Q3 2024 LXP Industrial Trust Earnings Call

Good morning and welcome to LXP Industrial Trust 3rd Quarter 2024 earnings call in webcast.

Speaker Change: All participants are an listen-only mode. After the speaker's remarks, we'll conduct a question and answer session. To ask a question at this time, you'll need to press star, followed by the number one on your telephone keypad. As our minders, this conference call is being recorded.

Speaker Change: I would now like to turn the call over to Heather Gentry. Investor Relations, please go ahead.

Speaker Change: The End

Heather Gentry: Thank you, Operator. Welcome to LXP Industrial Trust's third quarter 2024 earnings conference call and webcast. The earnings 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 SEC on a Form 8K.

Heather Gentry: 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.

Speaker Change: LXC 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 files with the SEC from time to time could cause LXP's actual results to differ materially from those expressed or implied by such statements.

Speaker Change: Accepted required by law, LXP does not undertake a duty to update any forward-looking statements.

Speaker Change: In the Earnings Press Release and Quarterly Supplemental Disclosure Package, LXC has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure.

Speaker Change: Any references in these documents to adjusted company FFL refer to adjusted company funds from operations available to all equity holders and unit holders on a fully diluted basis.

Speaker Change: Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of LXP's historical or future financial performance, financial position, or cash flows.

Heather Gentry: 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 turn the call over to Will.

Will Eglin: Thanks Heather and good morning everyone. We had a great third quarter characterized by strong leasing outcomes and same store NOI growth of 5.4 percent.

Heather Gentry: Second-generation leasing volume in the quarter of approximately 490,000 square feet resulted in attractive base and cash base rental increases of approximately 38% and 22% respectively.

Heather Gentry: And we made progress on leasing our development portfolio with the lease-up of our 250,000-square-foot development project in Columbus, Ohio.

Heather Gentry: We continue to work closely with the full building user at our 1.1 million square foot Ocala, Florida development project and our senior activity at our two remaining big box facilities with the most promising prospect at our Greenville Spartanburg facility.

Speaker Change: Our target market focus on the Sunbelt and Lower Midwest has contributed to our second-generation leasing success this year as these markets have performed well relative to many others.

Speaker Change: We continue to favor markets that are supported by strong, long-term demographic trends, including population and job growth, logistics infrastructure, and government spending programs designed to support advanced manufacturing initiatives.

Speaker Change: With the transaction market becoming more active, we have opportunistically sold several assets outside of our target markets for reinvestment into the Sunbelt markets where we have scale, market expertise, and strong tenant and service provider relationships.

Speaker Change: During the quarter, we sold an asset in the Cleveland market for $29 million, and subsequent to quarter end, we sold three industrial facilities in Chicago, which produced gross sales proceeds of $137 million.

Speaker Change: Further adding to our sunbelt exposure, we acquired a 34 million dollar industrial facility in Savannah in October and are in diligence on three additional assets for purchase in Houston and Atlanta.

Heather Gentry: In addition, we expect to receive approximately $83 million of sale proceeds now that the tenant under our Phoenix ground lease has exercised their purchase option, which we plan to utilize for reinvestment and debt reduction.

Heather Gentry: Moving to the balance sheet, during the third quarter we capitalized on a favorable market window for short-term interest rates, swapping the interest rate on 250 million dollars of our 300 million dollar term loan and approximately 83 million dollars of our trust preferred.

Heather Gentry: These actions increase the percentage of our debt that is fixed or swapped to approximately 94% for 2025 and 2026.

Heather Gentry: at a weighted average interest rate of 3.9 percent. We estimate the swaps were executed approximately 60 basis points below current levels.

Heather Gentry: Consistent with our goal of increasing our dividend annually, we announced this morning that our Board of Trustees authorized an annualized dividend increase of two cents per common share.

Heather Gentry: The newly declared common share dividend represents an increase of 3.8% over the prior dividend and will be paid in the first quarter of 2025.

Heather Gentry: As we look ahead, our focus remains on enhancing our internal growth profile through the lease-up of 4 million square feet available for lease.

Heather Gentry: and capturing the mark-to-market opportunities in our portfolio, with current rents that are estimated to be approximately 23% below market through 2029.

Heather Gentry: Finally, we published our 2023 Corporate Responsibility Report in October. The report emphasizes our continued focus on the resiliency of our portfolio and the enhancement of efficiencies and sustainability in our operations.

Heather Gentry: This included the completion of our first solar project, the completion of a greenhouse gas emissions inventory, and further green building certifications across our portfolio.

Heather Gentry: With that, I'll turn the call over to Brendan to discuss investment activity in more detail.

Brendan Mullinix: Thanks Will. During the quarter we continue to make progress on leasing our development portfolio with the lease of our 250,000 square foot facility in the Columbus market.

Brendan Mullinix: The full building was leased to a logistics provider servicing the data center space for five years, with 3.5% annual escalations, with the lease commencing on August 15th.

Heather Gentry: We estimate the stabilized cash yield to be 8.5%.

Heather Gentry: This is a great outcome given the recent completion of the project in the first quarter of 2024.

Heather Gentry: Investment activity during the quarter included a value-add opportunity within our portfolio at a 205,000 square foot industrial facility that we own in Port Orlando that was encumbered by a below market building lease and a ground lease.

Heather Gentry: We acquired the fee interest in 11.6 acres of land under the facility, along with a 146,000 square foot tenant constructed expansion on approximately 5.9 acres for $7.6 million.

Heather Gentry: Following the transaction, we own the fee interest in the entire 351,000 square foot expanded warehouse, subject to a short-term lease to the tenant that expires in May, providing us with flexibility to pursue a repositioning of the property.

Heather Gentry: On the sales side, we sold our 458,000-square-foot industrial facility in the Cleveland market for approximately $29 million during the quarter, and the 2.2 million-square-foot three-property portfolio in the Chicago market that we'll reference earlier for $137 million subsequent to quarter end.

Heather Gentry: These assets were sold in part due to a lack of scale and demographic and other considerations relating to these markets.

Heather Gentry: The average cap rate on these sales is approximately 6%.

Heather Gentry: Also following quarter end, we closed on an asset in Savannah and we anticipate closing on the acquisition of two buildings in Atlanta and a building in Houston shortly, further expanding our presence in these target markets.

Heather Gentry: Our aggregate investment in the four buildings is expected to be approximately $158 million.

Heather Gentry: at an average initial cash cap rate of 6%.

Heather Gentry: with average annual escalations of 3.6% and a weighted average lease term of 6.3 years.

Heather Gentry: All of the facilities are class A buildings with an average building size and age of approximately 294,000 square feet and two years respectively.

Heather Gentry: We are still very interested in build-to-suit opportunities, with our best prospects remaining on our current land bank in Phoenix, and acquisitions that are additive in the context of opportunistic capital recycling, to add to our holdings in our target markets in the Sun Belt and Lower Midwest.

Heather Gentry: Finally, the tenant that leases approximately 100 acres of our Phoenix land parcel has exercised their purchase option.

Heather Gentry: We expect this transaction to close before year-end, and our share of the sales proceeds will be approximately $83 million, or $60 million more than our original cost in just under a three-year hold period.

Heather Gentry: With that, I'll turn the call over to James to discuss leasing.

James Dudley: Thanks Brendan. The national industrial market continues to see vacancy rise with Cushman and Wakefield reporting a third quarter national vacancy rate of 6.4% up from 6.1% in the second quarter.

James Dudley: Once the remain development pipeline delivers, there is very little left behind it, which we believe indicates the market is approaching the top end in terms of vacancy rate.

James Dudley: Rent growth across our markets is currently in the low single digits. We continue to have significant embedded mark-to-market opportunity within the portfolio and have been able to successfully push rate on tenant renewals and second-generation leasing.

James Dudley: U.S. net absorption for the third quarter was 29.4 million square feet, down from over 46.3 million square feet in the second quarter. Downward pressure on the absorption number came predominantly from significant negative absorption from the California and northeastern U.S. markets.

James Dudley: In contrast, our top 10 markets reported a little over 25 million square feet of positive absorption in the third quarter, down slightly from 32 million square feet of net absorption in the second quarter, demonstrating the relative strength of our markets compared to the broader market.

James Dudley: While deals remain slow-moving, tenant activity in our markets continue to increase.

James Dudley: with tours and RFE traffic up significantly from the back end of 2023 and first quarter of 2024.

James Dudley: We continue to produce strong second generation leasing outcomes, further highlighting the quality of our assets as tenants use the softness of the market to look for newer Class A facilities with modern specs consistent with our portfolio attributes.

James Dudley: During the quarter, we addressed two 2024 lease expirations.

James Dudley: This included a 10-year renewal at 3.25% rental bumps at our 325,000 square foot property in the Baltimore, D.C. market, and a three-year lease renewal with 3.5% rental bumps at our 96,000 square foot facility in Indianapolis.

James Dudley: cash flow increases of approximately 15% and 35% respectively were achieved in these transactions.

James Dudley: Today, we've marked 2024 expirations of approximately 28%, excluding fixed-rate renewals, bringing tenant retention to approximately 94%.

James Dudley: We expect to produce cash flow increases of approximately 40% on the remaining 208,000 square feet in 2024.

James Dudley: Additionally, during the third quarter we replaced one of the tenants for 67,000 square feet in our 675,000 square foot multi-tenanted facility in the Nashville market.

James Dudley: The new tenant signed a five-year lease with 3.5% annual rental bumps which resulted in a 43% rental increase over the prior rent and a 50 basis point increase on the annual bumps.

James Dudley: We extended the lease term to 2029, which was originally a 2026 expiration.

James Dudley: Our portfolio is 93.2% leased at quarter end and 99.3% leased excluding first-generation vacancy. With that, I'll turn the call over to Beth to discuss financial results.

Beth Boulerice: Thanks, James. Total gross revenues in the third quarter were approximately $86 million, with property operating expenses of about $15 million, of which 91% was attributable to tenant reimbursement.

James Dudley: Third quarter adjusted company FFO was $0.16 per dilute common share or approximately $47 million.

James Dudley: We announced this morning we are tightening our 2024 Adjusted Company FFO to a new range of $0.63 to $0.64 per diluted common share.

James Dudley: ENA was approximately $11 million in the third quarter. As discussed on last quarter's call, we will have one-time charges in 2024 for employee severance costs.

James Dudley: We estimate these charges to be approximately $1.8 million, of which we recognize roughly $1.5 million in the third quarter.

James Dudley: We anticipate that these personnel reductions will result in annual cost savings of approximately $1.2 million moving forward.

James Dudley: Our 2024 GNA is still expected to be within a range of $39 to $41 million.

James Dudley: Our same-store portfolio was 99.2% leased at quarter end, and same-store NOI increased 5.4% in the third quarter when compared to the same period in 2023.

James Dudley: At quarter end, approximately 98.5% of our portfolio leases had escalations with an average annual rate of 2.7%.

James Dudley: During the quarter, we entered into four interest rate swap agreements. As a reminder, our current interest rate swap agreements on our $300 million term loan expire at the end of January 2025.

James Dudley: These new forward interest rate swaps are effective January 31, 2025, and fix the average interest rate at 4.31% on $250 million for two years, leaving $50 million of the $300 million term loan available for deleveraging.

James Dudley: Additionally, we swapped $82.5 million of our $129.1 million trust-preferred securities to fix the average interest rate at 5.2% from October 30, 2024 to October 30, 2027.

James Dudley: The combination of these transactions increased our fixed rate debt percentage for 2025 and 2026 from about 73% to approximately 94%, as well as reducing our future projected interest expense.

James Dudley: On last quarter's call, we estimated that the additional interest expense on the term loan would impact 2025 adjusted company FFO by approximately $0.02 per share.

James Dudley: The swap transactions during the quarter have mitigated this impact, and we now expect the increase in aggregate interest expense for the term loan and trust-preferred securities to be approximately a penny per share based on the latest SOFR curve.

James Dudley: We ended the quarter with net debt to adjusted EBITDA of 6.1 times. Our focus remains on progressing to the low end of our target leverage range of five to six times, and we expect we can reach this target over time through a combination of leasing vacancy and increasing rents.

James Dudley: At quarter end, our total consolidated debt outstanding was approximately $1.6 billion with a weighted average interest rate of 3.8% and a weighted average term to maturity of 5.7 years.

James Dudley: There was approximately $55 million of cash on the balance sheet at quarter end and our $600 million unsecured revolving credit facility was fully available. With that, I will turn the call back over to the operator who will conduct the question and answer portion of this call.

Speaker Change: Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. To withdraw any questions, please press star one again.

Speaker Change: Our first question comes from Todd Thomas from KeyBank. Please go ahead, your line is open.

Speaker Change: Hi, good morning. This is AJ on for Todd. I appreciate you guys taking my question. First off, just going back to Will's opening comments, would you just be able to provide a little bit more information regarding the Ocala full building user that you're in talks with? Are you still marketing that building elsewhere? And then any additional comments specifically around Greenville-Spartanburg and the Indy properties, perhaps quantifying the interest levels and any updates around timing would be helpful.

Speaker Change: Sure, no, we're still working with a tenant in Ocala and it's, you know, it's not unusual in this market for large leases to take a long time. So we are making progress. We feel like we're closer on that transaction than we were when we reported last time.

Speaker Change: The building is available for lease, of course, but we're continuing to work.

Speaker Change: with the same tenant there. And I think in Greenville, compared to when we reported last time,

Speaker Change: We're closer to having that building leased.

Speaker Change: Hard to say exactly what the timing would be. And in Indy, which was quite slow a few months ago, there's more activity now. So I think we're cautiously optimistic in each instance that we're making progress.

Speaker Change: Okay, that's helpful. And then real quick, just around the purchase option for the Phoenix land, if I'm not mistaken, that was for the 100 acre deal you did about two years ago with the data center operator. I think it was $5.2 million with 4% escalators. So I think that equates to about a six and a half cap. Is that correct? And then any update on the remaining 320 acres?

Speaker Change: Thank you. Thank you.

Speaker Change: It's about a six cash cap rate on the in-place rent on that ground lease.

Speaker Change: and then in terms of the balance of the site there, as I said in my prepared remarks

Speaker Change: We've been focused on Build-A-Suit inquiries at the site, and we've looked at a number of them. Unfortunately, Build-A-Suit is a little bit like other tenant decisions these days, and it's just taking a little bit longer, but there's been some good activity there.

Speaker Change: Okay, I appreciate that. And then lastly, just real quick, the subsequent to quarter end dispositions, what were the cap rates on those?

Speaker Change: The four assets that were sold

Speaker Change: the selling cap rate was 6%.

Speaker Change: All right, perfect. Thank you.

Speaker Change: Our next question comes from John Peterson from Jefferies. Please go ahead, your line is open. Great, thanks. Good morning, guys. So if we look at the lease expiration schedule in 25 and 26, can you give us any maybe guideposts to think about in terms of leasing spread expectations on renewals and if there's any move outs that we should be aware of?

Speaker Change: Morning, John. This is James.

Speaker Change: So, looking at 2025, we have two no move-outs. We've got a 124 and a...

Speaker Change: And then we had a tenant in the Richmond market that leases a million square feet from us that contracted. So they had a contractual option to contract one of the buildings.

Speaker Change: and that will take effect July 1st. So those are the two known move-outs. Now that we've gotten through the Mars lease, the remaining 2025 lease expirations are projected to be about 34% below market.

Speaker Change: And then looking to 2026, we have a pretty sizable role there, about 7 million square feet, 24 leases, and our projection there is about 24% below market.

Speaker Change: Okay, all right, that's great. And I'm sorry to do this to you, but you're the first read to report after the election results. So, you know, I guess, what are your thoughts? And I was thinking specifically about the trend of onshoring of manufacturing, which we've seen over the last couple of years, which you guys seem pretty well positioned for. Any knee-jerk reactions on what the election results mean for that trend specifically?

Speaker Change: I mean I think it's a little too early to say. I would say that the

Speaker Change: The history of governments undoing spending programs is not, you know, there's not a whole lot there that you can point to. There's a lot of spending in Republican congressional districts.

Speaker Change: So it might be that some of those government plans are revisited and amended. Maybe they'll require less regulatory scrutiny and things of that nature. But I still think that there's a focus in this country around supporting more manufacturing, and that's, I think, consistent inside both political parties.

Speaker Change: Great. Appreciate the color. Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Jim Kammert from Evercore. Please go ahead, your line is open.

Jim Kammert: Given the sales youíre posting at the quarter end, could you remind us what remains kind of in that non-core bucket? I think it was always discussed as six to seven assets, looks like youíve knocked out maybe four of them in totality. Is that kind of what the dollar range was left, please?

Speaker Change: Yeah, I think what we've said in previous calls...

Speaker Change: Jim is that in markets where we have a handful of assets with no plans to scale We you know from time to time if we can get if we can extract good value we will

Speaker Change: And those tend to be, you know, markets like we have a building in Kansas City, we've got one in Philadelphia, a couple in St. Louis.

Speaker Change: you know, so there's a handful of assets there that we may monetize over time, but we'll just you know, take it as it comes rather than trying to hang a dollar value on it, and it's really being driven by when we have a good alternate use of capital.

Speaker Change: So we've got a couple of assets that we expect to close shortly that will be a good fit with respect to using the capital that's coming out of that Manuka portfolio sale.

Speaker Change: That makes sense. And could you remind me what prevents you from retiring the Trust Preferred Securities? Obviously it's the most expensive sort of quote unquote debt in the cap stack.

Speaker Change: Well one thing is that it's it's still a long-dated maturity with you know a pretty good spread associated with it and it's extremely covenant light so it has it has value. We did take advantage of the opportunity to swap some of that.

Speaker Change: and reduce the cost quite a bit. And the reason why we left the 47 million floating was that we've had some on and off discussions that might lead to us retiring that at a discount to par. So I think if we can find a way to buy it in at a discount, you know, there's value in doing that, but otherwise I think we'll just leave it alone for now.

Speaker Change: Thank you.

Speaker Change: As a reminder, to ask a question, please press star followed by the number one on your telephone keypad.

Speaker Change: Our next question comes from Mitch Jermaine from Citizens JMP. Please go ahead. Your line is open.

Mitch Jermaine: Thank you. Well, just a little bit more clarity on the plan. You mentioned, obviously, growing exposures in the Sun Belt.

Mitch Jermaine: You've got about 20% of your rents outside, so is it sunbelt or is it market scale? How are you thinking about, you know, kind of the way that you want to kind of position the portfolio over time?

Speaker Change: Well, we're redeploying the capital from these sales specifically into the Sun Belt, but we still like the lower Midwest markets that we're in, and we would add to them. At the moment, we just had a better opportunity set in the Sun Belt.

Speaker Change: And I think the portfolio, you know, it's still going to skew that way. We're over 70% in the Sun Belt today, and that's still going to get a disproportionate share of capital allocation.

Speaker Change: Gotcha.

Speaker Change: James, any change in some of the sentiment toward the larger leases? Are you seeing any increasing activity? I know that you had suggested previously that, you know, those type of properties had a little bit of a slowdown in demand.

Speaker Change: I'm sorry, I'm sorry, I'm sorry, I'm sorry, I'm sorry

James Dudley: There's definitely been an increase in activity so you know speaking to our markets there have been large leases that have been signed recently in all in all the markets.

Speaker Change: that we had big box exposure in, which is good because we had had a period of time, particularly in Indy, where there hadn't been anything signed.

Speaker Change: And there's an expectation that there are several other deals right now in the Indy market that are probably going to get signed maybe in the fourth quarter, which would be good momentum.

Speaker Change: RFP traffic is up. We have active prospects, as Will mentioned earlier, on all three properties. So, cautiously optimistic, but things feel like they're moving in the right direction.

Speaker Change: Great, and I just, if you guys can just clarify, I think I missed the purchase price of those four assets, the Savannah and then the other three planned acquisitions, what is that purchase price?

Speaker Change: In the aggregate, it aggregates to $158 million. $158 million. And then you haven't talked about cap rate though, have you?

Speaker Change: In total, it's a six-cap rate. A six-cap rate. Thank you. Appreciate it.

Speaker Change: We have no further questions. I would like to turn the call back over to Will Eglin for closing remarks.

Will Eglin: Thanks, Operator, and thanks to all of you 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 the other members of Senior Management with any questions. Thanks again, and have a great day.

Speaker Change: This concludes today's conference call. Thank you for your participation. You may now disconnect.