Q3 2023 LXP Industrial Trust Earnings Call
Good morning, and welcome to Dan Alex Pete Industrial Trust's third quarter, 'twenty twenty-three earnings conference call and webcast.
Please note that this call is being recorded.
All participants are in listen only mode at this time.
After the Speakers' remarks, there will be a question and answer session.
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Thank you.
I will now turn the call over to Heather Gentry Investor Relations you May begin your conference.
Thank you operator, welcome to Alex the industrial Trust's third quarter 2023 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 FCC on our 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 1995.
Or implied by such statements.
Except as required by law, Alex if he does not undertake a duty to update any forward looking statements.
In the earnings press release, and quarterly supplemental disclosure package Alexey has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure.
Any references in these documents to adjusted company. That's all refer to adjusted 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 Alex Pease historical or future financial performance financial position or cash flows.
On today's call will Eglin, chairman and CEO, Beth Boulerice, CFO, Brendan Mullinix, CIO and executive Vice President James Dudley will provide a recent business update and commentary on third quarter results I will now I'll turn the call over to will.
Thanks, Heather good morning, everyone.
Had a successful third quarter driven by meaningful progress on office sales additional leasing in our development portfolio rental increases and further leverage reduction.
Both our Philadelphia, and New Jersey office assets were sold during the quarter for gross proceeds of approximately $48 million.
The remaining office assets in Fort Mill, South Carolina are currently being marketed for sale and as we've discussed previously the Palo Alto, California ground lease will expire in December.
We've nearly completed our office sales with the two Fort Mill property is representing just <unk>, 2% of gross book value.
Office sale proceeds were used to retire line balances, leaving our $600 million revolver fully available as of September 30th.
Our net debt to adjusted EBITDA at quarter end was six two times a substantial reduction from seven one times in the third quarter of 2022.
Leverage would have been five eight times net debt to adjusted EBITDA with the pro forma stabilization of our 2023 leased development projects.
As rents grow and our spec development pipeline continues to lease up leverage is expected to decline further.
Disposition proceeds from remaining office sales and industrial assets outside of our target markets may be utilized to keep our revolver available further reduce leverage and capitalize on new investment opportunities.
Particularly in the build to suit area.
On the leasing front, we've leased $5 8 million square feet through the end of October during the quarter. We made further progress in our spec development pipeline by leasing our 305000 square foot spec building in Greenville, Spartanburg at an estimated stabilized cash yield of seven 2% excluding.
Partner promote.
This brings year to date total spec development leasing to one 9 million square feet at an average estimated stabilized cash yield of seven 5% excluding partner promote.
We continue to raise rents on second generation, new and renewal industrial leases with a year to date leasing volume of $3 6 million square feet at attractive base and cash base rental increases of approximately 39% and 24% respectively.
When excluding fixed renewals.
<unk> and cash based rental increases were approximately 51% and 33% respectively.
Our average annual Escalations are trending higher with the average annual escalator for industrial leases signed in 2023 and three 5%.
This improved internal growth profile combined with marking rents to market continue to drive same store industrial NOI growth, which was 5% in the third quarter.
This morning, we announced that our board of trustees authorized an annualized dividend increase of two cents per share the new declared common share dividend, which represents an increase of approximately 4% over the prior dividend will be paid in the first quarter of 2024.
Finally, we're pleased to have published our 2022 corporate responsibility report.
The report highlights enhancements made to our ESG in our program and our demonstrated commitment to transparency and disclosure utilizing established reporting frameworks, including SaaS B T. C. F. T N G O Ray we also improved our overall 2023 grasp real estate assessment score.
With that I'll turn the call over to Brendan to discuss our investments in more detail.
Thanks, well.
Starting with our development portfolio, the core and shell build out of our remaining development projects are now largely complete.
Approximately 488000 square foot pre leased facility in Phoenix is expected to complete later this quarter and we placed into service in the first quarter of 2024.
Additionally, the corn shell build out of our 250000 square foot New project in Columbus is expected to be completed in the first quarter of 2024 for an estimated cost of approximately $29 million.
Year to date, we've invested approximately $100 million on development, which included $36 5 million in the third quarter.
We anticipate investing approximately $72 million more in these projects excluding partner promotes.
Our non lease development pipeline currently represents 6% of our gross asset value and we expect this number to decline below our target of 5% as we continue to lease this portfolio.
Moving to development leasing during the quarter, we leased approximately 305000 square foot facility in Greenville, Spartanburg for a little over five years with three 5% annual rental bumps.
The lease term includes a five month free rent period with the tenant expected to take occupancy in December.
Additionally, our one 1 million square foot project in Columbus that was lease earlier. This year was placed into service subsequent to quarter end.
We also leased approximately 58000 square feet at one of our buildings and our two building 271000 square foot development project and Ruskin, Florida in October.
The five year lease is expected to commence in January of 2024 at a starting rent of $9 95 per square foot with 4% annual bumps.
We continue to see interest at our remaining completed spec development properties, although more robust activity is four are under 250000 square foot spaces, given the modest oversupply of big box product currently in the market.
Also during the quarter, we completed the forward purchase of our newly constructed approximately 124000 square foot facility in the Dallas market for $15 million.
Leasing interest has been strong at this facility.
As we think about additional growth opportunities on the investment front, our focus is likely to be on build to suits and we are reviewing prospects in this area.
Given the constrained capital market environment with few back construction starts we anticipate build to suit activity to pick up.
We believe we are uniquely well positioned to capitalize on these opportunities given our long track record in that space are strong developer relationships and our well located land bank.
With that I'll turn the call over to James to discuss leasing.
Thanks, Brendan quarter over quarter, we're seeing some moderate softening in tenant leasing demand across U S logistics markets. However, leasing continues to get done.
Be it at a slower pace as tenants take longer to make decisions and some oversupply in certain markets and Submarkets is present.
As Brendan mentioned, the big box sector in particular has experienced an oversupply of product, creating a more competitive market environment for our larger development projects.
Would expect us to dissipate over time as the impact of fewer new starts begins to put pressure on supply.
Rents in our target markets grew approximately 15% in third quarter, when compared to third quarter of 2022.
We currently estimate that our industrial portfolios in place rents are approximately 24% below market as.
As we approach 2024, we've already completed $2 9 million square feet of 2020 for lease extensions at a base cash rental increase of 16, 1% or 24, 3% when excluding two fixed renewals.
We expect the remaining $3 7 million square feet of 2024 lease expirations of which almost all of our negotiations to produce a cash base rent will increase 20%, 30% based on current negotiations and broker's estimates.
Our stabilized industrial portfolio was 99, 2% leased at quarter end down slightly compared to last quarter due to a known move out in Houston, we've had promising activity at the site.
In the third quarter, we signed a five year lease renewal with the current tenant at our 408000 square foot facility in Duncan South Carolina, which we increased cash base rent of approximately 16% for three 5% annual bumps up from 2%.
We also signed a new five year lease a 4% annual rent bumps that are Antioch, Tennessee facility, bringing the building to <unk>.
Subsequent to quarter end, we continue to experience strong leasing volume for the approximately $1 1 million square feet of new leases and extension signed in October.
Notable activity included a 10 year lease extension with 4% annual rental bumps that are approximately 500000 square foot facility in the Dallas market.
The new starting rent represents a 32% increase over the prior rent.
We also signed a five year lease with a fixed renewal rate and our 341660 square foot facility since foreign books South Carolina.
No more fixed renewals for this tenant going forward and the rate will convert to market when the lease expires.
Finally, we addressed existing vacancy and our plant city, Florida facility.
We leased the remaining approximately 180000 square feet for 12 years with three 5% bumps with that I will turn the call over to Beth to discuss financial results.
Thanks, James third quarter revenue was approximately $85 million with property operating expenses of $15 million of which approximately 95% was attributable to tenant reimbursement.
Adjusted company <unk> in the quarter was <unk> 18 per diluted common share or approximately $52 million.
We are increasing the low end of our adjusted company <unk> guidance range by two cents to a revised range of 68 to 70 cents per diluted common share.
This guidance range considers the timing of development lease up and sales volume amongst other items discussed on today's call.
Our two remaining office assets and important <unk> held for sale as of September 32023, and as mentioned the Palo Alto office asset with regard to the ground owner in December these.
These assets along with the two office assets sold during the quarter contributed <unk> <unk> per share of annual <unk>.
Third quarter, G&A was $8 $6 million and we still expect 2023 G&A to be within a range of 35% to $37 million.
At the end of the third quarter, our same store industrial portfolio was 99, 1% leased and same store industrial NOI increased 5% when compared to the same time period in 2022.
Year to date same store NOI is four 5% and we continue to anticipate our 2023 industrial same store NOI growth to be within a range of 4% to 5%.
At quarter end, approximately 99% of our industrial portfolio leases had escalations with an average annual rate of two 6%.
As will mentioned, our $600 million unsecured revolving credit facility was fully available as of September 32023.
Our consolidated debt outstanding was approximately $1 $5 billion at quarter end with a weighted average interest rate of three 3% and a weighted average term to maturity of five eight years.
Our fixed rate debt percentage was 91, 3% at quarter end.
Finally, we are reviewing refinancing options for our upcoming debt maturities, specifically, our $199 million unsecured bond, which expires in June 2024, and our $300 million term loan expiring in January 2025, we expect new rates to be in excess of our current rates given the state of the financing environment. So we anticipate that.
Interest expense will increase as we address these maturities with that I'll turn the call back over to the operator, who will conduct the question and answer portion of this call.
Yeah.
As a reminder, in order to ask a question. Please press star one on your telephone keypad.
Our first question comes from Anthony Powell loan with J P. Morgan. Please go ahead.
Thank you and good morning.
Maybe first one for James can can you maybe talk a bit more about the.
The changes in demand for big box space, and particularly just curious.
As we look out to 'twenty four explorations do you think the.
The reduction in demand has an impact on existing big box tenants or do you think this is just to fill incremental space at this point.
Hi, Tony how are you.
So yeah. The slowdown is definitely on the on the larger box space, but I would say at least in our portfolio. We've seen it more just on the.
The number of tenants that are looking at are large spec development pie.
Pipeline that being and Andy Ocala in Greenville Spartanburg.
And they're just as additional competition too. So there are fewer tenants to go around we haven't seen it really trickled down to us.
So our renewals we have done a number of large building renewals recently and we have some others that are coming up and we anticipate we're going to we're going to see a strong mark to market on.
On those as well and that we're going to retain those tenants and I think that the difference is just the spec development.
Properties that we have are just in submarkets that have a little bit more exposure to new product and we've got some more infill locations with their with the renewals that are performing better just because there isn't as much competition.
Okay. So as we love to some of the bigger explorations in 'twenty four you still feel pretty good about those.
Just staying in getting your mark to market on those.
We do we've only got two known move outs at this point, they're both small.
118000 square feet in a suburb of Memphis, We've got good activity on it that lease expires in January of next year, and then we've got a 58000 square foot.
Lease that's coming off towards the back end of next year in Carrollton, which is a suburb of Dallas.
We expect to have great activity and a really strong mark to market on other than that we are in.
Anticipating renewals.
For the tenants that we have rolling.
Okay, and then maybe for bass just can you remind me with the respective elements.
Finished earlier in the year when does your interest or other carry costs like when do those have to flow through the P&L.
Hi, Tony Yeah. They they once the property is substantially complete we will capitalize interest up to a year.
And until it or until it is 90% occupied.
Okay.
Okay.
So for a couple of those bigger boxes like if we don't see.
What I'm getting at least in the next quarter or so we should start to let that flow through I guess.
Right once they've come on line once they were substantially completed at the beginning of this year it'll be a year from there if they're not leased.
Okay, great. Thank you.
Our next question comes from Todd Thomas with Keybanc capital markets. Your line is open.
Can you talk a little bit about the leasing pipeline and demand for.
The spec developments today.
Are substantially complete just what the expected timeline might be to get those leased up what was tenant demand and interest looks like today.
Sure. So this is James again.
On the smaller ones that we have so south shore. The one in Tampa, We've got significant activity. There. We did just do the 305000 square foot lease in Greenville.
The forward weeks before purchase we did on the 124 in Dallas has a lot of really good activity. So the smaller size has very strong activity or larger buildings have activity and as far as the timing goes.
It's just really hard to peg it.
We have activity or we could have something done in the near term on a couple of them or we could miss out on those opportunities potentially and we could have a little bit of a prolonged downtime.
So again, just very hard to peg, but it's not that there's no activity there just isn't as much as there was.
Okay and then.
First in terms of the companies I guess cost capitalization policies.
If we were to assume that there is no leasing completed at any of the developments.
Throughout 2024 can you just help us sort of frame up what the <unk> impact might look like in 'twenty four as we think about the year ahead.
Just just with the capitalized interest burning off.
Right. So yes, the capitalized interest will burn off based on the schedule. If you look on page 13 of our supplement we have the base building completion dates for some listed so the capitalization will burn off a year from those states.
So you can plan on that and then what we'll do is end up picking up some operating expenses like real estate taxes insurance that will be expense along the way.
It will depend from building to building how much those are.
So it'll it'll just be incremental to two which ones are leased or not leased.
Okay.
Alright, and then and then just last question I guess, just with where leverage is today.
You talked a little bit about seeing some additional build to suit opportunities can you provide a little bit more detail on on what youre seeing there and maybe discuss the appetite to.
To move forward and be sort of opportunistic with with additional investments.
Okay.
Yeah in terms of the.
What we see on the investment front as I said in my prepared remarks build to suit is looking like the most.
Attractive option I think that.
Pricing in that space is.
Probably in a cap rate range of six five to seven.
We would anticipate getting.
Solid escalations in the 3% to 4% range.
So.
Active straight line yields as well.
Seeing opportunities.
<unk> bid build to suits and a couple of our land sites.
Including our Aetna site in Phoenix and.
We also have.
Reviewed build to suit opportunities from existing merchant builder.
Relationships.
Sorry, It does look like there is more activity in that space.
It's an area that we're going to continue to work on it.
Okay alright, thank you.
Our next question comes from Jim Cameron with Evercore. Your line is open.
Hi, Good morning. Thank you I was just kind of building on those prior questions.
The lesser demand in the big box to say could you pivot any of your land.
Inventory to smaller requirements and still make the economics work or is there something about those entitlements or.
Pattern, which you'd like you'd see in the land.
Not do that to Josh if you could use help that.
30.
No we can our land bank will support different building formats.
So in the current environment, if we were to consider expanding the stack pipeline it would be and.
We would expect it would be in smaller format buildings.
Okay, Great and just a small technical issue again, you raised the dividend modestly was that more driven by an elective decision or.
Really governed by the minimum tax requirement payout.
No it wasn't driven by attacks Jim that was just.
Consistent with our view around dividend growth.
Supported by the strong same store results that the portfolio is producing now okay.
Okay. Thank you for your time.
Thank you.
Our next question comes from Mitch Germain with JMP Securities. Your line is open.
Alright, Thanks for taking my question.
I'm curious about.
Office sale process, the buyer profile anything you can share.
With regards to that.
Situations.
Not necessarily with respect to buyer profile, it's safe to say that.
Bid sheets were office have become.
Very short.
The buyer in Philadelphia was someone that we've been working with for a long time.
The transaction fall out of bed.
Once before.
The investor in <unk> was a completely different type of investor because.
The use of that facility and the remaining lease term.
I think in Fort mill, the likely buyer.
We'll be someone who will turn that site into an industrial development.
So three to three completely different types of buyers for what's what's left in that pool.
That's helpful.
Are there any other fixed grant fixed rent increases we need to be aware of in 2024.
There is one that remains mentioned.
That's a 4% increase in a relatively small building 194000 square feet and Monroe, which is outside of Cincinnati, that's the only one that remains.
And that is tied into the numbers that we've kind of put forth on the on the 24%. So our 24% Mark to market includes anything thats fixed.
Great that's helpful and then.
Is it too early to.
Suggest that maybe some of the yield expectations on some of those bigger.
Relevant projects that.
Youre waiting to lease up.
Too early to suggest that maybe some of the yield expectations will be lower than you initially planned or.
Good luck.
Lease economics are still pretty strong to us offset the delay in leasing.
This is Brian and I would say, yes, I think it fits.
Early too to revisit those expectations, we're not we're not changing our guidance from what we had given previously with respect to the to the overall.
Pipeline.
Time will tell.
Thank you.
Our next question comes from Camille Bernal with Bank of America. Your line is open.
Hi, Good morning helpful commentary on the conversations you're having on the larger Expiries next year can you also provide an update on Xerox, whose lease I believe is coming up next quarter.
Yes, that's one where we don't own the ground. So there's a ground lease that's expiring at the end of the year.
So we had a 10 year lease with Xerox and we essentially have monetized all of all of the rent with a credit tenant lease financing close to 10 years ago.
So we took out all of our equity out of that transaction many years ago and all the rent has been applied to principal and interest which has created funds from operations, but no free cash flow.
So that will be in SFO.
Loss to us with respect to going forward, but theres been no free cash flow from that asset for close to 10 years.
Okay.
And on a similar question around your office disposals, we have seen some rates starting to take some pretty large impairments on their non core office assets and just looking at the implied yields and pricing you had this quarter seems to imply that valuations have moved quite significantly so.
Can you talk a bit more about how youre thinking about this and any read through to other office assets within your portfolio.
Hi, Alex back we just have the Fort mill assets that are left and we didn't paradigm in the past. So we don't anticipate any additional impairments on the remaining office that we have at this point.
Our consolidated portfolio.
Okay.
And finally.
Just around your development leasing it looks like you're taking them multi tenant approach.
On some of the new developments and if we think about your core strategy do you still see these assets, having a place in your portfolio long term.
Yeah.
Really the multi tenant strategy has been.
On our smaller building in Tampa or smaller buildings in Tampa that were designed that way.
All of our buildings are designed to be multi tenanted. However.
Our preference is to continue to lease them to single tenants and that's what we're going to try to do.
If we find a situation where it makes sense to multi tenant and thats, what we will do as well, it's a situation by situation.
Okay. Thank you for taking my questions.
Thanks Camille.
Seeing no further questions at this time I will now turn the call back to will Eglin for any closing remarks.
We appreciate everyone joining our call. This morning and in summary, we continue to successfully execute our strategic initiatives and are making considerable progress in all areas of our business. We believe we are well positioned to build on our strong operating performance and we are excited to continue to producing great results for our shareholders.
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 senior management with any questions. Thanks again for joining us today.
This concludes today's conference call you may now disconnect.
Okay.
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Thank you.
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