Q2 2022 LXP Industrial Trust Earnings Call
21% year over year in our target markets through quarter end.
We completed approximately 1 million square feet of new leases and lease extensions during the quarter in our warehouse distribution portfolio, resulting in strong base and cash base rental increases of 21% and 19% respectively with average annual escalations of 3%.
Currently we believe our portfolio is in place warehouse distribution leases are estimated to be approximately 17% below market based on independent brokers estimates are.
Our mark to market opportunity remains compelling as we move towards a heavy period of lease rollover from 2024 to 2028, and which 51% of our industrial ABR expires.
Based on the independent brokers estimates our industrial portfolio cash rents today are forecasted to grow on average.
Approximately 47% for lease expirations through 2028 or 36% when adjusted for rent Escalations.
We also expect our average annual industrial rent Escalations of two 4% to continue to improve as the majority of leases in our markets.
Are being executed with 3% or higher annual escalations further enhancing our embedded growth opportunity.
Our active asset management strategy has improved the overall quality of our industrial portfolio.
Tenant credit is strong.
With more than 59% of the portfolio investment grade the average age of our facilities is eight nine years.
And our weighted average lease term of six seven years, which provides some protection if tenant demand were to soften in a recessionary environment.
From a capital allocation perspective.
Sales proceeds and other sources of liquidity will be utilized to fund our development pipeline repurchase shares and pay down debt.
Acquisitions are useful in the context of the differing tax gain currently we do not see a need to complete any further 10 31 exchanges this year.
On the development front, our outlook for our pipeline remains extremely favorable we commenced development on a new project in central Florida during the quarter and we have a total of six development projects now underway.
We also increased our land bank to 637 acres this quarter, making.
Making investments in Atlanta, and Indianapolis, which further broadens our opportunity for prospective development projects.
Year to date, we've repurchased seven 9 million common shares at an average price of $11 27 per share and today, we announced that the board authorized the repurchase of an additional 10 million shares. We continue to view share repurchases as an attractive use of capital to drive value creation for shareholders and intend.
And to act on the new authorization of shares as market conditions warrant in July we appointed Derek Johnson to serve as an independent trustee on our board.
Disappointment was part of our ongoing board refreshment process and consistent with our previously outlined goals Derek <unk> extensive expertise across strategy marketing business development finance and operations at various organizations, including 20 years spent at UBS aligns very well with our warehouse distribution focus.
We are pleased to welcome Derek formerly to our board and believe his skills and experience will be of great value to shareholders. Additionally, on the ESG front, we recently submitted to <unk> for the 2021 calendar year and plan to publish our second corporate responsibility report this fall we've been busy improving our.
Current ESG program, including enhancing disclosure and we look forward to continuing down the path of establishing and maintaining best in class ESG practices.
In summary, we believe our portfolio is positioned to perform consistently well in the current environment. Our focus remains on maximizing shareholder value through all opportunities.
Including share repurchases asset monetization, completing and stabilizing our development pipeline and capitalizing on other re leasing opportunities.
With that I'll turn the call over to Brendan to discuss investments in more detail. Thanks.
Well.
We purchased one stabilized industrial asset Phoenix market for $59 million during the quarter.
Bringing year to date acquisition activity to $131 million.
At average stabilized GAAP and cash cap rate of four 5% and 4% respectively.
These acquisitions allow us to defer up to approximately $50 million basketball games.
Our investment strategy continues to focus on development project versus the purchase of stabilized that.
Development funding for the quarter totaled $53 million across ongoing development projects, which are comprised of 10 building in our target markets Phoenix Greenville.
Greenville Spartanburg Indianapolis.
In Central Florida.
We expect our Columbus in Ocala project to deliver this fall with the remainder of the delivery Guy.
Through the fourth quarter of this year to the second quarter of 2023.
As we mentioned on last quarter's call in May we commenced development on a two building 271000 square foot warehouse distribution project in RASK in Florida.
75 quarter, expanding our presence in the Tampa market.
Yes, I had experienced strong leasing activity for existing facility with limited that construction deliveries.
And roughly 20 acres the buildings will feature 32 foot clear height with railroading designs.
We expect the project to be completed in the second quarter of 2023.
<unk> cost of $41 million with a projected stabilized yield of approximately 5%.
During the quarter, we purchased 60 acres of developable land in Atlanta.
The Annapolis for in <unk>.
Aggregate investment of approximately $3 million.
Approximately 14 of these acres are adjacent to our stabilized completed development project to Fairburn, Georgia and the remaining acreage next to our existing development site in Mount comfort, Indiana.
This additional land increases our overall land bank, allowing for further development and square footage in our existing markets.
We are encouraged by the early indications of interest from prospective users at our 420 acre.
Farm land parcel in Phoenix.
Nothing has been formalized at this point, but we will update you as plans start to move further along.
The Phoenix market in general has been exceptionally strong and our billable square footage provides an exciting opportunity for us to secure a larger footprint in the market.
With that I'll turn the call over to Jamie to discuss leasing.
Thanks, Brendan our industrial stabilized portfolio occupancy at quarter end was 99, 3% as we mentioned on last quarter's call. We've addressed all 2022 industrial lease explorations to date and our.
Focused on leasing vacant space in our development and purchase portfolios as well as select 2023 and 2020 for exploration.
Looking at 2023 exploration, we expect expiring rents to increase more than 50% based on current negotiations and third party broker estimates.
We've had a good deal of success leasing up space in our warehouse and distribution portfolio aside from our development portfolio. We have just 337000 square feet left to fill across three properties all of which are showing good activity.
Starting with our second generation assets during the quarter released a combined 461000 square feet of space. The two industrial facilities in Olive branch, Mississippi Lafayette, Indiana, both early extensions for 2023, and 2024 lease exploration, respectively, and our Olive branch facility, we executed a five year lease.
For a new increased rental rate of 24% over the prior lease and two 5% annual bumps thereafter.
We also executed a five year lease extension with the current tenant at our Lafayette facility starting in September 2024 in which cash rent will increase by 16% with 3% annual bumps.
Our development portfolio, we leased one of the two facilities at our PV 303, Fenix project totaling 392000 square feet for more than 10 years with three 5% annual bumps.
Project completion is slated for the fourth quarter, what kind of occupancy likely in the first quarter of 2023.
Brendan mentioned Phoenix market continues to show strong tenant demand, resulting in a starting rent of $7 32, a square foot approximately 27% above our estimated underwriting assumptions.
We also continue to see strong activity on the second building in this park as well as for the balance of the expected all in the portfolio.
Is it going to quarter close we extended into early 2023 exploration for three years with three 8% annual bumps that are 230000 square foot industrial facility in Tampa, Florida. This was another great outcome for us, where we were able to raise cash rents, 41% with the existing tenant.
Additionally, we leased the remaining 36000 square feet at our Lakeland, Florida warehouse and distribution facility for five years, bringing occupancy up to 100% the attractive starting around the $7, 35% above our underwriting assumptions with annual bumps of 4% with that I'll turn the call over to Beth to discuss financial results.
Thanks, James revenue for the quarter were approximately $80 million with property operating expenses, roughly $14 million of which 85% was attributable to tenant reimbursement.
We generated adjusted company <unk> for the quarter of approximately $49 million.
17 cents per diluted common share and <unk>.
We are affirming our 2020 guidance range of 64 to 68 per share.
As a reminder, this guidance range reflects no additional acquisition volume of approximately $285 million other office and opportunistic industrial sales.
Are there off of sales and our joint venture in 2022.
Our forecasted development bank.
It is now approximately $310 million.
2022, G&A is estimated to be within a range of $35 million to $37 million.
Excluding advisory costs.
Our same store industrial portfolio with 99, 8% leased at quarter end.
Leasing 130 basis points, when compared to the same time period a year ago.
Our same store industrial NOI grew five 8% quarter over quarter, and five 5% year to date.
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 97% of our industrial portfolio leases had escalation with an average annual rate of two 4%.
During the quarter, we sold $55 million of assets.
<unk>, one office asset to industrial assets outside of our target market for GAAP and cash cap rate of six 2% six 7% respectively.
Most of our office portfolio is still held for sale as of June 30.
With the aggregate market value for these properties estimated to be within a range of $105 million to $115 million and forecasted 2022, NOI of approximately $10 $7 million.
Subsequent to quarter end, we took the opportunity to monetize an industrial asset that was outside our target market profile. In addition, we sold an office property and a tenant at our cold storage facility in Mcdonough, Georgia exercise the purchase option within there Lee.
These sales were completed at $6 $3 million over our initial costs.
We've looked at an average GAAP and cash cap rate of five 4% to five 1% respectively.
At quarter end net debt to adjusted EBITDA was six eight times with unencumbered NOI and over 92% of our total NOI.
At June 30, we had an aggregate of $182 $4 million under unsettled forward common share sale contract. These.
These contracts were scheduled to mature in may.
So we chose to extend these out until December 2022 to consider more advantageous capital raising opportunity.
Our net debt to adjusted EBITDA would be six one times had we said it'll be contract quarter.
Currently have $485 million borrowing capacity available under our unsecured revolving credit facility.
Subsequent to June 30, we amended our unsecured credit facility extending the maturity of the revolving portion out to July 2026 for added balance sheet flexibility and improve the terms applicable margin.
Calculation consolidated debt outstanding at quarter end was approximately $1 6 billion.
Over 85% of our consolidated debt is fixed with a weighted average interest rate of two 9% and a weighted average term maturity of six five years at quarter end continuing to keep us well protected against rising rates with that I'll turn the call back over to well. Thanks, Beth I will now turn the call over to the operator, who will conduct the question and.
Answer portion of the call.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
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We did have a question coming from John <unk> from Ladenburg Thalmann.
John Your line is live.
Good morning.
Good morning, Jonathan.
Just curious what you're seeing maybe in terms of cap rate environment as you look out in the back half of the year.
Click on the development side, obviously, given that is ready to focus on it has there been any kind of continued.
Expansion them or has kind of the robust.
Demand supply imbalance kind of help keep cap rates or targeted yields tight there.
Brendan do you want to offer your perspective on that.
Yes, sure Hi, good morning.
Sure.
The impact on cap rates is really the question that everyone in the market is asking these days.
And it really seems that we continue to be in a period of price discovery.
Following the rapidly changing inflation forecast.
The resulting rise in interest rate.
Yeah.
So I think it remains to be seen.
I will point out too that cap rates are.
Influenced by.
A variety of variables.
You also have to consider the lease duration.
Lease escalation structure in place rental basis relative to mark to market opportunities as well as the building and just the market quality.
So it's kind of hard to generalize.
Okay.
And then as you kind of think about your investment outlook.
How are you weighing.
Kind of stock buybacks versus development.
Is it kind of something that you want a mixing a little bit holistically, just given where the valuation of the stock is today or is it a pure.
Apples to apples what can we get.
In terms of a yield on an investment versus what would essentially the reverse cost of capital if you will.
Sure.
We're very pleased with the development pipeline that we've got.
And the land bank. So we're looking at new opportunity in that space, but we're being.
Cautious.
Because of.
Change in and cost of capital at the same time.
The share buyback is.
So good opportunity for us and its immediate versus taking more more forward risk. So.
We like the share buyback right now, we think its more valuable than potentially.
Potentially adding one more development opportunity to the pipeline.
Okay, and then on the disposition front I mean, maybe just I'm sorry, if I missed if it's kind of broad cap rate terms on kidney industrial deal, but maybe.
Everything that was canceled.
Yeah.
Beth do you want to walk through that.
Yeah.
Sure Good morning, John .
Yeah. So.
We sold them.
Three assets during the quarter, one was an office building.
Two were in the industrial portfolio.
On an average all of them to get all three of them together or at a cap rate of six 7%.
On a cash basis.
Okay, and then just the industrial versus the other assets.
Yes, I think the best data point for for the subsequent to quarter end sales is probably the property, we sold in and Wilsonville, which was roughly a 12 year lease that went off at about a 460 cap rate.
Okay.
That's definitely thank.
Thank you very much thanks John .
Thank you and once again, ladies and gentlemen, a reminder, if you wish to enter the Q&A queue. Please press star one on your telephone keypad. The next question is coming from Jon Petersen from Jefferies. John Your line is flat.
Hey, good morning, Thanks for the time.
I guess just on the office sales I mean, any update I know the.
All of these are are listed for sale you can kind of Google I can see 17 on one market Street on <unk> website.
Can you give us any indication of.
What demand has been like there.
And for some of these things like like in Philadelphia on market Street, or Coyote Hill in the San Jose area. The lease expiration is coming up pretty soon but still a little ways away like I'm, just kind of curious whether.
Buyers are more natural as you get closer to exploration and not like a year and a half out just any color on on how that process is going.
Well so far so good we acknowledge that it's become more difficult to sell office. This year and we've we've reduced a little bit the value of that sale portfolio, but market Street.
That's going to be an asset asset repositioning and theres, a little bit of lease term there. So for a buyer to have some cash flow between here and in redevelopment.
But that's probably not going to stay as an office building, although its possible and then in Palo Alto, that's the one where we have a ground lease that's expiring so.
That's just one where the rent is using to fully amortize.
The debt, but there's no residual value there.
So so far so good we got buyers.
Identified for the vast majority of the office portfolio, but.
It has become a more challenging market to transact in.
I mean, what's the what's the confidence level on this stuff all transacting by year end just given these market conditions.
It's still still pretty high.
Okay.
And then if we look at some of the stuff that you have in joint ventures, I know theres been some selective selling within those portfolios I mean should we be thinking about our models out for the next year or two should we be thinking about additional sales within those JV.
Portfolios.
Yes, I think certainly in the office portfolio.
We've been selling it down.
Steadily.
The plan there is to continue to shrink that portfolio.
We have some opportunities to make some good sales and continue to shrink that in the next.
A couple of quarters and then.
Then we'll have to see what the paces after that.
Okay, and then last question I guess in terms of redeploying proceeds from these asset sales you obviously have the share buyback program, which you've been using maybe just talk to us about the decision making between investing in properties that at current cap rates warehouses at current cap rates and buying back your stock.
I think we're more interested in and buyback and preserving balance sheet to fund.
To fund the development pipeline and then.
As I mentioned the land bank provides additional opportunity for us to build more over time.
Buyback is better than than acquisitions, and we don't foresee a need at the moment to purchase anything for <unk>.
Tax deferral reasons.
Alright, great. Thank you.
Thank you.
And we have John must OCA from Ladenburg back in with a follow up John Your line is live.
Just a quick one on the land bank I mean, how should we think about the timeline for executing on development.
With some of the land bank.
Assets that you have today is that going to be.
Our Q3 year look out or is that something where projects can start as soon as 2023.
Brendan do you want to jump in on that.
Yes, hi.
The.
I would say that.
R R.
Our largest parcel in Phoenix.
I would estimate that we're likely to start our first project there.
2023.
The balance of.
The land bank are relatively recent acquisitions and so we most likely and they are adjacent to existing ongoing project. So we will probably wait to lead.
The.
<unk> that are currently under construction.
Which we think will happen next year and then begin planning.
From there to develop.
Additionally.
Okay.
That was it thank you.
Thank you and the next question is coming from <unk> from Evercore ISI Wendy Your line is live.
Yes, good morning, and he's taking my question.
I just have a quick question about the leverage so your net debt to EBITDA is six.
One is E, including there for sure.
And but.
Could you. Please provide some color if you stabilize your 18 pipeline how much the.
Net debt to EBITDA.
Yes.
Sure Beth.
Yeah.
Hi, Good morning, Wendy Yes, it does not see a fixed projects come online in the development.
We anticipate that our leverage will be coming down so that six one that you call. It it will be something around like a five four times at that point.
Okay. Thank.
Thank you that's helpful.
You're welcome.
Oh.
Thank you and there were no other questions in the Q&A queue. At this time I would now like to hand, the call back to will Eglin for closing remarks.
Okay, well, thanks again for joining us this morning.
As always if you have any further questions.
Hope you won't hesitate to reach out to me or any other member of our senior management team.
Thanks, again and have a great day.
Yeah.
Thank you ladies and gentlemen. This does concludes today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your partner.