaining a low payout ratio. During this period of intensive capital recycling.
The new declared quarterly common share dividend, which will be paid in the first quarter of 2022 will be 12 cents per share representing an 11.6% increase over the prior quarterly dividend.
Our intent to grow the dividend annually moving for work reflects our confidence in the direction of market rent growth and our opportunity to raise future rats.
On the E. S. G front I'd like to highlight how pleased we are to have earned the first place ranking for U S. Industrial listed companies in our first 2021 Greuze assessment.
[noise] E. S. G is an ongoing priority for us cause we continue to enhance and strengthen our program. We encourage you to review our most recent E. S. G disclosures, which highlights many of our 2021 E S G achievements and initiatives.
In closing by transforming Alex pay into a predominantly single kind of industrial right. We have created a much stronger more valuable portfolio.
The compelling growth opportunities, we see ahead of us position as well to continue to drive meaningful longterm financial performance and enhanced shareholder returns.
With that I'll turn the call over to Brandon to discuss investment activity.
Thanks as well.
Starting with the acquisition during the third quarter, you purchase five warehouse distribution at that standing 1.3 million square feet for $135 million.
I'd average gap and cast stabilized cap rate.
Four nine and 4.6% respectively weed.
We briefly just got the four property portfolio located in Greenville, Spartanburg Ah last quarter's call.
We purchase that portfolio with a vacant property, which we least up shortly after our second quarter call.
Echoing well.
That demonstrates the value of our strategy acquiring vacancy and strong market, where we can utilize our market knowledge and expertise to enhance heel.
We also acquired a 293000 square foot cable light warehouse distribution facility in Columbus, Ohio, a primary distribution market and the Central U S.
This facility is the recent build occupied by two talent with a weighted average these term seven years, an average annual runs populations of 2.5%.
Quinta quarter close we purchase a three property 878000 square foot portfolio and the white laptop market of Indianapolis.
Indianapolis the market, we've made a commitment to for several reasons include.
Including its central location in population reach.
Stenseth Highway and air and rail systems deep labor pool business friendly government and its act puts the second largest paddock club in the world the.
The three property all recently constructed still on 565, and the White linen exchange business Park.
On the development, Brian required to land sites during the quarter that when completed will comprise five building three.
<unk> and the Greenville, Spartanburg market and two in Phoenix.
The 234 acre site in Greenville, Spartanburg is in the Smith farms Industrial Park, where we own two other warehouse distribution facilities.
Upon completion, which will be staggered in the first half of 2022 to three buildings will total roughly 1.9 million square feet.
The estimated development cost of this project is approximately $133 million with estimated gave light cash yields projected to be in the low to mid 5% range.
The Phoenix project is at 57 acre site and the Goodyear Submarket, along the southwest Valley, Luke three O three industrial hub.
Upon completion the project will consist of two cloth date warehouse disagree some facility totaling 880000 square feet.
Societies and P V. Three O three with some market Premier Masterplan business Park that is highly desirable for corporate users.
Like the Greenville Spartanburg project.
He just will have varying deliveries in the first half of 2022.
The estimated about my costs is approximately $84 million with estimated stabilized kashyap forecasted to be in the high 4% range.
Phoenix is an area, where we've been growing significantly in recent years and as a result, we built a deep knowledge and expertise and it's very strong market.
Currently we have 2.4 million square feet of modern class, a industrial space in Phoenix, and more specifically 2 million square feet and Goodyear.
And will further increase our footprint there with the completion of this development project.
The square footage author includes or be able to do that is largely complete with a tenant already occupying operating and most of the states.
We have observed record breaking activity and continue to like the market strong fundamentals driven by Phoenix is fast growing population is moderate operating costs low taxes, affordable labor and proximity to major market, such as Los Angeles, San Diego and Las Vegas.
We'll continue to provide regular updates on the progress of these project, which we believe provide a very attractive risk return profile.
With that I'll turn the call over to Beth got financial results.
Thanks, Brandon during the third quarter, we produce suggested company.
Ah roughly $54 million.19 per diluted common shaft.
Today, we announced an increase to both below and top end of our just did company at that though guidance range to a new range of 75 to 78 cents per diluted common share.
Revise range considered the timing of acquisitions and disposition and positive leasing how it comes.
Revenues for the corner, where approximately $83 million with property operating expenses of just over $11 million of which 84% was attributable to tenant reimbursement.
TNA for the corner was $8.4 million and we expect 2021 G&A to be within a range of $33 million to $36 million.
Our same store portfolio with 98.7 at least at quarter end with overall same store NOI, increasing 0.7%, which would have been approximately 1.9% excluding single tenant vacancy.
Industrial same store NOI increased 1.2% and would've been 2.5% excluding single tenant vacancy.
At quarter, and approximately 90% of our industrial portfolio, Lisa had escalation with an average rate of 2.6%.
Our company's balance sheet remain solid with net debt to adjusted EBITDA five four times at quarter end and unencumbered N y at 91.5%.
During the quarter, we issued $400 million of senior notes do in 2031 with an attractive rate of 2.375%.
The net proceeds in cash on hand, we used to fully redeem our 4.25 senior now do in 2023, and we pay the outstanding balance under a revolving credit facility.
Consolidated that outstanding as of September 30th was approximately $1.5 billion with a weighted average interest rate of approximately 2.9 per cent and a weighted average time of about eight years.
Finally during the quarter, we settled three 9 million common shares previously sold on afford basis, leaving $240 million or 28 million common shares of unsettled common sure contracts available at quarter end the.
The contract mature at various dates with the majority of these contracts maturing in May 2022, with that I'll turn the call back over to well.
Thanks, Beth I will now turn the call back over to the operator, who will conduct a question and answer portion of this call.
Thank you if you would like to ask a question today. Please press star followed by one on your telephone keypad. If you would like to retract. Your question. Please press style flip I K.
Oh first question today comes.
Elvis Rodriguez from Bank of America. Please go ahead Elvis your line is L. A N.
Hi, Good morning, and thank you for taking the question. My first question is <unk> you didn't well you didn't comment on the call on the letter you shared with shareholders from land and buildings, but perhaps you can give us an update on any subsequent conversations you've had with that investor.
Or any strategic changes, you're making as a result of that letter. Thanks.
[noise] well generally speaking, we we don't talk specifically about discussions that we're having with any individual shareholder I think the letter sort of speaks for itself. There were some matters that were were brought up to us from a shareholder.
Where we felt like it was important to the other shareholders of the company that we make them aware of those matters that'd be able to find out.
You know what they were thinking and yeah that was fruitful and candidly.
The opportunity to you know communicate with shareholders in letter form.
No. It was a wonderful opportunity for us to tell a great story around the company and highlight the.
The benefits of of executing this transformation out of office and into industrial how much value that's unlocked.
And the great prospects that we have in in the business. So from a corporate communications standpoint.
We we view that as a gift and I think we took full advantage so to be clear I think we've unlocked a lot of shareholder value.
We're creating a lot of shareholder value at the moment and we have very good prospects going forward to create shareholder value. We're well aware that there are many different paths, you're doing that and we're open minded about all of them.
Great Thanks, Wil and.
On your disclosure you share mm gap.
Same store NOI for both the industrial on the Oscars portfolio, but you don't do it.
On a cash basis are you able to share with the cash Same-store NOI is for the industrial portfolio and three Q N shall we see that get better over time.
Hello. This is fast what we're showing on a disclosure is on a cash basis actually.
No I see it on a cash basis, but it says consolidated but then on the other side you see same store in a light components of those gap or cash.
Those are cats.
Okay great.
And then and then so so just to dig in a little bit there you know, 1.2% as well below your peers is there anything different from your portfolio or your market that you can share relative to your industrial peers that are posting.
Mid single digit costume store in a light bulb.
Well really for for the for now the 1.2 is really a result of the fact that we had one property in statesville that was vacant for.
Most of the time, so if you take that property out it was going to do with about 2.5%.
So, it's a little better than the 1.2%.
Yeah, but the one comment I'd like to add is that we do have waited longer weighted average lease term than others. So are.
You know, our our mark to market slower we have a big window of lease rollover. Instead of 2024 to 2027 were that'll change, but we're not we're not in that part of the cycle yet.
Great, Yeah, and the rent escalators should help as well in the future given those.
Increasing over time, but thank you I appreciate the additional color.
Sure. Thank you.
[noise]. Thank you just as a reminder, that if you would like to ask a question today. Please press style Philippi one on your telephone keypad.
Next question comes from Craig Malmon from Quebec.
Two market. Please go ahead crank your line is now open.
Hey, good morning, everybody, maybe just to follow up on Elvis's first question, well I guess to ask him more pointedly are you guys hired a financial adviser.
We're we're well advised in a number of aspects of our business, but we you know we wouldn't have any further commentary on that.
Okay, I mean, what what would push the board to run a full process.
I mean are you guys getting any more shareholder commentary in.
In kind of support of of flat in the buildings kind of proposals or are you guys just gonna.
Wait until possibly you get a reverse inquiry to.
To kind of.
Price discovery.
I'm not aware of any you know shareholder that sort of you know reached out in support of that.
I think my my view is that as I said earlier, we have a lot of opportunity to create shareholder value. There's a number of.
Options available to us at the moment, we're open minded about all of them and I think that that's.
You know candidly a fair answer to the question.
Okay, No I I I I agree.
Just separately you kind of laid out the 60% embedded mark to market, but you noted that you can't get at it until you know the window opens around 2024 [noise] [noise].
Do you feel like that mark to market or [noise].
Where do you expect it that could go given the trajectory in cash rents in your markets. You know also had made me by the escalators that would eat into some of that.
Well that that window of heavy rollover right I mean, if if we.
Go through that period, where market rents are let's say 20 or 25 per cent higher than they are at the moment. That's you know that's a transformative period of time for for the company.
I said in my comments that that rents in our markets have grown 8% in the last 12 months. We think the next 12 months are probably equally strong that it gets a little bit harder to forecast but.
You know, we're we're in an excellent position and you know across our markets with respect to rent growth and and you're right. We don't have the same rollover at the moment that that others do but the escalation structures are improving and new leases.
Where we have rollover, where we're able to to push rants and I think we're gonna have pricing power for quite a while.
And if you kind of bucket the portfolio right you guys have the warehouse and maybe of that 20% you talked about last quarter of of manufacturing in cold storage.
How much is there a significant difference in the mark to market. If you were to you know pair some of those other assets overtime like what's the the growth differential in the 80 versus the 20th.
It's it's.
It's it's hard to quantify exactly but it's much much better in the warehouse distribution portfolio and that's that's why we're focusing our our growth activities in that space versus.
You know the the more you you'll D and and more you know risky industrial asset classes at least from residual value perspective.
Okay, and then just one last one for me. He noted the 7.2% yield on the Elisa put the spec development how much of that goes back to the developer in the form of a promote like how how big a promoter you guys, giving to develop or when the bids to get some of these assets.
Brenda isn't gonna walk through some of the mouth on that one.
Yeah. So you are correct, we are developing and joint venture.
Which includes tier promotes over certain IRR hurdle.
For competitive reasons, we we don't disclose the specifics of the with Fairbairn. The the leases is very recently, it's a little early to speculate as to promote it has not been negotiated yet with our development partner. So what what we'll do is we'll stylish Ah Margaret.
Value between US and then it gets run through IRR calculations, so while I don't have post promote.
Promote be able to share with each day in advance of those negotiations being completed.
Promote yelled is still gonna represent <unk>.
<unk> spreads to where ever seen pricing the acquisition market stabilize assets. So we we we're we're seeing a lot of value creation there.
[noise] great. Thank you.
Our next question today comes from Sheila Mcgrath from ethical. Please go ahead Sheila your line is now a pen.
I guess I have two questions first any markets that you're monitoring for excess supply right now and second well you have differentiated your way of Onboarding do industrial product with these merchant builders, how much guilt benefit do you think you're getting from.
This structure versus buying stabilized assets.
[noise].
Maybe James I'll ask you to give any commentary if you feel like we're seeing an oversupply anywhere.
[laughter].
Sure. So you know I think the oversupply piece is really more of a submarket conversation, it's hard to generalize market by market. Because there are are high supply markets that have very types of markets. You know D. F. W. In Atlanta have huge amounts of supply coming on the.
The latest report from Cushman and Wakefield on DFW had 45 million square feet under construction 40 million square feet in Atlanta under construction, but at the same time. There's also a huge amount of net absorption that's happening DFW. It almost 24 million in Atlanta at $24 million. So the absorption seems to continue to keep up with the construction.
However, there may be periods of lag and specifics submarkets within those markets that you're gonna see the supply demand slot supply demand dynamic it a little bit out of whack for a short period of time, but there continues to be an incredible amount of demand for the space.
And with respect to the spread between stabilized post promote development yolks and and purchases that's sort of in 100 to 150 basis point area, depending on market transaction et cetera.
So that's it yeah, that's a good a good spread and and a good opportunity for us to capture value in that part of our business.
And well just as a follow up maybe you could just describe you know some of the industrial peers. You know focused on you know the development profit any other benefits too you pursuing development in this structure, even though you'd lose you know the opportunity on that day.
Celebrate profit.
Yeah, I I think you know the the benefits are that we don't have right a huge huge amount of cost or or overhead on our balance sheet.
And the projects that come to us are essentially shovel right shovel ready. So we're we're not in the business at the moment of going out and purchasing raw land entitling et cetera. So it gives us.
It gives us flexibility in terms of reducing activities if the market cycle changes in and in the meantime, it it's very good from a capital allocation standpoint, compared to sort of straight straight acquisitions.
Okay. Thank you.
Our next question today is a follow up question from Elvis Rodriguez Since Banks America. Please go ahead Elvis your line is not light then.
Hi, Thank you. Thank you for taking the additional questions on your rent escalators I think you've common at 2.6% on the industrial portfolio, except for the whole portfolio of just a percentage and sorry, if I missed that.
[noise] that's for the whole industrial portfolio.
And then as you think about capital allocation and you'd think about developments buying new assets versus maybe buying back to your stock how do you think about.
Possibly trading you know call within a five plus percent of black cap right, but you are investing in the low forced on somebody and development is for example, Phoenix how do you think about capital allocation from that perspective.
Yeah, you know the development and in purchasing sort of Nonstabilized real estate is the best use of capital we have disposition proceeds where we're trying to manage our tax basis by reinvesting via.
10 31 exchange.
So in in those areas or a business development and the Nonstabilized real estate right. We could produce deals that above that are both where we can buy fully stabilise real estate.
And obviously, there's an arbitrage between producing that higher stabilize yielded and where those assets would get revalued in the private market. So that that aspect of our business is working well for us.
And we'll just one more because it's just not a lot of clarity on market cap rates for a cold cold storage and light manufacturing are you able to share what do you think those assets in your portfolio would trade today.
[noise].
You know, it's it's tricky with the manufacturing peace because the market is not not deep there, especially for a portfolio that has.
You know maybe relatively shorter weighted average lease term compared to what you might think market cap rates are but [noise].
You know overall and there's there's a difference between you know relatively new cold storage and older manufacturing and light manufacturing and those portfolios of ours are over over right over 20 years old [laughter]. So I I would think it's a few hundred basis point premium too you know the cap rate that you might be as to peg are.
Warehouse and distribution portfolio.
[noise] great. Thank you.
Our next question today comes from John Peterson from Jeffries. Please go ahead jump you're lying is now a 10.
Great. Thanks, Good morning, guys.
Hey on the office portfolio I don't think anybody's ask you guys about 17 O. One market Street, yet just curious if we can get any update there and you know what you think the timing is and how we should just think about the cadence and the cap right on the office dispositions through 2022.
Sure Laura.
Sure. So we'll put it out and the prepared remark we have acted on three sales in Q3, we have two additional property under contract and visibility to potentially one or two more this year, we do still hope to be fully out of office next year seven.
One market will be among our primary focus is in 2022, we expect when authors tenants are back in Philadelphia, it's more likely that well have a successful outcome. There. So I sent to every airline in 2022 that well, we'll launch at four one marketing effort error and endeavor.
To.
Hello.
Prepare the outer space or early on that that asset.
Okay, and then on the the joint the office joint venture that you have where you have a 20 per cent ownership could you just remind us of how we should think about that trending over the next few years I, if I remember correctly.
You you expected to kind of cell that there might be some properties that were sold down over time and just curious as your partner have like is it in a fun that has an expiration date just curious as we think over the next few years, how we should think about that portfolio.
Sure so that that portfolio originally had 21 asset their 15 now.
Mm a year to date anyway on it from all over $37 million.
In the portfolio together with a joint venture partner, we continue to evaluate assets for sale.
And and we'll be selling those assets as opportunities arise in the market right for for putting them into it.
Any commentary on where on the properties that you have sold like where the valuations came out on sale versus where they were when you contributed them contributors them into the JV.
So far we've had we've had very favorable outcomes on sale and were timing note sales when market dynamics, well, we'll provide for upside belichick contribution values.
Got it alright, that's helpful. Thank you.
Thanks, John.
Just as a final remind us of questions. If you would like to ask a question. Please press style flipped by one on your telephone keypad now.
We currently have a nice out of the question. So I'll have to call back to will Eglin.
For any occasion remarks.
Once again, we appreciate everyone joining us this morning, it was a great quarter for Lexington, Please visit our website or contact Heather gentry, if you would like to receive our quarterly materials and in addition is always you may contact me or the other members of our senior management team with any questions. Thanks.
Again for joining us and have a great day.
Is now complete today's cool.
May not disconnect your lines.
[music].