Q1 2022 LXP Industrial Trust Earnings Call
And advised to execute a transaction we.
We engaged in signed NDA is with a broad universe of buyers, both strategic and financial.
As the process progressed financial markets became increasingly volatile due to rapidly changing inflation forecast and rising interest rates.
This resulted in a sharp increase in borrowing costs of over 100 basis points, which had a disproportionate near term impact on the private market interest in our portfolio given its longer weighted average lease term.
Marty decided these factors and that any proposal would be contingent on significant improvements in financing markets as the main reasons why they ultimately chose not to submit actionable indications of interest for the whole company.
Therefore, the board unanimously determined that the best path forward at this time was for Alex paid to suspend our process and continue to execute our strategy, while completing the final stages of our portfolio transformation and capitalizing on the mark to market opportunity embedded in our portfolio.
It is important to note that while we decided to suspend the process the board and management remain open to all opportunities to maximize value for our shareholders.
And we expect there to be inherent value creation opportunities as we execute on our development pipeline and during 2024 to 2027 as leases roll.
We hope this additional context is helpful. In that it provides clarity regarding the misinformation that we've heard over the last several weeks.
Beyond the information we've just provided we do not intend to provide further details on the process and we ask that you keep your questions to our results and prospects going forward.
Turning to our first quarter performance. It is clear we began 2022 with strong portfolio performance, reflecting the benefits of owning industrial real estate that is producing growing rents.
With over two 3 million square feet leased in our warehouse distribution portfolio during the quarter, we increased base and cash base rents, 28% and 18% on average respectively.
We successfully negotiated average annual escalators of three 3% well above our historical results.
Last quarter, we began providing a forecast of the mark to market opportunity in our industrial portfolio based on estimates provided by independent brokers.
Currently the warehouse distribution leases in our portfolio are approximately 16% below market.
The mark to market opportunity, which considers our rent today compared to estimated market rent at lease expirations through 2027 is forecasted to grow to an average of approximately 42% during this time period.
The weighted average lease term of our warehouse distribution portfolio is six eight years and we are approaching a heavy period of lease rollover from 2024 to 2027 and 45% of our ABR expires.
We believe our average annual industrial rental Escalations of two 5% should increase as many new leases in our markets are being signed with 3% or higher annual escalators further improving our internal growth prospects.
On the investment front, we acquired approximately $72 million of industrial assets during the quarter and funded $69 million towards executing on our ongoing development pipeline.
At quarter end, we had five development projects underway comprised of eight buildings in target markets of Phoenix, Greenville, Spartanburg, Indianapolis, Columbus, and Central Florida.
Deliveries are expected starting in the third quarter through the second quarter of 2023.
Spec development continues to provide us the best opportunity to obtain favorable returns for new class a industrial assets.
With stabilized asset purchases used more as a vehicle to fill a 10 31 exchange need as.
As we deliver and stabilize our development pipeline net debt to adjusted EBITDA is expected to range from six to seven times as we execute on these opportunities.
Subsequent to quarter end, we sold approximately $55 million of assets, including one office property for $7 $8 million and two industrial properties in Shreveport, Louisiana, which were outside of our target markets.
All of our remaining office assets apart from our Palo Alto office building are in the market for sale.
Also subsequent to quarter end, we took two important actions in keeping with our commitment to positioning <unk> to deliver enhanced shareholder value.
First following the suspension of our strategic review process on April eight we began repurchasing shares under our existing repurchase authorization as part of our ongoing commitment to returning capital and driving value creation for shareholders.
We repurchased approximately one 2 million shares for an average price of $13 41 per share before our earnings blackout period.
There are seven 7 million shares remaining under our existing repurchase authorization and we expect to continue repurchasing shares as market conditions warrant.
Second as part of our ongoing board refreshment process in April we announced the appointment of Arun Gupta.
Who will serve as an independent trustee on our board. We're pleased to welcome Arun formerly to our board Arun brings over two decades of venture capital experience.
With extensive investing cyber security and technology expertise all focused skills, we were interested in adding to our current board.
We will continue our ongoing board refreshment process and expect to appoint another candidate by the end of 2022.
On a personnel note Lara.
Florida Johnson, one of our executive Vice President's has informed us of her intention to resign at the end of this month spend more time with her family.
Laura has been an important part of our transition handling the majority of our disposition activity.
I along with the rest of the management team and the board want to thank Laura for her consistent hard work and many accomplishments during her years at <unk>, we are well staffed with a deep bench of talent to step in and fill her shoes as she transitions out of her role.
Our goal is to fill her position from within the organization.
In summary, with our portfolio transformation substantially complete we will continue to enhance our portfolio primarily through the acquisition of partially stabilized assets that afford us attractive leasing and re leasing prospects.
Developing high quality warehouse distribution assets in our target markets and capitalizing on opportunities to increase rents.
We are focused on maximizing value for shareholders and remain open to all opportunities to do so with that I'll turn the call over to Brendan to discuss investments in more detail.
Thanks.
We purchased a portfolio of two adjacent recently complete a class a warehouse distribution facilities totaling 777000 square feet during the first quarter.
In the northern Kentucky sub market of Cincinnati.
The smaller of the two buildings of 233000 square foot warehouse was acquired vacant and fully leased within 21 days of closing on the acquisition.
We achieved a weighted average GAAP and cash stabilized cap rate of four 9% and four 5%, respectively and secured an average lease term of nine eight years with 275% average annual escalations.
The properties are situated two miles east of 175, just south of the I 75, I 71 split offering immediate highway access and a short drive to CPG International Airport.
Subsequent to quarter end, we closed on a fully stabilized 269000 square foot class a warehouse distribution facility in Phoenix.
Second closing of our newly developed two building project in Tulsa.
During the quarter, we fully leased the remaining 334000 square feet of vacancy in the first building that we closed on in December .
Also subsequent to quarter end, we commenced development on a two building 271000 square foot warehouse distribution project in the Tampa, Florida market.
The project is located in Ruskin, along the I 75 corridor of Hillsborough County, and expands our presence in central Florida.
We have begun some initial plans on the large Phoenix land parcel we acquired in December .
We should have more to discuss on this in the coming months as plans for that project start to materialize.
With that I'll turn the call over to James to discuss leasing.
Thanks, Brendan stabilized portfolio occupancy at quarter end was 99, 4% with leasing volume of $2 3 million square feet during the quarter as will mentioned.
We addressed all of our 2022 industrial lease expirations during the first quarter.
Pleased to report, we outperformed our expectations increasingly industrial rents, 39% compared to the 32% we initially forecasted.
These lease renewals included our two adjacent facilities in Hebron, Ohio, whose tenants leases expired in March of this year.
We executed leases to two full building users with staggered explorations, we experienced no downtime risk and raise these rents approximately 33% and 50% respectively. The larger of the two facilities has 3% annual escalations and the smaller facilities rent bumps by 32% after three years after.
It should escalate 3% annually.
We also were able to immediately fill 23000 square feet that expired in February and our multi tenanted industrial facility in Chillicothe, Ohio with our existing majority tenant as part of this transaction we leased the remaining vacancy in the property to the tenant and extended their existing lease by five years, increasing the rental rate by 6%.
With $2, 75% annual bumps, we extended to other industrial leases during the quarter. This included an extension with our new tenant in Lakeland, Florida for five years in connection with our request for an HVAC system, allowing us to further raise the rental rate, which increased over 13% with the new extension.
Finally, our tenant in one of our newer Cincinnati, Ohio facilities requested a one year extension, which we granted at an increase of almost 6% with an option to extend for an additional two years at a 4% increase each year.
We also had some great successes during the quarter and leasing vacant space or partially stabilized assets, we purchased in 2021.
In Atlanta, we leased 124000 square feet of vacancy we purchased when we acquired the property in December the rental rate came in slightly higher than where we underwrote it with three 5% annual bumps.
Moving to Phoenix, we executed a 334000 square foot lease for five years at an initial rental rate of $7 44 per square foot, 9% above our underwriting assumptions were three 5% annual escalations.
Both the Atlanta and Phoenix facilities are now fully stabilized lastly in Central Florida released a substantial portion of our 510000 square foot <unk> building at an initial rate of $5 65 per square foot approximately 9% above our underwriting assumptions were three 5% annual bumps.
To close we now expect 2023 expiring rents to increase approximately 49% based on current negotiations and third party broker estimates market rents in our targeted markets grew on average approximately 15% year over year as of quarter end with that I'll turn the call over to Beth to discuss financial results.
James we generated revenues of approximately $80 million during the quarter with property operating expenses of roughly $15 million of which 85% was attributable to tenant reimbursement.
Adjusted company <unk> for the quarter was 16.
Diluted common share totaling approximately $48 million.
Our same store industrial portfolio was 99, 8% leased at quarter end, increasing 130 basis points when compared to the same time period a year ago.
And our same store industrial NOI grew five 1% we are still projecting that our industrial same store NOI growth in 2022 will be within a range of 4% to 5%.
At quarter end, approximately 96% of our industrial portfolio leases had escalations with an average annual rate of two 5%.
Moving to the balance sheet nearly all of our office portfolio as held for sale as of March 31, 2022, with the aggregate market value for these properties estimated to be within a range of $115 million to a $150 million with forecasted 2022 NOI of approximately.
$11 $6 million.
At quarter end net debt to adjusted.
EBITDA was six three times and our unencumbered NOI was approximately 93% of our total NOI.
Additionally, we had $49 million of cash at quarter end and currently have $520 million borrowing capacity available under our unsecured revolving credit facility.
Consolidated debt outstanding at the end of the first quarter was approximately one 5 billion.
Over 91% of our consolidated debt is fixed with a weighted average interest rate of 285% and a weighted average term to maturity of seven three years, keeping us well protected against rising rates.
On the capital markets front in the first quarter, we issued $3 65 million common shares for net proceeds of $38 $5 million, which previously were sold on a forward basis under our ATM program.
As of March 31, 2022, we had an aggregate of $185 3 million or 16 million common shares under unsettled forward common share contract.
All of these contracts mature in may of this year.
Finally, turning to guidance our 2022 adjusted company <unk> guidance continues to be within a range of 64 to 68 cents per diluted common share.
This guidance reflects no additional acquisition volume beyond our forecasted 10, 31 exchange need and several office sales and our office joint venture as well as approximately $250 million of other office and opportunistic industrial sales.
We intend to use disposition proceeds line borrowings and forward equity to fund commitments in our development pipeline.
We are currently forecasting approximately $400 million of capital for development activity in 2022, some of which is for projects that have not yet commenced.
Additionally, G&A for 2022 is forecasted to be within a range of 35% to $37 million and no advisory our strategic alternative costs are included in this guidance range.
We continue to expect 2022 to be our earnings trough year, and we anticipate financial performance to improve as we move into 2023, driven by the ongoing development projects coming online and the strong mark to market opportunity and our leases as they mature.
With that I'll turn the call back over to well.
Thanks, Pat I will now turn the call over to the operator, who will conduct the question and answer portion of this call.
Thank you as a reminder to ask a question. Please press star followed by one on your telephone keypad. If your question has been answered or you wish to withdraw your question first.
Okay.
Your first question comes from the line of Sheila Mcgrath from Evercore. Your line is now open.
Hi, yes, good morning.
Well Beth outlines the sources and uses pretty clearly, but I was wondering if you could help us triangulate.
Triangulate sources and uses for 2022 and your target leverage and do you think you'll have room for additional stock buyback potentially.
Hi, Sheila good morning, it's back.
Yeah, I did outline a bunch of it on the call, but yes, we have our forward equity like I mentioned, we have about $185 million of forward equity there that we're going to utilize as well as our line that $600 million that we can we can utilize and we do have some sale proceeds that we're going to to use.
As well.
But.
Our leverage came in at six three and during this time, while we're ramping up our development and getting it online we're comfortable operating in a six to seven times range.
And you will see us depending on market conditions.
Utilizing the buyback as well.
Okay. That's great and then my second question is on the.
Projects that are presented that are going to deliver this year.
But aren't leased yet just if you could give us some detail on how leasing discussions are going on those projects.
Sure Sheila this is James So we've we've had a recent RFP activity on every one of our projects.
We're actually pretty close to having one of the two buildings in Phoenix leased.
Hopefully we will have a deal done there soon and we're also tracking significant demand in all the markets. So we're very bullish on being able to lease those buildings.
Great and my last question is we'll just on cap rates with debt costs going higher.
Just your view on.
Cap rates in your underwriting.
And any changes given this new dynamic.
Yes, it's not unusual share laughter.
A period, where rates have changed a lot for buyers and sellers debate struggling to sort of fund market equilibrium.
So I would say generally speaking the longer the lease.
More of the cap rates need to move higher to reflect that that encumbrance.
So in our case, we would see in our 10 year cost of financing move to about to about 5%. So if we had an appetite for.
Long term leases in the purchase market.
We would need to see cap rates move.
Above that cost of financing on the shorter end, where youre still looking at very strong market rent growth.
Arguably there hasnt been been much of a move at all.
Okay. Thank you.
Next question comes from Todd Thomas from Keybanc Capital. Your line is now open.
Good morning, this is already Cameron on for Todd.
Just a follow up to an earlier question, but can you guys walk us through your thought process on buybacks versus development here kind of if you were to rank them or prioritize your uses of capital with the stock at a high 4% implied cap rate versus where you guys are developing today.
Yes, I would say, we're very happy with the development pipeline.
That we've got.
We're being cautious about making new commitments there.
We're just watching where rents and costs go.
So that development pipeline as I said very pleased with the position and its prospects.
And we have room to to buy in stock as well.
Honestly the development spend is likely.
Bigger than.
The buyback opportunity, but we'll have to see what the share price is as we move forward, but we certainly have the capital capacity to execute on the balance of what's left in the buyback plan and fund the development pipeline.
Okay got it and then.
I guess bigger picture here, how should we think about the appetite from institutional players for your appetite given sort of the discrepancies between.
How your process resulted in what we've seen in the M&A market. Since you guys suspended the process have you guys seen any major pullback from these institutional players even if not for larger portfolio deals.
Sort of back away from.
Your asset type in the recent months.
Well, what I would say about our asset type is that our portfolio is characterized by longer weighted average lease term than some other industrial portfolios.
So for US we have a very large mark to market window between 2024 and 2028.
Between now and then obviously, we don't have the opportunities.
Others have but to the extent weighted average lease term is as an encumbrance on value.
That should sort of dissipate as we approach that mark to market opportunity.
So long story short I think the large institutions that have the capacity to write a sizeable cheque.
And there are fewer of those today because many have backed off the market and are just waiting to see how things settle out I think there is an interest in assets.
Our extremely extremely sensitive to inflation.
Our portfolio is better positioned for growth as it ever has been as reflected in the annual escalations structure of our leases.
How we're doing on new leases with respect to Escalations, where we're marketing rents too and the implied mark to market.
But in our case it just takes a little bit more time.
Got it and then one last one if I could I mean based on your commentary and your answer just now it sounds like.
The most.
Additional players are obviously backing off a little bit I mean, I guess, how should we reconcile that.
With your guys' comments on increasing your leverage target by seemingly a turn.
How are you guys thinking about leverage and can you talk a little bit about the thought process there.
Given what's going on with the macro and.
What's going on with the rates.
Yeah.
Well between 6% and seven times leverage it is not unusual if we're borrowing short term money to fund development before it stabilized it's not unusual to have leverage ticked up in the context of <unk>.
Net debt to EBITDA, it's still.
Relatively low loan to value and in relation to the whole.
Portfolio, obviously with the process that we've gone through and the work before that leading up to it we were not considering being in the equity market.
And we're not considering that.
At the moment so.
We've run the company with relatively low leverage and have kept.
Pretty much all of our line capacity available for a moment like this so I think we're still well capitalized to execute on the opportunities that we see in our development pipeline.
Sure.
Great. Thank you.
Yes.
Again as a reminder to ask a question. Please press star followed by one on your telephone keypad again, Thats star one to ask a question.
Your next question comes from the line of Jamie Feldman from Bank of America. Your line is now open.
Great. Thank you and good morning.
Amazon is your largest tenant at 7%.
The portfolio are at six 7% I guess of Brent can you talk at all about any conversations you've had with them about giving back space or sub leasing or just what your view is of them as a tenant going forward.
Sure James do you want to sure so.
So I certainly don't want to downplay the news.
Amazon was really a huge factor in 2020 from a leasing perspective percentage wise across the country.
Reduced down to about 5% last year of overall leasing and so far this year has been about three 5% of the leasing in our portfolio in particular.
We've got a weighted average lease term of eight and a half years.
And we were also very.
Cognizant of the fact that we didn't want to get above market rates and we wanted to warehouse space that was leased to Amazon and it was very functional so were also below market by about 23% right now on those assets specifically to your question.
With the news that came out we did go and have conversations with our our local Amazon contacts every one of our buildings is at full capacity right now theres been no conversation about sublease thing. So we really we feel good about our our use with Amazon, but also just the assets that we have and the prospect of a re leasing if we ever had to do it.
Okay is there anything else you can share from those conversations about maybe the headline versus reality.
But what we're likely to see in your markets.
Well they were just very specific to the use that we have so no there's really nothing about that.
Okay. What are the uses in your in your portfolio.
So five of the six buildings are just prototypical.
Warehouse not overly robotics warehouse a lot of it is hand picking.
With some small robotics, but not again not overly automated and then we have one facility in Chandler, Arizona, which is advanced facility.
Okay.
Okay.
And play or they give you the indication that these are important to their network.
I mean, the indication with them continuing to fully utilize them in the plans that we heard from the local folks to say theyre continuing to fully utilize them.
Because to me that they are important.
Yeah.
And then can you just talk about outside of Amazon I mean, what is the demand pipeline looks like for your assets the markets that you're in.
Yes.
5% like can you talk about the rest of the demand that's out there.
Yes, sure I mean, I'm pretty much every one of our markets I mean, the supply story is clearly a big one right now there's quite a bit of supply across the country coming online, but we're seeing equal if not greater than demand tracking in pretty much every one of our markets and the tenant pool is very diverse.
Yeah.
Okay are there any markets that you're more concerned than others.
Well I mean, we're almost 100% leased so we're not actively in leasing and every market. If you just kind of look at the <unk>.
High level headlines on supply.
Dallas to sticks out like a sore thumb with over 60 million square feet being developed but it's also every time that development has happened over the last few years. The demand is ticked up right along with it. So I figure that Dallas is probably going to have the same results. This time around just given the socioeconomic dynamics of that market with population growth.
Atlanta is another big one similar story, there and then Andy as well has quite a bit of supply coming on but in every case the demand seems to be keeping up with supply.
Okay. Thank you that's helpful and then.
The Mark to market you guys laid out so I think you said, 16%.
And then growing to 42%.
Is it is it is the right way to think about like one of the cash and wanted a GAAP number maybe.
And maybe if you could clarify that a little bit more how you get to those numbers and then also it looks like they've come up since last quarter.
So can you talk about the change since last quarter.
Sure no those are cash numbers. So I was just comparing the in place rent today to what the market rent is that we get from the brokers and then the ending is the same way, we're basically escalating it based on market.
Market Escalations that had been provided by third party brokers from their forecasting teams. So it's just a cash equation and we've just seen we've continued to see movement in market rates across the markets I mean, yes.
Yes, there's supply coming online, but I would say right now markets are supply constrained so youre continuing to see increases in rates really across the board.
Okay, So youre, saying that 42% assumes market rent growth that's not like a.
Current number correct.
<unk> is a great number.
On a GAAP basis, I think a lot of the other research quoting at a gap I'm just curious if you guys have that.
No.
Okay.
And then when you think about the development land bank, it's pretty heavily concentrated in a couple of markets.
How do you think about your future development starts versus your land bank.
Do you think we will just see it in those markets or.
You'll have to buy more land or are you thinking about buying more land.
This is Brian and Hi, well, we'll just simply review opportunities.
Present themselves.
So the land bank that we have today it looks very attractive to us, we're particularly excited about the opportunity in Phoenix, given how strong that market has been in the continued.
Demand there.
Our position in Columbus is also very attractive in that that's a market that's been.
Extremely tight as well.
We recently exercised a couple of options adjacent to our current project in Indianapolis, which allow us to add a couple of buildings there.
So well at the moment, where we're evaluating we're actively evaluating our first star and Phoenix.
And considering.
<unk> and Columbus and Indianapolis.
We are regularly reviewing other opportunities in other markets, but.
Right now the focus is on the current portfolio.
Okay.
Thinking about Phoenix, you've got 420 acres I mean, whats the potential square footage up to that.
Well, we're really.
It's.
It's still early to two <unk>.
Nail down a very specific number because it of course it will depend on.
The ultimate layout somewhat buildings, you build and I expect that there'll be some build to suit activity there, which.
<unk>.
It can be in a variety of building sizes.
But.
It could support the development of as much as around 7 million square feet.
Sure.
Bulk warehouse if you did all large buildings so that can vary.
Quite a bit as you start actually building the buildings, but as much as 7 million square feet.
Okay, Alright, great. Thank you.
Thanks, Jamie.
Next question comes from the line of Jon Petersen from Jefferies. Your line is now open.
Great. Thank you.
Maybe just curious a little more on the supply side of things like what sort of constraints or maybe yourself or other developers seeing in terms of acquiring building materials getting permits just trying to think about.
Where we're at in terms of supply growth I know, it's ramping up but are there are there kind of a physical or regulatory constraints on how high that new supply can come online or are you guys experiencing some of that yourself.
This is Bryan again.
Yes, my expectation is that.
The supply will moderate.
Because of.
Some of those challenges that you've referenced.
Yes.
We're constantly monitoring that.
Global supply chain.
Ourselves along with our development partners.
To see how it may affect our cost and our future our future development projects.
On the supply chain issues.
Costs are rising of course and there is also just the challenge of availability as well.
Which will push out delivery Timeframes and then in many.
Parts of the country. The permitting process is also elongated so I think those factors.
Serve to.
Moderate some of the supplier at least.
Slow the delivery of which.
Should be good for our ongoing development pipeline and our existing portfolio.
Okay. That's helpful and then.
I know you guys gave a range on the value of the remaining office sales I think.
I went back in and the cap rate on a couple of you guys did this quarter. It was about a seven 5% cap rate.
Anything new to say in terms of pricing trends on some of these suburban office properties, especially given the interest rate environment. This year.
Generally speaking where you have term.
Those assets may have declined a little bit.
And value so.
The portfolio has gotten smaller but.
There's still a handful of ones that are will be challenging sales to get through this year.
It's a combination of things higher rates.
The longer lease assets, a little bit less value valuable and.
Of course in some cases, the aftermath of Covid has diminished.
Diminished value as well.
Sure.
Okay. That's all for me thank you.
Thanks, John .
We have a follow up from Sheila Mcgrath from Evercore. Your line is now open.
But the JV in the quarter, how did the pricing levels compare to your expectations and then I think James or somebody mentioned.
Some planned industrial sales if you can just explain why sell those industrial assets in our state already listed and the interest level in those assets.
I think we might have missed the first part of the question Sheila was it around office sales in the joint venture with Davidson Kempner.
How did the pricing compare to your expectations the pricing achieved.
And it was very very good the execution there was very strong those assets were.
Under under contract before rates moved a whole lot. So that was sort of like low slow six area, we cap rate standpoint, because we thought it was really good.
And I think with respect to to taking advantage of some industrial sales. If you look at our footprint, we really have like a Midwest lower Midwest portfolio with southwest portfolio in the southeast portfolio.
So we will look at opportunities to harvest.
Some some value in the portfolio.
Outside of those areas really to sort of sharpen our regional and market focus.
And the same observation.
With longer leases cap rates are probably moved a little bit there on some shorter things not so much.
Okay and last question just on the.
I think you mentioned, a new lease with three 5% bumps.
Is that currently the market or are you or others trying to push for CPI linked escalations at this point.
There really hasnt been any CPI discussions and I would say that the escalators are market by market, but almost every market that we're in is above 3% now $3 has become kind of the norm, but were seeing it quickly pushed to 4% in some of our.
More supply constrained markets.
Okay. Thank you.
Okay.
This concludes our Q&A portion of the call I will now turn the call back will fit will Eglin, who will make a few closing remarks.
Once again, we appreciate everyone joining us this morning.
Please visit our website or contact Heather gentry, if you would like to receive our quarterly materials and in addition, as always you may contact me or the other members of our senior management team with any questions. Thanks again.
This concludes today's conference call. Thank you all for your participation you may now disconnect.
Okay.
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