Q1 2023 LXP Industrial Trust Earnings Call
Speaker 2: call and webcasts. All lines have been placed on mute to prevent any background noise. After the speakers are marks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one.
Speaker 2: Thank you. Heather Gentry, Investor Relations, you may begin your conference.
Speaker 3: Thank you, operator. Welcome to Alex and the Australian Trust's first quarter 2023 earnings conference call and webcast.
Speaker 3: Thurning's release was distributed this morning and both the release and quarterly supplemental are available on our website in the Investor section and will be furnished to the FEC on a foreign E.K.
Speaker 3: Certain statements majoring 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 1995.
Speaker 3: LXP believes 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 LXP filed for the SEC from time to time, could cause LXP's actual results to differ materially.
Speaker 3: from those expressed are implied by such statements.
Speaker 3: Except as required by law, LXP does not undertake a duty to update any forward-looking statements.
Speaker 3: In the earnings press release and clearly supplemental disclosure package, LXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure. Any references in these documents to adjusted company FFO refer to adjusted company from term operations available to all equity holders and unit holders on a fully diluted
Speaker 3: Will Eglins, Chairman and CEO , Beth Fullerist, CFO , Brendan Melanick's CIO, and Executive Vice President James Dudley, will provide a recent business update and commentary on first quarter results. I will now turn the call over to Will. Thanks Heather and good morning everyone.
Speaker 4: Our year is off to a good start with positive first quarter operating results and excellent year-to-date leasing outcomes underscored by significant rental increases and further progress stabilizing our development projects.
Speaker 4: and 42% respectively when adjusted to exclude one fixed renewal. Average annual increases of 3% for these leases, or 3.5% when adjusted for the fixed renewal, continue to highlight the upward trend of our escalators and improvement in our internal growth prospects. Our view of our market market opportunity remains favorable, and we look forward to a period of more active lease roll over releases expiring in 2024 and beyond as the year progresses.
Speaker 4: Subsequent to quarter-end, we had a great success, leasing our recently completed 1.1 million square foot Columbus development project to an investment grade tenant.
Speaker 4: We achieved a stabilized cash development yield of 7.3%, excluding our development partner promote, which was well in excess of our original guidance on yield.
Speaker 4: Our remaining development pipeline is in various stages of completion with all projects expected to be completed this year. We are working diligently to stabilize the remaining 4.3 million square feet, which represents roughly 7% of our overall portfolio.
Speaker 4: and we now expect to achieve stabilized cash yields in the 6% to 6.5% range after development partner promotes.
Speaker 4: Moving to dispositions, we sold our remaining industrial asset in Detroit for $28 million during the quarter.
Speaker 4: As part of our overall business plan to commit capital to our target markets, we may exit certain non-core industrial markets over time, with our industrial assets in these markets being viewed as potential sources of liquidity. We are actively seeking to dispose of our remaining office assets.
Speaker 4: and look forward to finishing this plan as soon as possible. Our fee-owned office portfolio of four assets, which we believe has an estimated value of approximately $75 million.
Speaker 4: currently generates approximately $12 million of annualized NLI. In addition, our Palo Alto Office Facility, which generates two cents per share of FFO, is subject to a ground lease that expires in December of this year with no renewal options.
Speaker 4: Moving to the balance sheet, net debt to adjusted EBITDA at quarter end was 6.3 times.
Speaker 4: Our net debt to adjusted eva-deb would be 6.1 times, including performance stabilization of the Phoenix facility leased in the quarter, and the subsequently leased Columbus project I mentioned earlier.
Speaker 4: As we continue to stabilize developments, we expect EBITDA to improve an overall leverage to decline over time to be within a target range of 5-6 times net debt to a dot-justed EBITDA.
Speaker 4: On the ESG front, we continue to make important progress. In April , we were named a 2023 Green Least Leader with Gold Recognition by the Institute for Market Transformation and the U.S. Department of Energy's Better Buildings Alliance for our Green Least Practices and Policies.
Speaker 4: Finally, we'd like to express our appreciation to Richard Fraery, who has served as our lead independent trustee since 2017 and is stepping down in May. He has provided significant support and insights through our portfolio transformation with a commitment to enhancing shareholder value. We look forward to welcoming Jamie Handworker into this role following the annual meeting in May and benefiting from her valuable industry leadership and experience. With that, I'll turn the call over to Brendan to discuss our investments in more detail.
Speaker 5: Thanks, Will. During the quarter, we funded approximately $31 million in our six ongoing development projects.
Speaker 5: We anticipate spending an additional $76 million on these projects over the balance of the year, excluding any potential promotes.
Speaker 5: We're excited to see all of our development projects nearing final completion.
Speaker 5: In the first quarter, we substantially completed our 1 million plus square foot projects in Ocala and Indianapolis as well as the 400,000 square foot pre-least fertility and our two property Phoenix development.
Speaker 5: The Phoenix property has been placed into service subject to a 10-year lease with 3.5% annual bumps and a stabilized cash yield of 7.4%, excluding partner promote.
Speaker 5: Subsequent to quarter end, we complete a construction of our 1.1 million square foot facility in Greenville, Spartanburg.
Speaker 5: Additionally, as Will mentioned, we lease the entire 1.1 million square foot newly completed warehouse distribution facility and at Ohio to an investment-grade tool manufacturer. We achieved significantly better terms in our original underwriting with a starting rent of $4.85 per square foot and 3.5 percent annual bumps for just over 10 years. JD and his team are working diligently to stabilize our remaining development assets and we continue to receive tenet interest for all the sites. We continue to keep our pulse on current market dynamics in our
Speaker 4: to be approximately 22% below market. With in place rents, forecasts to grow approximately 38% on average, are 28% net of contractual rent escalations based on independent broker estimates.
Speaker 4: Our industrial portfolio is 99.5% leased at quarter-end. We have one remaining 2023 expiration and continue to address 2024 expirations.
Speaker 4: with estimated 2024 expiring rents expected to increase 20 to 30 percent based on current negotiations and third-party broker estimates.
Speaker 4: We achieved several strong leasing outcomes during the quarter. The tenant and our 742,000 square foot facility in Indianapolis exercised their fixed rate option to renew for five years with annual rent increases of 2% per year through the January 2029 extended term. In the Atlanta market, the
Speaker 4: We renewed the tenant in our 676,000 square foot facility for seven years.
Speaker 4: We substantially exceeded our original underwriting by securing a new starting rent of $5.20 a square foot or a 66% increase over the previous per square foot rent.
Speaker 4: and increasing annual rent bumps from 2.5% to 4%, demonstrating the strong fundamentals of the Atlanta market.
Speaker 4: Finally, we executed a seven-year lease on a March 2024 expiration with a tenant at our 851,000 square foot industrial facility in Cleveland, Tennessee. At a starting rent per square foot of $4.10, or 25% over the existing rent with 3% annual bumps up from 1.2%.
Speaker 4: We believe this is a fantastic outcome for this property. With that, I'll turn the call over to Beth to discuss financial results.
Speaker 6: Thanks James. First quarter revenue was approximately $85 million with property operating expenses of roughly $50 million of which approximately 94% was attributable to tenant reimbursement. Adjusted company FFO for the quarter was 17 cents per diluted common share or approximately $50 million. We are maintaining our current adjusted company FFO guidance.
Speaker 6: within a range of 66 to 70 cents per diluted common share.
Speaker 2: Approximately 91.4% of this debt is fixed, which is beneficial in mitigating exposure to higher interest rates. Lastly, our unencumbered NOI remains exceptionally strong at over 93% of our total NOI. With that, I'll turn the call back over to Will. Thanks, Beth. I will now turn the call over to the operator who will conduct the question and answer portion of this call. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad.
Speaker 2: And your first question comes from the line of Todd Thomas from KeyBank Capital Markets. Your line is open.
Speaker 7: Hi, thanks. Good morning. Just 1st. Question on the development leasing. Um, is the Columbus lease commencement is that anticipated for for the 2nd quarter of this year? And then can you talk about demand for other ongoing developments and whether there are any other commencements embedded in the, in the full year guidance?
Speaker 8: Sure. So the commencement will be a second quarter commencement. However, the rent won't start until November on the Columbus lease. So there's a little bit of a free rent period. Then as far as the demand goes on the others, I mean, we have varying degrees of demand on all the assets that are under construction are just completed.
Speaker 7: And then with cap rates having come up a little bit, the cost of us buying out our development partner upon stabilization is also sort of worked in our favor. So it's a combination of things. Okay. And then, well, the $75 million value, I think you mentioned for the Office portfolio. Is that right? And which assets are you including in that specifically? Can you describe that value and those comments a little bit more? And then can you speak to any updates around 1701 market street and also the two adjacent Charlotte office assets?
Speaker 4: Sure, those valuations are from potential buyers of those assets. So it's not, you know, it's not our estimate and it's not like a broker's estimate. It's actually based on...
Speaker 4: Inbound interest, 1701 market is included in that number and then it is under contract at the moment, but with a lot of contingencies.
Speaker 4: So that includes the four buildings, 1701 Market, the Flood Simulator facility in New Jersey, and the two Wells Fargo properties. So we don't have an update on Wells' ongoing need with respect to occupancy in either of those buildings at the moment, but we expect in the relatively short term that we'll know the outcome.
Speaker 7: there and that will facilitate moving forward and monetizing those assets. Okay, and are there any additional details on 17-0 on market either related to the contingencies or the potential timeline there? What should we be thinking about?
Speaker 4: I don't think there's more to add other than a closing like that is a lengthy process.
Speaker 4: But we would be optimistic about being able to bring it in before the lease expires next January . Okay. All right. Thank you.
Speaker 2: Next time. Your next question comes from a line of Jim Kemmer from Evercore. Your line is open.
Speaker 5: Thank you. Good morning. Looking at the operating portfolio is about a 6.1-year-old.
I'm just curious, what is your strategy now thinking about trading term versus escalators? Just trying to get a sense that there's a goal to kind of raise that or what's with the ambition for the operating assets in terms of releasing? Sure, thanks Jim. I think the weighted average lease term will migrate shorter over time. Most renewal discussions are in the context.
our heavy period of mark to market starting next year.
That's fair, but I'm curious, you know, you think at this point in the cycle you're comfortable, obviously if some are extensions, it's out of your control, but, you know, your preference is to continue to sort of focus on that five to seven year horizon, and take advantage of the growth in the markets. You don't feel you need to extend duration. Well, I think it really depends on the asset.
There's somewhere if we can lock in some longer duration term with today's escalators, we think that that's a good outcome. Often the lease on a development project, the term is really negotiated for by the tenant, who's often making a big investment in the building. So I think it's a mix of outcomes simply in our position, we're just trying to optimize with the...
as far as we're going to do any kind of CAPEX regarding maybe a RU for or something like that. So it's really just a matter of time.
Okay, but that's right. One of the extensions was a fixed rate extension that came with no TI. And the other two opportunities we were able to keep the TI down to a dollar on the extensions.
Terrific. Thank you.
Thanks Jim. Your next question comes from the line of Mitch Dermain from JMP Securities. Your line is open. Thanks for taking my question. I'm just curious about future development.
Is it market specific or is it really going to be driven by leasing at this point? I think it's principally driven by leasing. We're very focused on stabilizing what we've got. It doesn't mean we're not willing to look at new projects, but I think...
a rule of thumb where we're trying to stabilize more projects compared to what we might look at committing to going forward. I think that's...
thematically. I'd like to see a little more stabilization before we think about starting something new. But we're happy, you know, in Phoenix, for example, our land back, we think is very valuable. There could be some opportunity there, and Columbus looks good that's also. Great, that's helpful.
Obviously, you sold an asset industrial property in Detroit, and I'm curious what you learn from that process with regards to getting pool, demand, pricing. What do you take away from that process?
Well the bidding pool was pretty deep on that one but it was a long-term lease with flat rent.
So the capitalization rate was high there. That didn't reflect a shortage of bitters. It really reflected the term and the lack of growth.
We thought it was a good sale because it was a hundred and forty seven dollars a foot. So now there's capital out there to sell into for sure. But longer duration leases really become more function of leveraged IRR and require positive leverage.
It's helpful. And the last one for me, the Indy renewal, I know it's a fixed rate, was it higher or was it just at market or can you provide some perspective there?
It's below market. I mean, it's a two percent escalation over the five years, so annual escalation, and that was something that was negotiated into the original lease that we acquired.
Excellent, thank you guys. Thanks Mitch. And again if you would like to ask a question it's star one in your telephone keypad. Your next question comes from the line of Vincent Tabone from Green Street. Your line is open.
Hi, good morning. Giving the strong yield an access of 7% on the Columbus and Phoenix development, do you expect to promote payment to your partner and if so, how that, you know, changed the yield that our LHP Regies?
Yes, there will be a promote payment. It hasn't been determined as of the moment, but I think you should think of Columbus probably landing in sort of the six and a half area or maybe a little bit above there. So still a very good outcome for us beating our guidance by about 100 basis points in that of promote. Got it. And then on the Phoenix and until the town like your.
This is Brendan. The Phoenix development is actually a two building development. The promote will be determined upon leasing of the second building. I think that in terms of the guidance that we gave for the remaining
portion of the pipeline that's yet to stabilize, that's six to six and a half. I think Phoenix will be at the upper end of that range, probably in the mid-sixes to above that. The different
joint ventures have different promote structures. But it's fair to say that in all of the projects that are yet to stabilize with the guidance that we've given, there is a promote that's being paid.
Okay, that's helpful. Thank you. And then one just thing to clarify gets around guidance and disposition plans. Are you still, you know, marketing the non-core market industrial assets? Is that incorporated into 23 guidance? And then, you know, should we expect, you know, cap rates on any industrial sales to...
growth. So you know we will have some things in the market to sell and we're really looking at where we want to land the year-end balance sheet with our revolver clear. So there will be some sales in that portfolio that we've identified. But the number and volume are yet to be determined.
Yeah, I'm just to, so it seems like it's fair to say though that the cap rail life would be lower on their, you know, any other potential industrial sales and you got on Detroit is out of fair. I don't want to put a range of numbers. Yeah, that's a fair assumption for sure.
Great. All right. Thank you. Appreciate the front. Thanks. Thanks.
And your next question comes from a line of Stephen Masock from Layton Bergthalman. Your line is open.
a picture question and sorry I dropped in the call so if you already addressed this my apologies but have you seen an influx of kind of proposals from development partners as a result of some of the regional banking stress that's been out there recently and has that impacted kind of your return hurdles at all is that part of what's driving this or is the the increase more just about rent and interest rates.
Now.
Well, I guess to address first the question about the increase in guidance, as I indicated over the last couple of quarters, between
market rank growth that we've seen during construction and higher exit cap rates reducing promotes, we thought that there was a potentially good opportunity to exceed the original guidance and as we've gotten closer to completion and leasing we're raising our guidance today as we have.
We are seeing more inbound inquiries from developers looking for capital partners. It is both a function of challenges in the debt market but there are also challenges in the debt market.
in the equity markets in terms of Richard Building's finding equity capital. I do think that that will present opportunities for us to expand our relationships. Also, as it relates to
The portfolio we are seeing, and I think everyone in the market is seeing, a very significant slow down in new starts, which I think will ultimately drive more rent growth in our existing portfolio and our pipeline that's underway. So that's encouraging.
And then you mentioned, there are a couple of submarkets that maybe had a little bit of kind of supply concern in your term. I guess how long are the legs on some of that supply delivery and maybe some of those tougher markets, if you will?
Yeah, so I mean, if you just kind of look at the broader rise and you know, you had net absorption nationally at 62 million and yet 129 million in deliveries. So yeah, vacancy rising and specific to our markets, we don't have a ton of exposure to sub markets with kind of the supply demand.
and balance, but India's one. I mean, we've got some softness in the Indianapolis market. But I think the legs are pretty short-lived. I mean, with what Brennan just mentioned about there not being another wave coming on, there still is significant in a demand. I think you're gonna see strong leasing this year, and I think you're gonna see.
And then increase in the near term of vacancy, but then probably sometime next year and the 2025, it's probably going to get tied again. So I think it's a short window. Okay. And then on the development kind of construction cost side, seems like it's been a bit of mixed messaging broadly about whether that's starting to abate, even go backwards or if kind of there's a little bit of a surprised, surprising kind of increase in kind of construction costs in certain areas. I mean, what are you seeing today?
at this time, Mr. Will Eglink. I turn the call back over to you for some final closing remarks. Thanks again for 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 any of the other members of our management team with any questions. Thanks again and have a great day.
This concludes today's conference call. Thank you for your participation. You may now disconnect.