Q4 2022 LXP Industrial Trust Earnings Call
And please be advised that this call is being recorded.
After the Speakers' prepared remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad. If you would like to withdraw your question Press Star One again and now I'd like to turn the call over to MS. Heather Gentry Senior Vice President of Investor Relations. Mr. <unk>. Please go ahead. Thank you operator welcome to Alex.
Dovetail Trust fourth quarter 2022 earnings conference call and webcast.
Earnings release was distributed this morning, and both the release and quarterly supplemental are available on our website in the investors section and will be furnished to the SEC stay on a form 8-K.
Certain statements made during this conference call regarding future events and expected results may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
I'll, let <unk> believes that these statements are based on reasonable assumptions. However.
Certain factors and risks, including those.
Those included in today's earnings press release, and those described in reports that LSP files with the SEC from time to time, but cause <unk> actual results to differ materially from those expressed or implied by such statements.
Except as required by law <unk> does not undertake a duty to update any forward looking statements.
In the earnings press release, and quarterly supplemental disclosure package LSC has reconciled all non-GAAP financial measures the most directly comparable GAAP measure.
Any references in these documents to adjusted company <unk> 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 are not intended to be viewed as presenting a numerical measure of lsp's historical or future financial performance financial position or cash flows.
On today's call will Eglin, chairman and CEO <unk> <unk> CFO, Brendan Mullinix, CIO and executive Vice President James Dudley will provide a recent business update and commentary on fourth quarter results I will now turn the call over to will.
Thanks, Heather good morning, everyone. Our fourth quarter operating performance was good across the board with notable accomplishments in leasing dispositions and balance sheet management.
We continue to have tremendous success on the leasing front, raising industrial base and cash base rents on renewals, approximately 38% and 43% in the fourth quarter respectively.
Industrial leasing volume was exceptionally strong in 2022 with 4 million square feet leased during the year at base and cash base rental increases of approximately 31% and <unk>.
<unk>, 6% respectively.
We are currently in discussions with many of our tenants, whose leases expire through 2024, which we believe bodes well for strong tenant retention with the opportunity to raise rents as contract rents continue to be well below market move.
Moving forward the slowdown in overall leasing that is more in line with pre pandemic levels as expected, but we believe the prospects for continued industrial rent growth or good as overall vacancy remains low.
We realized approximately $50 million of proceeds from dispositions in the fourth quarter, including the sale of two industrial properties.
These industrial sales are consistent with our strategy to dispose of assets in non core markets that do not fit our growth objectives.
Further we continued to shrink our office joint venture during the quarter disposing of three assets valued at approximately $37 million.
Subsequent to quarter end, we sold another joint venture asset in Houston for $82 million, which generated net proceeds of approximately $8 million for our 25% interest.
Total 2022 consolidated disposition volume of approximately $197 million at attractive five 6% GAAP and cash cap rates produced favorable pricing in a year where cap rates increased.
Our 2023 disposition plan contemplates marketing for sale up to seven industrial assets in certain non core markets, including St. Louis Detroit.
<unk>, Kansas City and Philadelphia.
Continued challenges in the office sales market delay at the disposition of several consolidated office assets originally slated for sale in the fourth quarter.
While we still intend to dispose of their mandate for office assets, excluding our Palo Alto property as soon as practicable. This portfolio continues to produce strong cash flow with annualized NOI of approximately $11 million.
Moving to the balance sheet at year end, we settled our 16 million common share forward equity transaction.
Using the proceeds to repay amounts outstanding on our $600 million revolver.
Which was fully available at year end.
When adjusted for 2022 share repurchases, we issued a net $3 9 million common shares.
$13 53 per common share in connection with that transaction.
Leverage declined from seven one times at September 30 to six four times net debt to adjusted EBITDA at year end, well within our current target leverage range of 6% to seven times.
As we look ahead to 2023, we anticipate development spend of approximately $125 million to be funded with sale proceeds cash on hand and line draws.
We may utilize any excess capital to reduce leverage further while maintaining some capacity to deploy capital into our land bank and other investments should attractive opportunities arise.
Finally, we're excited to make further progress with our ESG program in 2023, as we prepare to submit to grasp for the third time enhance our framework transparency.
Spanned our resiliency reporting and implement a de carbonization program.
We also look forward to sharing more details in our 2022 corporate responsibility report, which we will publish later this year.
With that I'll turn the call over to Brendan to discuss investments in more detail.
Thanks, well during.
During the quarter, we funded approximately $53 million.
Six ongoing development projects, we completed construction of our previously leased facility in Greenville, Spartanburg in the fourth quarter with the tenant occupying the 800000 square foot facility upon the buildings completion.
The larger of the two remaining properties in this project is expected to be completed in the first quarter and the smaller properties slated for delivery in the second quarter.
Total 2022 development spend was approximately $255 million.
For the six ongoing project and the stabilized Greenville, Spartanburg property I just mentioned.
Moving to Phoenix, we expect completion of the lease facility and our spec development project later this quarter with the second facility likely finishing in the second quarter.
Also in Phoenix as discussed last quarter, we ground leased 100 acres at our 420 acre farm land parcel.
Data center user for 20 years.
The initial annual ground rent of $5 2 million.
With 4% annual rental increases is a fantastic outcome that is expected to produce an initial five 2% annual return on our original purchase price.
Subsequent to quarter end, our Ocala, and Indianapolis project reached substantial completion and.
And we expect our south shore, Florida project to complete in the second quarter.
Lastly, in Dallas, we anticipate closing on a $15 million toward purchase of eight.
124000 square foot building in the first half of 2023.
The project is being developed by the same developer and completed our <unk> facility in Dallas, which is adjacent to this project.
We are actively marketing the space released and if on tenant demand to be strong for this size facility.
Additionally, we continue to see active tenant inquiries at all of our ongoing development projects.
With that I'll turn the call over to James to discuss leasing.
Thanks Brendan.
Growth in our target markets grew on average approximately 20% year over year through the fourth quarter, while average vacancy declined marginally.
Compared to the third quarter. This represents a slight increase in our target markets rent growth, despite a broader modest leasing deceleration.
As of the fourth quarter for leases expiring through 2028, we estimate our industrial portfolios in place rents to be approximately 21% below market.
He has in place rents forecasted to grow approximately 34% on average or 24% net of contractual rent escalations based on independent brokers estimates.
Forecasted rent growth is likely to be slower going forward, which is more in line with the leasing environment pre pandemic as will mentioned, we believe our mark to market opportunity remains strong for quality assets in key markets with access to an attractive tenant base.
Our industrial portfolio grew to 99, 5% leased at year end, a slight increase when compared to the third quarter.
There are only two remaining 2023 lease explorations, which are currently being addressed.
Year to date, we have approximately 6 million square feet of industrial space expiring in 2024, which provides us with a great opportunity to increase rents. We estimate 2020 for expiring rents to increase 20% to 30% based on current negotiations and third party broker estimates.
During the quarter, we extended the 2023 lease exploration of our 510000 square foot industrial facility in Dallas for three years with 4% annual bumps for an increase of 43% over the prior terms cash base rent.
Additionally, we leased the remaining 81000 square feet at our industrial facility in Greer, South Carolina for just over five years annual rental bumps of 4% and a starting rent of 17% above our original underwriting assumptions is a great outcome for the space.
Subsequent to quarter end dependent on our 742000 square foot industrial facility in Indianapolis.
Exercise their fixed rate option to renew for five years, increasing the annual rent 2% per year for the extended term.
The renewal extends the lease through January of 2029.
With that I'll turn the call over to Beth to discuss financial results.
Thanks, Jane revenue in the fourth quarter with approximately $81 million with property operating expenses of approximately $13 million, 90% of which was attributable to tenant reimbursement.
Adjusted company <unk> for the quarter of 17 cents per diluted common share or approximately $48 million.
Our 2022 adjusted company <unk> to 67.
<unk> common share.
Fourth quarter, G&A was approximately $10 million with full year G&A of approximately $36 million, excluding certain advisory costs.
We expect 2023 G&A to be within a range of 35% to $37 million.
During the quarter, we recognized $37 $7 million of.
Selling profit from sales type leases.
It's primarily related to the recognition of an investment in a sales type lease for the 100 acre ground lease in Phoenix that Brendan mentioned.
This ground lease was classified as a sales type lease versus an operating lease under GAAP.
In accordance with the guidance, we do recognize the land measured the investment at fair value and recorded an investment in a sales type lease on the balance sheet and recognized a day one gain.
This morning, we announced 2023 adjusted company <unk> guidance within a range of 66 to 70 cents per diluted common share.
This guidance considers the timing of development lease up and sales volume amongst other items discussed on today's call.
Our same store industrial portfolio was 99, 8% leased at year end with same store industrial NOI growth of six 7% quarter over quarter and five 3% for 2022.
We anticipate our 2023 industrial same store NOI growth will be in the 4% to 5% range at quarter end, approximately 96% of our industrial portfolio leases had escalations with an average annual rate of two 5%.
We settled our forward common share sale contracts in December with aggregate net proceeds from this transaction of $183 4 million as of December 31, 2022, we have full availability on our $600 million unsecured revolving credit facility, we continue to experience minimal.
As you are to rising interest rates at quarter end consolidated debt outstanding was approximately $1 5 billion.
With 91, 4% of this debt fixed our total consolidated debt had a weighted average interest rate of three 2% and a weighted average term to maturity of six five years at quarter end.
Finally at yearend, our unencumbered NOI remains favorable at over 93% of our total NOI.
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 this call.
Mr. <unk> Your line is open Sir.
Oh, Okay. Thanks, Sarah good morning.
Okay.
First question.
Can you provide any color on what the yield on the development delivered in the fourth quarter was perhaps net of any maybe promote and also maybe just give us an update on kind of where you think the the overall pipeline as it stands today will end up being.
That'd be great.
Okay.
Brendan.
The development yield on stabilized assets delivered on a cash basis.
In the mid five range $5.
Yes.
Just as a refresher we are developing in a joint venture with.
Merchant builders partner.
If any will be calculated once the three buildings are 8% stabilized.
But that is the development yields.
With respect to the balance of the portfolio.
We've guided to.
Similar yields in the low to mid fives.
With that said there may be opportunities to exceed that just based on rent growth. That's occurred during the development process and no rising cap rate environment.
The promotes would be expected all other things being equal to us.
Lower which will increase our most familiar yes.
Okay got it and then on.
On the disposition side you.
You mentioned selling seven industrial properties. This year, just any order of magnitude I don't know if you mentioned the dollar amounts are not.
We did it the NOI from that pool is about 18 $3 million.
So we want to have enough assets in the market to cover our development spend this year.
And hopefully we can keep working our leverage down a little bit too, but I think we have to wait and see in terms of giving guidance to valuation.
And I would expect.
Issues that probably be back loaded.
As the year progresses.
Okay, and then I guess my one.
Last one maybe relates to still dispositions.
You mentioned the tougher office environment in terms of sales, but I think 17 O. One was going to a condo converter of resi converter of some short is that did that fall out or is just taking longer or what's happening there.
Yes, I would characterize that transaction is having having fallen out.
Media coverage.
So that asset is fully leased and providing a lot of cash flow to us, which we're happy to collect.
We're certainly open to that transaction coming back together, just certainly possible.
Happy to transact.
Or as I said, just continue to collect the rent.
See what other options are available to us.
Okay, great. Thank you.
Thanks, Tony.
Thank you and just a reminder, ladies and gentlemen star one please for any questions. We go next to Todd Thomas of Keybanc capital markets.
Hi, Thanks. Good morning, just following up first I guess on.
Dispositions can you share the cap rate on the Houston office disposition that was completed after the end of the year and then just around some of the delays that you mentioned.
Regarding additional office asset sales are realized.
There is a little bit fluid, but can you just maybe provide us with an update on.
On the sort of the timeline more more generally for additional office asset sales.
Just just.
For a little bit more color there, perhaps that would be helpful.
Hey, Todd it's Pat.
The Houston sale to cap rate down was seven nine.
And that does cash and GAAP cap rate on that one.
We're working with Vale.
In this environment.
It's tougher than we had anticipated.
Yes.
But we're hopeful to make progress this year the range.
For the economy.
Okay.
Okay.
Okay, and then with regards to the $11 million of annual NOI on those office assets I realize that you don't have any any lease roll.
In 2003.
Are you expecting NOI.
Any change in NOI in that bucket of assets throughout the balance of.
The hold period or do you anticipate that to be relatively steady.
It's relatively steady for the year so.
So as they get through all of that number will come down.
Sure No I understood, Okay, and then just.
Over to the development can.
Can you just talk a little bit about.
The demand for the assets that are.
The development assets.
All expected to be sort of completed here over the next couple of quarters I'm. Just wondering if you could talk a little bit about the pace.
Of leasing and.
The timeline for.
Rent commencements and sort of conversions to the operating portfolio.
Sure. This is James so, it's a little bit of a mixed bag by market.
The velocity in Phoenix is extremely strong.
We anticipate having a leasing outcome there in the fairly near term.
The Columbus asset also had quite a bit of activity.
Other assets are a little bit slower and thats not to say that there isn't a long pipeline of potential tenants in the market I think the major change that we've seen in the market recently, it's just there was a feeding frenzy.
One at the beginning of last year for tenants concerned about not having space and that pace has slowed some in the seems to be a little more methodical. So there continues to be a lot of interest and it's just a little bit slower moving so I think generally across the board. It may take us a little bit longer there may be a six to 12 month downtime on some of the assets.
We would expect to have a couple of positive outcomes on the two assets I mentioned hopefully much sooner than that.
Okay. So those two.
We might expect to see some.
Some NOI come online in 2003, but for the balance of the portfolio. It sounds like it would be.
Later, 'twenty three or into 'twenty four.
Alright, I think thats a good utilization.
Okay.
Alright, great. Thank you.
Thank you Mister Thomas Ladies and gentlemen, just a quick reminder, star one please for any questions for the next now to Jon Petersen at Jefferies.
Oh, great. Thanks.
On the share buybacks you guys did a little bit in the fourth quarter can you talk to us about the decision, making there on on when you pull the trigger on buybacks.
Sure John It really reflects our view of.
More than anything else, but we've also wanted to keep an eye on our on our leverage and have them.
Overall for the buyback to be leverage neutral.
So having that forward equity transaction available to us provided us with some flexibility around the buyback.
Last year and also the opportunity to start to bring our leverage back down.
So we did buy a little bit of stock in a low price at the beginning of the quarter, but since then.
The share price has been grinding steadily higher and we haven't been.
Chasing chasing share price as the market has recovered.
Got it alright, that's helpful and then.
I guess, where are you seeing private market cap rates move to maybe for Brendan.
I think the last time, we spoke last quarter. It certainly seemed like you guys feel like Youre getting better.
Returns on development than acquisitions, but.
With cap rates rising.
What are you guys looking for in terms of cap rates too.
I guess jump back into the acquisition market and view that as more attractive and just at a high level, where do you kind of see in those cap rates move too.
Yes, I'll say I'll say first debt.
We're still very much.
Yes.
Price discovery so.
It's hard to.
Generalize about cap rates.
I'll repeat what I've said before and others and others have commented on that.
Probably the biggest factor.
The mark to market opportunity.
So the shorter.
The lease and the better the mark to market opportunity you're going to see.
A.
Smaller impact on cap rates relative to where we were before.
The spike in interest rates so we.
Prior to the move in rates, we talked about.
Across our more primary markets too so some of the yoga airlines the market being kind of in a low threes to fours and I think today.
It's sort of in the <unk>.
Or is the size.
If that's helpful, but again it.
It's hard to be the setback.
The lower yields would be the more in that range the more primary markets.
Or alternatively, a very quick mark to market opportunities.
Okay, Yeah that makes sense and then just a point of clarification on the 24 maturities you said that 20% to 30% increase is expected is that on a cash or a GAAP basis, and what kind of market rent growth are you expecting between now and then.
Based on the assumptions on.
Yes, that's on a that's on a cash basis and that kind of includes escalation our market rent growth on average at six 5% for two three and four 2% through 'twenty four.
Okay, Alright, that's helpful. That's all for me thanks.
Great. Thanks, John.
Thank you Mr. Peterson again, ladies and gentlemen, just a final reminder, today's star one please for any further questions and we will pause for just a moment.
And we have a question now from Jonathan Soccer at Landenberger Alan.
Good morning.
Hey, John.
Okay.
I was on the disposition side of things you are looking to sell out of a couple of markets I guess, maybe just thinking about geography of the core markets you see in the portfolio today.
And.
Maybe what makes those attractive relative to either kind of larger gateway markets are some of the markets you are looking to exit.
Yes.
I guess.
Ones that we've identified as potential.
Disposition exits are markets, where we only have one or two asset.
And where we haven't been adding.
And our most recent portfolio repositioning.
So example, we mentioned a couple of assets.
Detroit that we were looking at it exiting one of which close.
So the primary Differentiators were just be where we see them.
Potential for annual NOI growth.
And that's where we're focusing.
In terms of markets those markets are tough.
The best access to growing populations and strong logistics center attributes.
And then I guess, maybe is there a differential in kind of the cap rate environment between some of those markets you're exiting versus areas with you. They are doing development ore.
Maybe even longer term attractive from an acquisition perspective.
Yes.
We would expect that exiting a smaller market with less favorable.
Rent growth prospects.
Great in the market.
Yes.
We do think it's important to continue to focus the portfolio and where we see the strongest growth.
Opportunities.
Sure.
Any kind of brackets on why that.
Yes cap rate differential is.
Okay.
I think that is.
Okay.
There in particular I mentioned before that.
We're there's just been so few transactions in the market, it's really hard to tell yet.
And I think that that sort of diversion.
Screen market.
Particularly tricky right now I think it's a little early.
As we work on.
Thinking about this disposition plan, okay further guidance.
Okay, That's fair and that's it for me. Thank you very much.
Thank you.
Thank you we'll take a follow up question now from Anthony Cologne at J P. Morgan.
Alright, Thanks, just one follow up item on the data center lease the land lease.
Prior to that was that land basis were you capitalizing interest against that or was that just is this just purely incremental in terms of the rent.
It's the rents it wasn't just the land before there was no rent coming in or any any kind of incoming.
Okay and so.
Yes, great. So then it sounds like especially.
Especially with the GAAP accounting on on the sales type lease or finance.
Financial takeaways I guess it is.
It sounds like that adds probably a couple of pennies to earnings is that kind of thing.
Right, yes, so on a cash basis is going to generate $5 2 million here and on a GAAP basis for 2020, great it's going to generate $7 4 million.
Okay got it thank you.
Thanks Terry.
Okay.
Thank you and ladies and gentlemen, it appears we have no further questions. This morning, Mr. Eglin I would like to turn the call back to you for any closing comments.
We appreciate everyone joining us this morning, and please don't hesitate to visit our website or contact Heather gentry, if you would like to receive our quarterly materials and in addition as always.
Contact me or the other members of senior management with any questions. Thanks again.
Thank you Mr. Eglin, ladies and gentlemen that does conclude the LSP Industrial Trust fourth quarter 2022 earnings call and webcast, we'd like to thank you all so much for joining us.
You all a great day goodbye.