LXP Industrial Trust (NYSE:LXP) Q4 2023 Earnings Call Transcript
LXP Industrial Trust (NYSE:LXP) Q4 2023 Earnings Call Transcript February 15, 2024
LXP Industrial Trust misses on earnings expectations. Reported EPS is $0.04 EPS, expectations were $0.17. LXP Industrial Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by and welcome to the LXP Industrial Trust Fourth Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder today’s call is being recorded. I will now like to hand today’s call over to Heather Gentry. Please go ahead.
Heather Gentry: Thank you, operator. Welcome to LXP Industrial Trust fourth quarter 2023 earnings conference call and webcast. The earnings release was distributed this morning and both the release and quarterly supplemental are available on our website at www.lxp.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 and expected results may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. LXP believes that these statements are based on reasonable assumptions. However, certain factors and risks, including those included in today’s earnings press release and those described in reports that LXP 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.
Except as required by law, LXP does not undertake a duty to update any forward-looking statements. In the earnings press release and quarterly supplemental disclosure package, LXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure. Any references in these documents to adjusted company FFO refer to adjusted company 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 LXP’s 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 fourth quarter results.
I will now turn the call over to Will.
Will Eglin: 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 based 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 expirations and anticipate that renewals will result in a 20% to 30% cash rental increase based on current market conditions.
Our two remaining office assets in Fort Mill, South Carolina are currently under contract for $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 markets 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, we'll have no debt maturing until 2027 and a proforma weighted average interest rate of 3.8% and a weighted average term of 6.5 years.
Approximately 7.2% 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 FFO of $0.70 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 FFO guidance we announced this morning in the range of $0.61 to $0.65 per diluted common share. The low end of our guidance assumes we don't lease 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 are strongly in our favor, including average annual fixed rental escalations of 2.6%, below market rents and occupancy gains in our development pipeline. Based on our estimate of current market rents, leases expiring through 2029 are 23% below market, which represents an increase of $36 million in initial annual cash rent or $0.12 per share. The stabilization of the 3.7 million square feet of non-leased development in our pipeline is also estimated to result in approximately $20 million of initial annual cash rent or $0.07 per share. Moreover, market dynamics such as lower new spec construction starts and potential interest rate declines offer 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 maximize our ability execute on accretive investments that further enhance revenue and shareholder value. With that, I'll turn the call over to Brendan to discuss our investments in more detail.
Brendan Mullinix: Thanks, Will. In 2023, we invested approximately $122 million on development projects, including $24 million in the fourth quarter. As of yearend, we have approximately $53 million left to fund in our remaining projects, excluding any partner promotes which we plan to fund with cash on hand. During the quarter, we began recognizing revenue for 1.4 million square feet of development projects that were placed into service. This included our approximately 1.1 million square foot development project in Columbus, in which we achieved a stabilized cash shield of 6.8% 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 488,000 square foot Phoenix facility into service and completed the core and shell build out of our 250,000 square foot development project in Columbus. With the completion of this build out, all of our spec development projects are core and shell complete. In 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 growth. Our plan is to continue reviewing build to suit-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.
James Dudley: Thanks Brendan. We had strong leasing volume in the quarter of 2.2 million square feet at base and cash based rental spreads of approximately 56% 41% respectively, excluding fixed renewals. Lease escalators continue to trend upward with the average escalator on leases signed in 2023 at 3.7% 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 5-year extension with 4% annual bumps at our 370,000 square foot facility in the Atlanta market, resulting in excellent base and cash based rental increases of 79% and 62%, respectively, over the prior rent.
Additionally, we executed a 10-year extension with 4% annual bumps at our 500,000 square foot facility in the Dallas market, achieving base and cash based rental increases of 58% and 32% respectively when compared to the previous rent. Our industrial stabilized portfolio was 100% leased at year end as we addressed our remaining vacancy during the fourth quarter. This included a 12-year lease with 3.5% bumps for the remaining 180,000 square feet at our Plant City, Florida facility and a 5-year lease with 3.75% bumps our approximately 258,000 square foot Houston facility. With that, I'll turn the call over to Beth to discuss financial results.
Beth Boulerice: 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 reimbursements. Our overall 2023 tenant reimbursement rate was approximately 94%. Fourth quarter adjusted company FFO was $0.17 per diluted common share or approximately $51 million. Fourth quarter G&A was $9.5 million bringing full year 2023 G&A to an approximately $36 million. We anticipate 2024 G&A to be within a range of $37 million to $39 million. Our same-store industrial portfolio was 100% leased at quarter end and same store industrial NOI increased 4.1% in the fourth quarter when compared to the same period in 2022. Full year industrial same-store NOI growth was also 4.1% when compared to full year 2022.
At year end, approximately 98% of our industrial portfolio leases had escalations with an average annual rate of 2.6%. With respect to 2024, we are expecting same store industrial NOI growth to be within a range of 3.5% to 4.5%, which considers a range of leasing assumptions. At quarter end, net debt to adjusted EBITDA was 6 times and our $600 million unsecured revolving credit facility was fully available. Our consolidated debt outstanding as approximately $1.8 billion at quarter end with a weighted average interest rate of 3.9% and a weighted average term to maturity of 5.8 years. Finally, 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.
Operator: Thank you. [Operator Instructions]. Your first question is from the line of Todd Thomas with KeyBanc Capital Markets.
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