Q2 2023 LXP Industrial Trust Earnings Call
Hello, and welcome to L X P. Industrial Trust second quarter 20, twenty-three earnings call and webcast all lines have been placed on mute to prevent any background noise.
After the speaker's 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.
I will now turn the conference over to Heather Gentry I R. Please go ahead.
Thank you operator, welcome to Alex P. Industrial Trust second quarter, 20th twenty-three earnings conference call and webcast. The earnings release was distributed this morning in both a relief and quarterly supplemental are available on our website and the investors section and will be furnished to the F. C. C on a for me K.
Certain statements made during this conference call regarding future events unexpected results may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Unlike b 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 Alex <unk> files with the S. C. C from time to time could cause Alex speeds actual results to differ materially from those.
Expressed or implied by such statements.
Except as required by law I like speed is not undertake a duty to update any forward looking statements.
In the earnings press release, and quarterly supplemental disclosure package, Alex He has reconciled all non-GAAP financial measures to the most directly comparable gap measure.
Any references in these documents to adjusted company F. F. L refer to adjust a company funds from operations available to all equity holders and unitholders on a fully diluted basis operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of Alec fees.
Historically, our future financial performance financial position or cash flows.
Today's call will Egland, chairman and CEO <unk> CFO , Brendan Mullen X C I O and executive Vice President James Dudley will provide a recent business update and commentary on second quarter results I will now turn the call over to <unk>.
<unk> good morning, everyone.
We continue to make progress in all areas of our business during the second quarter with excellent Lucy results in our development portfolio and strong Same-store industrial NOI growth 5.8%.
Lucy volume of 1.6 million square feet and our development portfolio included are 488000 square foot facility in Phoenix, and 1.1 million square foot facility in Columbus.
These leafing outcomes produced.
Committed average Kashi old of 7.5% exclude the partner promotes.
Resulting in heels well in excess of our original guidance.
You have strong turn it interests that are remaining 3.8 million square feet of projects available for Luis and expect to make more progress during the balance of the year.
Total cost for these remaining projects is approximately $293 million or 6% of our gross asset value of which we have $45 million left to fund.
Our development pipeline has been a valuable vehicle for adding a single payment warehouse facilities to our portfolio and since initiating our warehouse development program, we have least seven industrial facilities.
These positive results highlight are continued success and development leasing and our ability to deliver superior outcomes relative to the purchase market.
Moving onto sales, we continue to anticipate that our Philadelphia and New Jersey office assets will be sold by year end.
<unk> due diligence is well underway at our 17 O one market Street property in Philadelphia.
And our whippany in New Jersey as it is under contract subject to standard closing conditions.
The two remaining facilities leads to wells Fargo in South Carolina are to be marketed for sale later this year.
Our Palo Alto office facility, which generates two cents of episode per share is subject to a ground lease that expires in December 2023, and as a result, this asset will no longer produce F. F O. After this year.
Currently we aren't expecting any additional sales activity this year, but continue to view certain industrial assets in non target markets as potential sources of incremental liquidity.
Turning to our balance sheet to adjusted EBITDA headquarter and was 6.3 times and our $600 million revolving credit facility was fully available.
<unk> to adjusted EBITDA would be six times, including pro former stabilization of our least development projects.
Additionally, would will be realized as we continue to stabilize or development pipeline and overall leverage is expected to decline is N O Y. It comes online we are targeting leverage range of five to six times net debt to adjusted EBITDA.
With that I'll turn the call over to Brenda and to discuss our investments in more detail.
Thanks, well.
Reviewing the second quarter leasing outcomes in our development program at.
At our 488000 square foot Phoenix facility, we executed a seven year lease with the starting rent of $9.60 per square foot.
Attractive annual rental bumps, averaging approximately 4%.
We also secured a 10 year lease with the starting rent of $4.85 per square foot and 3.5% annual Escalations at our 1.1 million square foot project in Columbus.
Both facilities requires some additional buildup requested by the tenants.
<unk> are expected to take occupancy when the Buildouts are completely which should be early November for the Columbus asset in early January for the Phoenix facility.
During the quarter, we completed the Korn shell of the remaining buildings and our Greenville Spartanburg project.
Which included a 1.1 million and a 305000 square foot facility.
We also completed the Korn shell of one facility and our two property South shore, Florida project at the end of June and subsequent a quarter and we completed the second facility.
Finally in July we've completed the Ford purchase of our 124000 square foot South Dallas project for approximately $15 million.
With the leasing progress we've made today, we commenced construction of a 250000 square foot project and the Edna part 70 joint venture, which is in the Columbus market on land, we already own.
Market demand for this size facility remains strong the building will feature modern specs, including a 36 foot clear high with a real low design.
We expect to Korn shell building to be completed in the first quarter of 2024 for an estimated cost of $29 million and.
Projected stabilized cash yield of approximately 7% excluding partner promote.
We intend to continue utilizing our development pipeline as a way of adding single tenant warehouses to our portfolio at yields and access to the purchase market.
Her development strategy will continue to be responsive to tenant demand, which will include smaller facilities with staggered deliveries to help mitigate potential leasing risk.
Additionally, our goal is to target or speculative nonstabilized development pipeline to be around five per cent of gross asset value or less.
With that I'll turn the call over to James to discuss leasing.
Thanks, Brendan overall.
Overall currently using and demand continues to be solid across the United States. Despite some some more consultants in certain markets excess supply.
In the second quarter <unk>, 18% in our target markets compared to the same period in 2022.
As we approach a more robust period of lease rollover in the coming years, our view of our mark to market opportunity has not changed and we still expect ample rent growth compared to current rates.
A quarter and we estimate that our industrial portfolios embrace friends releases expiring through 2028.
Recently, 23% below market.
We expect in place for him to grow approximately 39% on average or 31% that of contractual rent escalations based on independent brokers estimates.
Our industrial portfolio at 99.5% leased a quarter and a vacancy remaining very low.
Subsequent quarter, and we signed a five year lease renewal with attendant in our 408000 square foot facility and Duncan South Carolina.
Cash rental increase of approximately 16% with 3.5% annual bumps up from two per cent.
While the tenant exercises three year renewal option during the second quarter or desire to increase the length of the lease pushed final negotiations into the third quarter.
Allowing us to secure a better terms than we had originally anticipated.
Here today, we've completed a 2.7 million square feet of lease extension that attractive base in cash base rental increases are approximately 41% in 2006% respectively.
Excluding one fixed renewal based in cash base rent spreads where approximately 49% in 35 per cent respectively.
We expect to see a pick up in leasing activity in the third and fourth quarters as renewal Windows for 2000, 2004 at least explorations approach and we complete negotiations.
Currently we are in negotiations on approximately 70% are of 2024 explorations and have meaningful activity on our small amount her many vacancy.
Our estimates on 2024 <unk> are still expected to be 20 to 30 per cent higher than place rents based on current negotiations and brokers estimates.
We also have promising activity on a significant portion of the remaining expect development pipeline and hope to report additional leasing progress later this year.
With that I'll turn the call over to Beth to discuss financial results.
Thanks, James revenue in the second quarter, approximately $87 million with property operating expenses of $16 million of which approximately 95% was attributable to tenant reimbursement.
Second quarter adjusted company <unk> was 18 cents per diluted common share or approximately $53 million.
We are maintaining our current adjusted company FFL guidance within a range of 66 to 70 cents per diluted common share.
This guidance range considers the timing of development, Lisa and sales volume amongst other items discussed on today's call.
Second quarter, G&A was approximately $9 million and we still expect 20 twenty-three G&A to be within a range of $35 million to $37 million.
At quarter end, our same store industrial portfolio was 99.8 per cent least and same store industrial NOI increased 5.8% in the second quarter compared to the same period in 2022.
We continued to anticipate or 2023, industrial same-store NOI crowd to be within a range of 4% to 5%.
At quarter, and approximately 98% of our industrial portfolio leases had escalations with an average annual rate of 2.6%.
As well mentioned are 600 million dollar unsecured revolving credit facility with fully available as of June 30th 2023, a consolidated that outstanding was approximately $1.5 billion, a quarter and with a weighted average interest rate of 3.3% and a weighted average time to maturity of six years.
Our fixed rate that percentage remains at approximately 91.4%, which continues to mitigate our exposure to higher interest rates.
Finally are unencumbered NOI remains exceptionally strong at over 93% of our total in Hawaii.
With that I'll turn the call back over to the operator, who will conduct a question and answer portion of this call.
Thank you if you have a question. Please press star one on your telephone keypad.
If you have a cute up and wish to withdraw your question you May press start one again.
Your first question comes from the line I have Anthony how Lonnie J P. Morgan. Please go ahead.
Thanks, Good morning.
I was wondering if you could talk about just your appetite too just refill the development pipeline as you start to work two to 2024 and you know what yields might look like on sort of the next round as you start things.
Yeah, I mean, I think Tony overall, we've been I'm working on shrieking that exposure. So in this quarter. We did 1.6 million for you to have leasing and <unk> committed to that.
250000 square foot project in in Columbus that we think makes a lot of sense given the land that we own and and the size facility that is relative to where we see tenant demand.
So I think overall, it's it's a net shrink to that position and then over time sort of target that five per cent of gross asset value I think that you know that sort of makes sense to.
To us and.
Brandon and you wanted to comment on where you see feels penciling these days.
Well.
Relative to the to the announced project in Columbus that we just added to the program.
We've model.
Number of single and Multitenant scenarios with their we anticipate that the stabilized.
Stabilized yield to Alex P will be in the six five per cent plus range.
That gives you.
Idea of where we would be.
Okay.
And then just second question on the projects that are available till we use you talked about just you know.
Activity, there can you give us a little bit more color depth as to.
Just how that's coming along anything that's changed in terms of tenant demand.
Hey, Tony is James So yeah, I would say, we're we're in varying stages, we have activity on all the different properties. Some are further along than others.
So I would say that the demand is continued to be strong, but I mean, I think it's pretty well known in the commentary across.
Industrial companies is that they are just taking longer to make decisions and I think we would echo that so the process is just a little bit slower than it was 12 to 18 months ago, but.
To add activity.
Okay, great. So I got thank you.
Your next question comes from the line Todd Thomas with Keybanc capital markets. Please go ahead.
Hi, Thanks. Good morning, just first question I guess last quarter you discuss.
The foreign core off.
$75 million range I appreciate the commentary or around.
The update on some of those assets has anything changed around the expected proceeds that you expect to generate.
And then at 17 O on market Street in Philadelphia can you just clarify whether that's under contract or or maybe provide a little bit more detail around some.
Some of the contingencies or key items awaiting approval before executing an agreement.
Sure I think there's been some erosion in the value of your office portfolio. Overall, so while we have 17 O one and whip any under under contract with.
With deposits.
I think we wanted to be a little cautious about pegging the value of the wells Fargo assets until we have them under contract as well. So I think we you know there has been some diminution of value from the $75 million Uhm.
I think we'll just have to wait to quantify that to see how we do with with the Fort mill assets.
You want to comment on 17 O one market share in both circumstances. We've moved the process along we have this is my hard earned money deposits and anticipate you know hopefully a smooth closing from here, but they're not done until they're done in the the current off the sale environment.
Okay on the on the wells assets has there been you know any any notification or decision around what what they're looking to do with the two office assets, whether they're going to renew or or vacate one or both of those assets.
Yeah, they let the renewal period expire.
In terms of exercising any renewable options with respect to either facility.
So we'll move ahead and market them for sale or as possible during that process wells could change their mind or get back involved but we're moving to turn those assets into cash.
Finish the off the sale process.
Okay got it and then on the on the 15 million dollar acquisition in the quarter can you provide.
Ah Ah cap right an initial yield on that transaction and then are you are you seeing more deals begin to surface and what's the company's appetite like four.
Additional investment opportunities.
It's Brendan that acquisition was actually a Ford purchase agreement so we required.
Or shall we negotiated that deal an early early last year and early in the spring, there's the anticipated stabilize yield there.
We're looking at around five to low five range.
In terms of additional acquisitions again that that one was put under contract last year, while we're monitoring the the purchase market.
We remain as I've said very focused on stabilizing more of the development pipeline.
And as that happens, we we may look to expand the pipeline in our land back because we announced this quarter with the Columbus transaction and Alternatively, we may revisit the purchase market.
Okay and just just last question I guess, maybe maybe Beth <unk> can you just remind us of.
Sort of the policy.
In place to transition developments into service just wondering if there is a timeline either once completed whether whether leased or not for for some of the projects.
That are available for lease today that are complete or or just about complete.
Where where they might be placed into service and and then in terms of the the leasing the additional spec leasing I guess.
Along with that do you expect to have.
Leases executed before before the projects are placed into service.
Yeah. So our our policy is if the asset is 90% occupied or one year from substantial completion of the base building.
So when these ask these assets many of them are core and shall complete as of today, but they are not placed into service and until that occupancy.
Mark is Matt.
So that'll be later, yeah, we've put in our supplemental some estimates on when some of the least properties are going to.
Achieve that occupancy and placed in service date.
Okay got it so if I'm looking at like now and comfort in in Ocala.
Central Florida, those would be transitioned whether they're leased or not they would be transitioned into service during the first quarter of 24.
That's exactly.
Right one ear.
And and then so when we think about the progress on on leasing for those projects is there any anticipation of dressing.
Perhaps into service without executed leases in place or based on you know negotiations and the coroner leasing pipeline and demand you expect to have leases executed before they would be transitioned otherwise.
We'll see you know we're working on that now and time will tell on that.
Okay alright, thank you.
Once again, ladies and gentlemen, if you have a question it is start when.
Your next question comes from the line of cameos Vanilla with Bank of America. Please go ahead.
Good morning.
Iconic correctly in your opening remarks.
Mark to market opportunity within the portfolio is around 30 per cent.
I guess my first question is was this comment on a gambler cash basis.
It's on a cash basis Camille this is James and it's it's 23 per cent today, and if you compare that to the ending around it's 39% and then we also track the number to 31 per cent number is basically the ending rent versus the the rent the in place rent that is escalated by the escalators and <unk>.
<unk> and compares the two.
So three different numbers, but as of today, we think we're 23 per cent below market.
Okay and is it possible to expand on what this opportunity is within the portfolio specifically for 2020th floor cause just thinking about the least expectations at.
Duncan self care Uhm, Duncan, you're South Carolina asset, which it seems to be tracking ahead of your expectations that outcome.
But the six year, so casually spreads came well below the 75 per cent you've been achieving year to date. So just trying to connect the dots their sure. It's blended we have 18 leases left so it's some of them are very very high double digits and some of them. We have a couple of fixed rate renewal options ones that.
1%, 4%. So it's a blend over those 18 outcomes that gets us to the average of 20 to 30 per cent.
Okay, so the ones excluding mm.
Fixed.
Increases you're still seeing double digit.
Like Spence.
So the 20th 30 per cent includes those for the average.
So yeah, we're our expectation is over those 18 outcomes that we're gonna see 20th 30 per cent increase in right.
Okay.
And the final one for me I see your security office loan on your Palo Alto asset is coming to you at the end of the year just wanting to get your thoughts on your plans here.
Yeah. It it fully amortize is so it'll be a zero balance and yeah 10 years ago, Xerox exercise, a 10 year renewal option, we essentially use all the rent payments.
To support credit tenant leaves financing so that was how we cashed out of the asset 10 years ago, and we have a groundless that expires won't have any continued economic interest after the maturity.
We won't or anything either.
Thank you.
Your next question comes from the line of Mitch Jeremy with J M. P. Securities. Please go ahead.
Good morning.
The 70 per cent of the 2024.
Explorations that you're under discussion with.
Uhm is I'm talking about I guess I'm curious about the other 30 per cent.
Are they just kind of back waited and those tenants haven't started yet or or do we have some known move outs that comprised some of that 30 per cent.
Alright. This is James you're right on the first part they're just back and waited there's only one no no move out in 2024, which is 118000 square foot facility, an olive branch Mississippi.
Okay, Great and then maybe we'll I just help me out with regards to the I think you suggested other than some of the office assets that are.
Under discussion or under negotiation or a letter of intent no more sales and I know you sold one industrial property.
In Detroit last quarter.
I believe that you were going to tap the sales market for a little more based on what your original comments worse. It was there anything that changed from your perspective.
Uhm, just observing that it's not a great time to be a seller given how hard. It is you know acquisition financing is not favorable. So I think we'll just monitor the market. We have an interest in keeping our revolver ballads low, but I think we'll just be opportunistic about sailor.
Sales opportunities versus committing mm.
It wouldn't surprise me if we test the market in the next few months with a handful of assets and see what we find and I think that'll be R.
Approach that friend.
Thank you.
Yeah. Our next question comes from the line, Jim Kennard of Evercore ISI. Please go ahead.
Good morning. Thank you just a clarification on the two newly least development pipeline projects. It looked like the costs went up.
Rinse you quoted and the causes are not presented in the second quarter supplemental those are the full in and reflect the additional 10 at Buildout requirements I think you mentioned.
Exactly that's exactly what it is Jen we've added in the G I amounts now.
Okay. Just wondering if you wanted to call someone else, particularly unkind, but that's that's fine cause you'll there's pretty attractive and then actually it was just building off Mrs question is similar slot.
What is the typical sort of renewal notice requirement on the part of represented a seven year lease you know, how how quickly or a window. The tenants have to say private exploration to tell electric what their intentions are.
Typically nine to 12 months.
Okay. That's helpful. Thank you.
Thanks, Jim.
Your next question comes from the line of John Peterson with Jeffries L. L. C. Please go ahead.
Thanks, Good morning, I'm curious on just looking at the renewals for next year. He any change in behavior on these lease renewals like are they coming to.
Early as they have over the last couple of years to renewal or are they kind of wait and see.
Is there any change in the escalators that you guys are able to negotiate on renewables or is that right now.
Sure. It's James again, it varies we have some that are proactive and so I'm gonna wait until the last minute.
And in most circumstances, we still have the upper hand, so we're fine the way, but the ones who are set out he wanted to make sure that they have the ability to renew window potentially give up the space, but missing their window. So it's typically as we kind of discussed so far conversations around that renewal window and then from an escalator perspective, you know we continue to see.
<unk> pushed towards for I would say on average across our markets and portfolio. When we're doing a mark to market. We're also improving on the escalators on probably on average to 3.5%, though in some cases, we've got into for.
Okay. That's helpful. That's all for me.
And there are no further questions at this time I will turn the call too well Eglin.
We appreciate everyone joining a call. This morning in summary, we continue to produce strong financial and operational performance and are successfully executing on our strategy with progress in all areas of our business.
We believe we are poised for strong performance going forward and are excited to continue to producing great outcomes for our shareholders. Please visit our website or contact Heather gentry, if you would like to receive our quarterly materials and in addition is always you may contact me or the other members of senior management with any questions.
Again for joining us.
This concludes today's conference call. We thank you for joining you may now disconnect your line.
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