LXP Industrial Trust Q2 FY2024 earnings call

• Robust leasing activity in Q2 with 2.7 million sq ft leased, base and cash rent increases.
• Successfully completed portfolio transformation by selling remaining office assets, positioning as a pure play industrial REIT.
• Raised same-store NOI growth expectations to 4.5%-5.5%.
• Strong mark-to-market outcomes on expiring leases, with 88% of facilities being Class A.
• Balance sheet ended at 6.2 times net debt to adjusted EBITDA, focusing on reducing leverage to 5-6 times.
• Exploring asset sales in non-target markets for leverage reduction or liquidity.
• Development portfolio: $35M invested in spec and build-to-suit, 60% of developed square footage leased, 1.7M sq ft in leasing pipeline.
• Strong leasing outcomes including significant rent increases in renewals and new leases, e.g., 63% increase in rent for Mars lease in Atlanta.

LXP Industrial Trust had excellent second quarter results. They sold their remaining consolidated office assets, becoming a pure play industrial REIT. Leasing activity in the second quarter saw 2.7 million square feet leased with base and cash base rental increases of 44.5% and 44% respectively. Same-store NOI growth was 5% and was revised to a new range of 4.5% to 5.5%. 88% of the portfolio consists of Class A facilities.

• Raised same-store NOI growth expectation to 4.5%-5.5%.
• Focus on reducing leverage to 5-6 times via leasing, rent increases, and potential asset sales.
• Estimate current rents 24% below market through 2029, with 4.1M sq ft available for lease.
• Explore external growth including build-to-suit projects.

• Market conditions affecting rental increases.
• Interest rate changes impacting interest expense.
• Challenges in renewing leases at favorable terms during lease expirations.
• Uncertainty in asset sale outcomes and market reactions.

Q: Thank you. Good morning. First question, I just wanted to get into the development leasing pipeline a bit more. I think you mentioned 1.7 million square feet of leasing in the pipeline. And just maybe can you go over again how much of that do you think relates to some of the developments that have been delivered already and just prospect of leasing up some of these large million square footers?

A: James Dudley: Tony, it's James. So just -- I'll just run through the portfolio and kind of where we stand. So I think we've talked about Ocala for a while. We continue to be close on Ocala with a prospective tenant that would take the entire facility. We also have another identified tenant for our 250 in Aetna, and we think we're close on getting a deal done there. We've responded to a couple of full building RFPs on our Indianapolis facility. And then we have a partial building user that's looking at our South Shore Tampa facility. And then a couple of partial building users that have inquired about Greenville/Spartanburg. So, I would say we're in a good spot on Ocala and Columbus right now and a little further away from having certainty on the others.

Q: Okay. And just any comments on just where you think yields will end up on those given what you're seeing and where the rents being discussed are?

A: Brendan Mullinix: Yes. We're maintaining the prior guidance of 6% to 6.5% that we've previously guided to.

Q: And then just one other question, maybe Beth. I think your same-store NOI guidance was 4% to 5% previously. Just wondering if that's still kind of the number, if there's any changes there for the year?

A: Beth Boulerice: Yes, we've upped the guidance, Tony, to 4.5% to 5.5%.

Q: Hi, thanks. First question, Beth. You mentioned the $39 million to $41 million G&A guidance for ’24 that’s higher by $3 million, I believe, from the prior G&A guidance. I just wanted to clarify is that all as included in adjusted company FFO, it sounded like a portion was one-time in nature. I just wasn't sure I heard the comments there, can you clarify.

A: Beth Boulerice: Yes. So the severance charges of $1.7 million are going to be a one-time so they won't be an adjusted company FFO. The range I had last -- the range we said last time was $36.5 million to $38.5 million. So now we're saying $39 million to $41 million, so it's not quite $3 million, but less than that. It's really due to all of our leasing that we've done and the great outcomes that we've had in our spreads and being able to capture that GAAP rent, it's really the motivator for that.

Q: Hi, good morning. So the team has done a lot to term out and manage the floating rate exposure. But as Beth, you highlighted in your opening remarks, interest expense will still be a drag to the bottom line earnings growth. And when you look at the pace of stabilizing your development asset, it seems like we're still a few quarters away, which implies further drag on 2025. So I'm wondering what your thoughts are on that and what you can do to improve this outlook while balancing potential dilution from your asset sales? Thank you.

A: Beth Boulerice: Well, we're exploring different opportunities for the term loan. Right now, it's at 2.72% with the swaps that are in place right now. We're looking at potentially some fixed rate, maybe a potential bond offering or swapping today for some of that exposure. We're also -- potentially, we may pay down a portion of it as well. And so going forward, you're right. Interest expense is going to be higher by about $0.02, as I mentioned in our remarks.

Q: And as you explore those considerations in light of where your stock is trading today, which does seem much closer to NAV relative to peers. Just wondering how you're thinking about potential equity raises as a source of capital maybe to address capital requirement needs or investment opportunity.

A: Will Eglin: Well, we are very pleased that the shares have performed well recently, but we're focused on what things that we can achieve that can improve the share value even more. And obviously, making more progress on stabilizing the development pipeline would be top of the list. So things are certainly better from a cost of capital standpoint, but our focus is on, as I said, working in the portfolio, producing better leasing outcomes and improving our valuation further.

Q: I know Will, did I miss it? Did you quantify maybe the potential sales that you would consider in terms of dollars and maybe you don't want to tilt your hand but a range of cap rates? The non-core assets that you're thinking?

A: Will Eglin: No. I mean I would think that what we have in the market right now is sort of more than $100 million, but less than $150 million. And as Brendan was saying, cap rates for this sort of asset or arguably in the 5.75% to 6% area, that sort of space which is better than it has been, and those cap rates are certainly lower than our floating rate borrowing cost right now, although over time, it's certainly possible that so or we go down.

Q: On Ocala and Columbus, are you guys able to -- can you give us like the annual like run rate FFO upside from leasing those two properties? Like how should we think about quantifying that since that seems to be the most likely upside in the near term?

A: Beth Boulerice: It’s about $0.03.

Q: Okay. And then on Ocala, because I think that's the one we've been talking about the longest here, can you characterize how the negotiations have evolved there? Is it just waiting for the potential tenant to sign the dotted line or is there a lot of back and forth on terms and that's what's holding it up?

A: Brendan Mullinix: It's just waiting on the tenant at this point. Their internal process is incredibly long and we're working through it and we're trying to be patient, but hopefully we're going to have something done soon. I know we've been saying that for a couple of months now, but it continues to move in the right direction, just at a very slow pace.