Q4 2023 LXP Industrial Trust Earnings Call
Participants
Heather Gentry; Investor Relations; LXP Industrial Trust
Will Eglin
Brendan Mullinix
James Dudley; Executive Vice President, Director - Asset Management; LXP Industrial Trust
Beth Boulerice
Todd Thomas
Jim Kumar
Mitch Germain
Presentation
Operator
Yes, thank you for standing by, and welcome to the LXP Industrial Trust's Fourth Quarter Earnings Call and Webcast. (Operator Instructions) 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.
Heather Gentry
Thank you, operator, and welcome to LXP Industrial Trust Fourth Quarter 2023 Earnings Conference Call and Webcast. Our 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 8K. 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 actual results to differ materially from those expressed or implied by such statements, except as required by law, LSC does not undertake a duty to update any forward-looking statements in the earnings press release and quarterly supplemental disclosure package, Lexington 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 a total of approximately 16 billion, 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 from 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 at a pro forma 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 $0.7 per diluted common share was driven by strong leasing outcomes. The 2.6 million square feet of recent developments 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 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 or 23% below market, which represents an increase of 36 million in initial annual cash rent or $0.12 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 $0.07 per share for other market dynamics, such as lower new spec construction starts and potential interest rate declines off of 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 to execute on accretive investments to 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, well, in 2023, we invested approximately $122 million on development projects, including $24 million in the fourth quarter. As of year end, 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 yield 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, we're 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, our 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 leasings.
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.
James Dudley
Thanks, Brendan. We had strong leasing volume in the quarter of 2.2 million square feet and base and cash cash base rental spreads of approximately 56% and 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 five 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 90% 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 five year lease with 3.75% bumps at 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, Joe. 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 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 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 2020 for us, 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 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 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, we will conduct the question-and-answer portion of this call.
Question and Answer Session
Operator
(Operator Instructions) Todd Thomas with KeyBanc Capital.
Todd Thomas
Hi, thanks. Good morning. First question just around the guidance, Beth, it sounds like the low end of the guidance assumes no commencements and related to the development leasing during the year, how much leasing is assumed at the high end of the range? And then maybe for then, can you talk or expand a little bit on the leasing pipeline and just discussed, demand for and some of the larger spaces and the development projects in general.
Will Eglin
Good morning, Todd. Yes, so the low end has the three big boxes, not being leased all year. The high end has been coming in in some form in the fourth quarter.
James Dudley
It's either James. So just kind of elaborate on our leasing pipeline right now, all three of the big box facilities had activity down. 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 and in supplier competition, are you seeing any any change at all in market rents, and I'll take that.
Brendan Mullinix
This is Brendan. In terms of the the targeted returns that we're looking at for the balance of the unleased development pipeline, we're not changing our guidance from the 6 to 6.5 post promote that we've previously guided to.
James Dudley
And I guess I would just add, this is James again on the on the market rents thus far and market rents are holding. I mean, we are likely to see that there's going to be a little bit of a change in concessions or free rent more TI. on the first generation space. But as of right now, as we're reviewing opportunities, market rents seem to be holding.
Todd Thomas
Okay. All right. Great. Thank you.
Operator
(Operator Instructions) Camille, Bank of America.
Good morning. As we look across vacancy rates by size band, it's clear the concentration of supply risk is in the larger industrial buildings. Can you remind us how much of the moderating rental spread you disclosed for 2024 going from 42 to 20% to 30% is driven by where in-place rents are for those expiring leases versus the outlook for market bankers.
Brendan Mullinix
As this is Brendan, and I know a lot of it just has to do with mix. I don't know that it's necessarily a forecast for you. Our entire portfolio are the pipe Got it and just expanding on your earlier comments about market rents to clarify, that's on a gross basis, right? I know that the mark to market are you referring to?
No, I have it in the previous response? You mentioned like market rents are relatively flat. Is that just on a gross basis? And I mean that I was referring to the net rent Okay.
Thanks for clarifying that. And finally, how are you thinking about your capital allocation strategy when it comes to driving earnings growth? Just given stabilized development yields are tracking slightly below two in line with the implied cap rate of LXP. on 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 stalling a chair. So just how can you talk to how you're thinking about our income growth evolves in today's funding environment?
Brendan Mullinix
This is Brendan. And again, I'm yes, I 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 think in a range of 6.5 to 7 for initial going-in yields kind of depending on what the escalation structure and at least duration.
Operator
Jim Kumar, Evercore.
Jim Kumar
Good morning. Thank you a I apologize my notes. So it's my fault regarding that data center land or potential sale in Phoenix. Can you just review the history of that?
Again, my notes there is next up, it's my fault. And then I'm trying to think about if you were able to sell it in the latter part of this year, very nice embedded gains. Can you effectively shelter that by reinvesting in other assets. Thank you.
Brendan Mullinix
And this is Brendan. In terms of the history. So we acquired a roughly 420 acre site in late 2021 for about 101 million in the fourth quarter of 2022. 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 20. And with that with options, the ground leases 50 years on the initial cash rent on that ground lease of $5.2 million. So that was a great transaction for us to provide to in a relatively immediate a cash flow to the project and added a whole lot of value before any vertical construction began. The ground lease does include a purchase option on the second anniversary, which will be in the fourth quarter of this year. It's open for one year on and the tenant has has the opportunity explained in the prepared remarks to purchase for roughly $87 million. I'm sure there are a lot of factors that that user will consider and whether or not to exercise the option, I can add that they have begun their development of the site, so they are already investing there involve a substantial investment, whether or not they exercise that option on if they if they choose not to. We still have a very valuable ground lease there.
Jim Kumar
Very helpful. Thank you.
Operator
Mitch Germain, JMP Securities.
Mitch Germain
High-security automatic.
I just wanted to ask about the lease negotiations. Is it just the dynamic right now that taking longer to get to the finish line? Or is it the same kind of dynamic as before?
James Dudley
This is James. I would say that the duration from start to finish is definitely lengthened from 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.
Mitch Germain
Got it. And do you have any large move-outs expected in the coming quarters and nothing that's significant.
James Dudley
We do have three no move outs for 2020 for one one of which just happened, which was 118,000 square foot deal in Memphis. The tenant moved out the end of January we have another 320,000 square foot building in Columbus that the tenants moving out at the end of March. And then we have a 58,000 square foot tenant in the Dallas market that's moving out in October. That's on our list of known move-outs.
Mitch Germain
I've got it. Thank you. That's all.
Operator
(Operator Instructions) [Jessica Zang, Green Street].
Could you please expand on to what extent have concessions and TRS expanded in your markets versus pre-COVID versus the past couple of years?
Will Eglin
It's really hard to generalize because every situation is different, but whereas you might have been or use a big box, for example, where you might have been in the mid single digits on a TITI.s are creeping into low double digits. But again, it's difficult to generalize, every situation is different depending on the competition and that particular market situation.
Operator
Camille Bonanno.
Hi. Just one quick follow-up. Could you expand on what?
Will Eglin
Yes, occupancy and bad debt, a set of assumptions are baked in to your same-store NOI guidance.
So on on our same-store guidance, it's really leasing outcomes. There's no bad debt baked in there at this point.
Okay. Thanks for clarifying. That's it for me.
Operator
Yes, at this time, there are no further audio questions.
Will Eglin
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. In addition, as always, you may contact me or the other members of senior management with any questions. Thanks again for joining us today.
Operator
That concludes today's call, and thank you for joining and you may now disconnect your lines.
