Q4 2023 LXP Industrial Trust Earnings Call
Thank you for standing by and welcome to the Alex P. Industrial Trust's fourth quarter earnings call and webcast. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
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As a reminder, today's call is being recorded I would now like to hand today's call over to Heather Gentry. Please go ahead.
Thank you operator, welcome to Alex the industrial Trust's fourth 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 at Www Dot Alex P. Dot com in the investors section and will be furnished to the SEC on a form 8-K.
Certain statements made during this conference call regarding future events unexpected result may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, Alex. He believes that these statements are based on reasonable assumptions, however, certain factors and <unk>.
Risks, including those included in today's earnings press release, and those described in reports that Alex Pease filed with the SEC from time to time critical as Alex. These actual results to differ materially from those expressed 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 <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 Alex Pease historical or future financial performance financial position or cash flows.
On today's call will Eglin, chairman and CEO, that's Polaris CFO, Brendan Mullinix, CIO and executive Vice President James Dudley will provide a recent business update and commentary on our fourth quarter results I will now turn the call over to will.
Thanks, Heather and good morning, everyone. Our fourth quarter results were strong propelled by robust leasing volume and excellent leasing spreads. We also took advantage of refinancing opportunities that will effectively extend our debt maturities to 2027.
Our fourth quarter leasing activity built on the strong momentum we maintained throughout the year in which we leased $6 8 million square feet at attractive base and cash base rental increases of approximately 52% and 37% respectively, excluding fixed renewals.
Over half of our 2024 industrial expirations were addressed in 2023, and we expect good results on the remaining $2 9 million square feet.
We are in negotiations for the majority of these 2024 explorations and anticipate that renewals will result in a 20% 30% cash rental increase.
Based on current market conditions are.
Our two remaining office assets in Fort Mill, South Carolina are currently under contract for a total of approximately $16 million subject to certain closing conditions.
We expect to collect approximately $1.8 million of rent for these assets in 2024 prior to their projected sale in the second quarter.
On the capital market side, we continue to strengthen our balance sheet position and maintain considerable financial flexibility.
During the quarter, we extended the maturity of our $300 million term loan from 2025 to 2027.
And raised $300 million in a bond offering with the proceeds currently earmarked for our remaining development funding needs and the repayment of our 2024 senior notes maturing in June of this year.
With the expected payoff of the 2024 notes will have no debt maturing until 2027.
On a pro forma weighted average interest rate of three 8% and a weighted average term of six five years.
Ultimately seven 2% of our debt is currently floating which is expected to increase to 27% at the beginning of 2025, we may consider swapping some of this exposure or other long term fixed rate options later this year or early next year.
Our full year 2023, adjusted company <unk> of <unk> 70 per diluted common share was driven by strong leasing outcomes. The $2 6 million square feet of recent development that began contributing revenue and the delay in office sales.
The revenue loss from our office sales the timing of development leasing and increased interest expense are reflected in our 2024 adjusted company <unk> guidance, we announced this morning.
In the range of 61% to <unk> 65 per diluted common share the low end of our guidance assumes we don't leave any of the big box development projects. This year that are available for lease.
As we look ahead, we believe the building blocks for steady growth of strongly in our favor, including average annual fixed rental escalations of two 6%.
A low market rents and occupancy gains in our development pipeline.
Based on our estimate of current market rents leases expiring through 2029, or 23% below market, which represents an increase of $36 million.
Initial annual cash rent or <unk> 12 per share.
Stabilization of the $3 7 million square feet of non lease development in our pipeline is also estimated to result in approximately $20 million of initial annual cash rent or seven cents per share.
Moreover, market dynamics, such as lower new spec construction starts and potential interest rate declines after the backdrop for a more favorable leasing and valuation environment as new build to suit opportunities arise. We believe our long track record in this area and strong merchant builder relationships matter.
<unk> is our ability to execute on accretive investments that further enhance revenue and shareholder value with that I will turn the call over to Brendan to discuss our investments in more detail.
Thanks will.
In 2023, we invested approximately $122 million on development project.
Including $24 million in the fourth quarter.
As of year end, we have approximately $53 million left to fund and our remaining projects, excluding any partner promote which we plan to fund with cash on hand.
During the quarter, we began recognizing revenue for one 4 million square feet of development projects that were placed into service.
This included approximately $1 1 million square foot development project in Columbus.
In which we achieved a stabilized cash yield of six 8% after partner promote.
The leasing market for new construction continues to be challenged given the supply of big box product as prospective tenants have more choices are taking longer to make decisions and are being more cautious in the current macro environment.
However, we continue to see activity at our remaining development projects and we will update you as we gain greater visibility.
Subsequent to quarter end, we placed our approximately 488000 square foot Phoenix facility into service and completed the core and shell build out of our 250000 square foot development project in Columbus.
With the completion of this build out all of our spec development projects are core and shell complete.
And thinking about near term capital plans. We currently believe the build to suit market will provide us with the best investment opportunities given the decline in new spec construction starts and the elimination of leasing risks.
Our plan is to continue reviewing build to suit projects that may be a good fit for our portfolio and respond to inquiries relating to our land bank, including our Phoenix land.
The data center user that previously leased 100 acres in Phoenix in late 2022 has an option to purchase the land at the end of this year for roughly $87 million, which represents $63 million in excess of the original cost of the allocated $24 $1 million.
For the 100 acres.
Our cost basis on the remaining 320 acres in Phoenix is approximately $74 million.
With that I'll turn the call over to James to discuss leasing thanks.
Thanks, Brendan we had strong leasing volume in the quarter, a $2 2 million square feet at base and cash cash base rental spreads of approximately 56% and 41% respectively, excluding fixed renewals.
Lease escalators continue to trend upward.
The average escalator on leases signed in 2023 at three 7% excluding fixed renewals.
Our considerable mark to market opportunities continue to reflect the quality of our portfolio and underscore the value of our investment strategy.
Notable leasing outcomes in the fourth quarter include a five year extension with 4% annual bumps in our 370000 square foot facility in the Atlanta market, resulting in excellent base and cash base rental increases of 79% and 62% respectively over the prior rent.
Additionally, we executed a 10 year extension with 4% annual bumps that are 500000 square foot facility in the Dallas market, achieving base and cash base rental increases of 58% and 32%, respectively when compared to the previous rent.
Our industrial stabilized portfolio is 100% leased at year end as we addressed our remaining vacancy during the fourth quarter. This.
This included a 12 year lease with three 5% bumps for the remaining 180000 square feet at our plant City, Florida facility and a five year lease with 375% bumps at our approximately 258000 square foot Houston facility with that I'll turn the call over to Beth to discuss financial results.
Thanks, James revenue in the fourth quarter was $83 million.
With property operating expenses of about $13 million.
Of which 91% was attributable to tenant reimbursement.
Our overall 2023 tenant reimbursement rate was approximately 94%.
Fourth quarter adjusted company <unk> was <unk> 17 per diluted common share or approximately $51 million.
Fourth quarter, G&A was $9 5 million.
Bringing full year 2023, G&A to approximately $36 million.
We anticipate 2020 for G&A to be within a range of $37 million to $39 million.
Our same store industrial portfolio with 100% leased at quarter end and same store industrial NOI increased four 1% in the fourth quarter when compared to the same period in 2022 full year industrial same store NOI growth was also four 1% when compared to full year 2022.
At year end, approximately 98% of our industrial portfolio leases had escalations with an average annual rate of two 6%.
With respect to 2024, we are expecting same store industrial NOI growth to be within a range of three 5% to four 5%, which considers a range of leasing assumptions.
At quarter end net debt to adjusted EBITDA was six times and our $600 million unsecured revolving credit facility was fully available.
Our consolidated debt outstanding was approximately $1 8 billion at quarter end with a weighted average interest rate of three 9% and a weighted average term to maturity of five eight years.
Our fixed rate debt percentage was approximately 93% at quarter end.
With that I'll turn the call back over to the operator, who will conduct the question and answer portion of this call.
Yes.
Yes.
Thank you as a reminder, if you would like to ask a question press star one on your telephone keypad.
We would like to withdraw your question Press Star one again.
For just a moment to compile the Q&A roster.
Yeah.
Okay.
Your first question is from the line of Todd Thomas with Keybanc capital.
Hi, Thanks. Good morning first question just around the guidance Beth.
It sounds like the low end of the guidance assumes no commencements.
To the development leasing during the year, how much leasing is assumed at the at the high end of the range and then maybe for Brian.
Can you talk or expand a little bit on the leasing pipeline and just discussed demand for.
Some of the larger spaces and the development.
Projects in general.
Good morning, Todd.
So the low end has the three big box is not being leased all year.
The high end has them coming in in some form in the fourth quarter.
Okay.
Hey, Todd this is James.
Just kind of elaborate on our leasing pipeline right now.
All three of the big box facilities have activity.
Look there's a lot of new supply that we're dealing with in those markets. It's very competitive, but we do have some hopeful activity on all three buildings. So it's difficult to say when that's going to equate to a new lease but.
Hopefully sometime this year, we're going to have some good news.
Okay, any any updated thoughts on the stabilized yield expectations across the development portfolio and just given some of the increase in <unk>.
And supply our competition are you seeing any any change at all in market rents.
I'll take that this is Brandon in terms of the targeted returns that we're looking at for the balance of the lease development pipeline.
We're not changing our guidance from the six to six five posts promote.
That we've previously guided to.
And I guess I would just add this is James again on the market rents. Thus far market rents are holding I mean, we are likely to see that theres going to be a little bit of a change in concessions morford ramp more ti on the first generation space, but as of right now as we're reviewing opportunities market rents seem to be holding.
Okay.
Alright, great. Thank you.
Thanks Todd.
As a reminder to ask a question press star one on your telephone keypad.
Your next question is from the line of <unk> <unk> with Bank of America.
Okay.
Good morning, as we look across vacancy rates by size, then it's clear the concentration of supply risk than the larger industrial building can you remind us how much it's a moderating rental strategy disclosed for 2024 going from 42 to 20% to 30% is driven by we're in.
Place center for those expiring leases versus the outlook for market rent growth.
Okay.
This is brendan.
A lot of it just has to do with mix I don't know that its.
Necessarily forecast for <unk>.
Our entire portfolio or the pipeline.
Got it and.
Just expanding on your earlier comments about market rents to Claire.
Clarify that's on a gross basis right.
Yes.
Okay.
No.
The Mark to market are you referring to.
In the previous response, you mentioned like market rents are relatively flat is that just on a gross basis.
Okay.
Yes.
I mean, I was referring to the net rent.
Okay. Thanks for clarifying that.
Finally, how are you thinking about your capital allocation strategy.
When it comes to driving earnings growth.
Given stabilized development yields are tracking slightly below two in line with the implied cap rate up Alex.
Recognize you do have a lot of embedded growth within the portfolio to unlock but that's sort of limited by how many leases are calling each year. So just how can you talk to how you're thinking about.
How income growth evolves in today's funding environment.
This is Bryan again.
Both would point you to.
The building blocks of growth that will outline in his prepared comments. In addition in the investment market.
We're currently seeing.
Build to suit as potentially being a very interesting line of business for us which would be.
We've taken a range of six 5% to seven for initial going in yields on it depending on what the escalation structure.
Lease duration so.
Okay.
Okay. Thank you.
Yeah.
At this time that we get next question is from the line.
Jim Tomorrow with <unk>.
<unk>.
Hey, good morning, Thank you.
Apologize my notes, it's my fault regarding the.
Yes.
Data center land or a potential sale in Phoenix can you just review the history of that again my notes here is next up it's my fault.
And I'm trying to think about if you were able to sell it in the latter part of this year, a very nice embedded gain can you effectively shelter that.
Reinvesting in other assets. Thank you.
This is Brandon in terms of the history. So we acquired a roughly 420 acres site.
2021 for about $101 million.
In the fourth quarter of 2022, so about a year later or just inside a year, we entered into a ground lease with the data center user for about 100 acres of that for 'twenty.
With with options to ground leases 50 years.
The initial cash rent on Dod ground leases of $5 $2 million. So.
As a great transaction for us.
Provide relatively.
A relatively immediate.
Cash flow to the project.
And added a whole lot of value before any vertical construction began.
Please.
Does include.
A purchase option on the second anniversary, which will be in the fourth quarter of this year.
And it's open for one year.
And the tenant has has the opportunity.
Explained in the prepared remarks to purchase for roughly $87 million.
<unk>.
I'm sure there are a lot of factors that that user will consider and whether or not.
Exercise the option I can add there.
They have been.
<unk> begun their development of the site so they're already investing there the other substantial investment.
Whether or not to exercise that option.
If they if they choose not to will we still have a very valuable ground lease.
Sure.
Got it very helpful. Thank you.
Yes.
Your next question is from the line of Mitch <unk> Chairman.
JMP Securities.
Hi, This is jordy on for Mitch.
I just wanted to ask about the lease negotiations is it just the dynamic right now is it taking longer to get to the finish line or is it the same kind of Jonathan I guess before.
I would say that this is James I would say that the duration from start to finish is definitely lengthened.
Identifying the property identifying the market from a tenant perspective to getting through the LOI process and ultimately signing a lease is definitely significantly longer than it was a couple of years ago.
Okay.
Got it and.
Do you have any large move outs expected in the coming quarters.
Nothing thats.
Significant we do have three known move outs for 2020, 411 of which just happened, which was 118000 square foot deal in Memphis. The tenant moved out at the end of January we have another 320000 square foot building in Columbus that the tenants moving out at the end of March and then we have a 58000 square foot tenant.
And the Dallas market Thats moving out in October.
Our list of known move outs.
Okay got it thank you.
That's all for me.
As a reminder to ask a question press star one on your telephone keypad.
Your next question is from the line of Jessica Zeng with Green Street.
Okay.
Good morning could you. Please fix then to what extent have concessions and Ti expanded in your markets versus.
Pre COVID-19 or versus the past couple of years.
It's really hard to generalize because every situation is different but whereas you might've been we'll use a big box for example, where you might've been.
In the mid single digits on a ti ti's are creeping into low double digits.
But again, it's difficult to generalize every situation is different depending on the competition in that particular market situation.
Okay.
Okay.
Yeah.
Yes.
We do have a follow up question from the line of Camille by now.
Hi, just one quick follow up could you expand on them.
What your occupancy and bad debt.
Functions are baked in to your same store NOI guidance.
So on our same store guidance Israeli leasing outcomes there.
There is no bad debt baked in there at this point.
Okay. Thanks for clarifying.
That's it for me.
Thanks Camille.
At this time there are no further questions.
Once again, we appreciate.
Everyone joining our call. This morning, and thank you for your interest in our company.
Please 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 for joining us today.
This concludes.
Today's call. Thank you for joining you may now disconnect your lines.
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