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spk00: Good day. My name is Chantelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the LXP Industrial Trust third quarter 2022 earnings conference call and webcast. As a reminder, today's conference call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star 1 again. Thank you. Heather Gentry, you may begin your conference.
spk04: Thank you, operator.
spk06: Welcome to LXP Industrial Trust third quarter 2022 conference column webcast. The earnings release was distributed this morning, and both the release and quarterly supplemental are available on our website. at www.lxt.com in the investor 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 LXC files with the SEC from time to time, could cause LXC's actual results to differ materially from those expressed or implied by such statements. Except as required by law, LXC does not undertake a duty to update any forward-looking statements. In the earnings press release and quarterly supplemental disclosure package, LXC has reconciled all non-GAAP financial measures to the most directly comparable gap measure. 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. 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 Eglem, Chairman and CEO, Beth Bulleris, CFO, Brendan Mullenix, 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.
spk02: Thanks, Heather. Good morning, everyone. We delivered solid third quarter results as our team continues to execute our prudent disposition and investment strategies. to enhance our portfolio and drive strong leasing and rental growth. Our industrial portfolio continues to perform well with quarterly same store NOI growth of 6.2%. Additionally, our weighted average lease term of 6.4 years, investment grade tenancy of 59.1%, average building age of 8.6 years, and functional utility of our industrial assets provides us with stability and valuable defensive attributes. We are confident in our ability to continue to build on our momentum to drive strong financial performance and enhance shareholder value as we capitalize on leasing and releasing opportunities and advance our development pipeline. Asset sales for the quarter totaled $92 million at weighted average gap and cash cap rates of 5.4% and 5.1% respectively. We are in the home stretch for dispositions in our office and other assets portfolio with two properties sold during the quarter, one subsequent to quarter end, and an additional five currently targeted to be sold by year end or first quarter 2023. Subsequent to quarter end, we sold the Parachute Colorado asset in our DK office joint venture, and we are working on other sales in this portfolio. After selling our remaining two Louisiana industrial assets in the second quarter, we sold one industrial asset in the third quarter, which marked our departure from Oregon. These sales are consistent with our strategy to dispose of industrial assets in non-core markets that do not fit our growth priorities. This plan is primarily focused on industrial assets in St. Louis, Cleveland, Kansas City, Philadelphia, and Detroit, consisting of eight buildings with estimated NOI of $19.3 million. We expect proceeds from sales will be used to fund development, invest in our target markets, and to retire debt. Development funding in our ongoing six projects was roughly $71 million in the quarter. We substantially completed our 1.1 million square foot project in Aetna, Ohio in the third quarter, and subsequent to quarter end, We leased 100 acres of land at our Wolf Farm site in Phoenix. Our remaining projects are estimated for substantial completion by the end of this year through second quarter of 2023. We continue to produce strong leasing performance with 270,000 square feet leased during the quarter at high industrial base and cash base rental spreads of 47% and 41% respectively. Year-to-date base and cash-based rents on new and extended industrial leases increased approximately 31% and 26% respectively, with average annual escalations of 3.4% on 4 million square feet of leasing volume. Our leasing outlook remains positive for next year, and we believe we continue to have a very good mark-to-market opportunity ahead of us. We returned capital to shareholders during the quarter, through the repurchase of 5.6 million common shares at an average price of $10.16 per share. Year-to-date, we've returned a total of $131 million to shareholders via share repurchase activity. Going forward, share repurchases will be considered in the context of maintaining leverage within our target range of six to seven times net debt to adjusted EBITDA and development funding needs. Leverage increased during the quarter but is expected to decline when proceeds of our forward equity are utilized at year end to reduce debt levels. We also announced this morning that our Board of Trustees authorized a quarterly dividend increase that reflects the strength of our operations. The new declared quarterly common share dividend, which will be paid in the first quarter of 2023, will be 12.5 cents per share representing an increase of approximately 4.2% over the prior quarterly dividend. On the ESG front, we're pleased to have published our second corporate responsibility report in October, which includes a comprehensive overview of the significant progress we are making on our ESG and R initiatives and strategies. A commitment to ESG is core to who we are at LXP, and we are dedicated to continuing to advance our initiatives and enhance our policies and practices to help our tenants create a more sustainable future, to embrace diversity and inclusion on our team and in our communities, and to foster a culture that supports and empowers our employees. In recognition of our progress to date, we received a score of A for public disclosure reporting above the global average in this year's GRESB real estate assessment and increased our overall score relative to last year. We also remain committed to best in class governance practices, including ensuring we have the right board structure to continue to oversee the execution of our strategy and maximize value for shareholders. In addition to refreshing our board with seven new independent members since 2015, our nominating committee recently adopted a resolution to recommend Jamie Handwerker as the next lead trustee in May 2023. when our current lead trustee, Richard Frary, steps down. In summary, we believe the industrial sector continues to perform well despite valuations that have been impacted by higher interest rates and financial market conditions. While our portfolio value is not immune to these effects, so far we have seen little softening in tenant demand. We remain very focused on our development initiatives as well as leasing existing vacancy, stabilizing our development projects, maintaining high levels of occupancy, and raising rents. With that, I'll turn the call over to Brendan to discuss investments in more detail.
spk10: Thanks, Will. Total 2022 development spend on the six ongoing projects through the third quarter is approximately $192 million, and we anticipate an additional $56 million to be funded by the year end. Our Aetna Ohio development project that reached substantial completion on September 30th resides in a prime location in the East Columbus Submarket, right off I-70, and spans 1.1 million square feet. This Class A warehouse distribution facility features modern specs, including a 40-foot clear height. We have experienced a good deal of tenant interest since the project's completion, and we are hopeful a full building user will occupy the space in the coming months. We also expect to deliver our Ocala and Indianapolis projects, along with the previously leased buildings at our Greenville Spartanburg three property project by year end. Also subsequent to quarter end, we entered into a 20 year ground lease with a data center user for approximately 100 acres at our 420 acre Wolf Farms land parcel in Phoenix. Initial annual ground rent for these approximately 100 acres is estimated to be $5.2 million with 4% annual rental increases. This is a great outcome, as approximately 25% of the site is already expected to produce an initial 5.2% annual return on our original $101 million purchase. The lease includes options to extend for up to an additional 30 years, as well as a purchase option after two years for $20 a square foot, a significant appreciation in asset value when compared to the $5.50 per square foot we paid for the land in December 2021. We continue to work on our development plans for additional projects at the site where user interest remains quite strong. Looking ahead to 2023, we anticipate development spend for our ongoing six development projects will be approximately $113 million, excluding partner promotes. With that, I'll turn the call over to James to discuss leasing.
spk13: Thanks, Brendan. In general, tenant demand remains positive despite pockets of softening in certain markets due to some supply, demand, and balances. More specifically, rent growth in our target markets grew on average 25% year-over-year through the third quarter. We currently estimate our industrial portfolios and place leases to be approximately 20% below market based on independent brokers' estimates, presenting us with significant future mark-to-market opportunities. In fact, Our industrial portfolio cash rents today are forecasted to grow on average 43% for lease expirations through 2028, or 33% when adjusted for rent escalations based on independent broker estimates. Our mark-to-market opportunity underscores our successful portfolio strategy to grow in key markets with high-quality assets that are likely to attract strong tenant interest. Vacancy remains low in our stabilized industrial portfolio, with occupancy of 99.4%, representing a slight increase when compared to last quarter. For the remainder of 2022 and into 2023, we intend to focus on leasing our small amount of existing vacancy, as well as stabilizing our development portfolio. With respect to the remaining 2023 expirations, we expect expiring rents to increase within a range of 40% to 50% based on current negotiations and third-party broker estimates. Notable industrial leasing activity during the quarter included a second-generation, three-year extension with 3.8% bumps on an early 2023 expiration in Tampa, Florida, resulting in a 41% cash rental increase, as well as a new lease for the remaining 36,274 square feet of space in our Lakeland, Florida facility for five years. This lease resulted in a starting rent of $7 a square foot, approximately 35% above our original underwriting assumptions, with annual bumps of 4%. Subsequent to quarter end, we had successful leasing outcomes for an existing lease and a new lease on vacant space. In our 510,000 square foot industrial facility in Dallas, Texas, we extended a 2023 expiration for three years with 4% annual rent bumps and increased the rent by 43% over the prior term's cash-based rent. We also leased 81,000 square feet at our 211,000 square foot industrial facility in Greer, South Carolina, for just over five years, bringing the building to full occupancy. The starting rental rate of $6.25 is roughly 17% above our original underwriting assumptions, and the 4% annual rent bumps are very attractive. We continue to receive indications of interest and field RFPs for our development portfolio, and we will continue to provide updates as this activity progresses. With that, I'll turn the call over to Beth to discuss financial results.
spk07: Thanks, James. Third quarter revenue was approximately $80 million with property operating expenses of $14 million, of which 85% was attributable to tenant reimbursement. Adjusted company FFO for the quarter was approximately $48 million for 17 cents per diluted common share. We announced this morning that we are tightening our 2022 guidance range to 65 to 68 cents per diluted share by raising the low end by a penny per share. DNA in the quarter was approximately $9 million, and we expect our 2022 GNA to be within a range of $35 to $37 million, excluding certain advisory costs. Our same-store industrial portfolio was 99.8% leased at quarter end, and our same-store industrial NOI grew 6.2% quarter over quarter and 5.3% year-to-date. We are increasing our 2022 industrial same-store NOI growth guidance by 75 basis points at the midpoint to a range of 5 to 5.5%. At quarter end, approximately 96.5% of our industrial portfolio leases had escalation with an average annual rate of 2.4%. The majority of our office portfolio remains held for sale as of September 30th with the aggregate market value for these properties now estimated to be within a range of 95 to $105 million and forecasted 2022 NOI of approximately $11 million. Net debt to adjusted EBITDA at quarter end was 7.1 times, which we expected to climb by year end in conjunction with the maturity of the forward equity contracts. Had we settled the contracts at quarter end, our net debt to adjusted EBITDA would have been 6.3 times. As of September 30th, we had an aggregate of $182.1 million under unsettled forward common share sale contract, which we intend to settle at contract maturity in December. At quarter end, our unsecured NOI was over 93% of our total NOI. We currently have $450 million of borrowing capacity available under our unsecured revolving credit facility. During the quarter, we amended our unsecured credit facility, extending the maturity of the revolving portion out to July 2026 for added balance sheet flexibility and improved the terms for applicable margin and debt covenant calculation. Consolidated debt outstanding at quarter end was approximately $1.6 billion, with over 84% of this debt fixed. Total consolidated debt had a weighted average interest rate of 3.1% and a weighted average term to maturity of 6.5 years at quarter end, continuing to keep us well protected against rising rates. With that, I'll turn the call back over to Will.
spk02: Thanks, Beth. I will now turn the call over to the operator who will conduct the question and answer portion of this call.
spk00: At this time, I would like to remind everyone to ask a question, please press star 1. We'll pause for just a moment to compile a Q&A roster.
spk04: Again, if you would like to ask a question, please press star 1.
spk00: Our first question comes from James Allen Villard with Lattenburg and Salmon. Your line is open.
spk03: Good morning, guys. Good morning. Yeah. Can you give us some more color on the 100 acres in Phoenix that you rented subsequent to quarter end?
spk09: Sure. Sure.
spk11: As I indicated in the prepared remarks, it's 100 acres. that we ground lease to a data center operator who plans to develop a data center park on that portion of the site. The lease has an initial term of 20 years, and there are extension options for 30 years beyond that. Okay. That's helpful.
spk03: Yeah, just kind of big picture, how are you balancing stock repurchases versus deleveraging And would the trust preferred be a potential target for deleveraging activity?
spk02: Yeah, as I said, one of the things that we're monitoring is just making sure that we're keeping our overall leverage within that six to seven times area. You know, buyback has been a good use of capital this year compared to acquisitions. You know, our funding needs for our projects underway at the moment aren't huge next year, but we want to have capital available to exploit opportunity in the land bank, you know, especially Wolf Farms, you know, where we had a great outcome on that land lease that Brendan was just talking about, but we want to have capital available to build as well. And, you know, the trust preferred is... Interesting, because that's the sort of principle piece of our floating rate exposure, but it's roughly a 15-year maturity. So, you know, while it would be, from a deleveraging standpoint, I guess the highest return, you sort of have to balance that, you know, compared to the shorter maturities in 2024 and 2025. That's kind of helpful. That's helpful.
spk03: Kind of just bigger picture, what are you seeing in the acquisition and the disposition market today and kind of how are you thinking about it going into 2023?
spk11: Well, just broadly speaking, the transaction market continues to be really slow. And there's a lot of price discovery in the market that began with the spike in inflation expectation and rising interest rates. So that market is pretty tough to peg today. In terms of our own activity today and how we're looking at capital allocation presently, we're really, as we've said before, focused on our ongoing development pipeline and future opportunities in our existing land banks. So we're not presently active in the acquisition market, although we're monitoring it.
spk02: And on the disposition side, we mentioned in the comments that we have some properties in markets where we have just one or two buildings that we'll look at as sources of liquidity to keep our revolver balances low next year. And we can't give pricing information there yet, but I will say that we've got the two Michigan assets in the market, and there's very strong investor interest.
spk03: That is helpful. That's it for me. Thanks.
spk02: Thank you.
spk04: Again, if you would like to ask a question, please press star 1.
spk00: There are no further questions at this time, and I'll turn the call back over to Will Eggman. We have one more question from John Peterson with Jeffries. Your line is open.
spk08: Great, thanks. Got in just in time. So on the, I guess on the development portfolio, you know, I know you've got a decent amount that still needs some pre-leasing. It seems like demand for industrial still remains strong. But, I mean, anything you're seeing in the macro environment that might be, you know, slowing down kind of the potential to lease some of those developments, has expected yields changed at all just given everything that's been going on in the world?
spk09: Yeah, why don't I jump in?
spk11: Sure, J.D., if you want to talk about the demand side from users, why don't you start with that?
spk13: Okay. You know, so there's still quite a bit of demand in all of our markets. You know, we're tracking north of 10 million in every one of our development markets and in 20 and some. I will say the user demand has maybe slowed a little bit just from a decision-making perspective. It seems like maybe there's not as much pre-leasing right now, and users are taking a little bit more time to make their decisions. And it does seem like it's softer, but I just would point out that that's relative to record-setting year last year, and that this year still seems to be on track to be the second highest net absorption year in history. So, though it feels softer, it's softer relative to what it was last year, and I do think that there's still significant demand in the market and that we're going to have positive outcomes.
spk09: So, there may be a little bit of downtime to lease them versus releasing.
spk11: And then in regard to your question on yield, I do think that there may be opportunities for our projects to exceed our past yield expectations just as a result of market rent growth that has occurred during the development process of these buildings, as well as, as you're aware, we do develop in joint venture and with rising exit cap rates that the partner promotes are very sensitive to that. So between some market rent growth and higher exit cap rates, lower promotes or after promote yield, I think there's good, there are opportunities there to exceed our prior guidance on yield.
spk09: Okay. All right. That's helpful.
spk08: And then on the office sales and I know the prior uh, you know, indications where to get it done by year end. I think you indicated it, you know, some of that might be pushed into the first quarter of next year. I mean, can you pull back the curtain a little bit? I mean, it's there, there've been a lot of retraining, like if we've been close to selling some of these buildings and then, you know, obviously the debt markets move and, and, and some of these deals fall through, like, can you give us a little more context on how, I think the CAE property in New Jersey, which has the longest lease has been the one that's been most sensitive to debt market conditions.
spk02: You know, the two other big components of value are, you know, the Wells Fargo facilities and 1701 Market Street where we're working with buyers. We just don't have them under contract with nonrefundable deposits yet. So we're making progress. You know, unfortunately, it has become just a more challenging market to transact in. Okay.
spk08: And I apologize if I missed this, but did you indicate what the mark to market is on your portfolio right now?
spk09: 20% at the moment. Is that GAAP or cash? Cash. Cash. Okay. Great. Okay. That's all for me. Thank you.
spk02: Thank you, John.
spk00: Our next question comes from Camille Bonnell with Bank of America. Your line is open.
spk01: Hi. Good morning. I see over the past few years you've been shifting the weighted average lease term to shorter durations. Could you just comment on what you see as an appropriate level for the portfolio and how the lease terms in your leasing pipeline are trending?
spk02: Sure. I think weighted average lease term has been trending shorter and will continue to do so. I think if it makes it to five years, that's about the right balance between short-term leasing opportunity and longer-term stability of cash flow. And in terms of leasing on rollover, sometimes we get sort of three- to five-year extensions. Often on new construction, tenants are making significant investments in those facilities and are negotiating for more term. So it's a little bit hard to predict. We just try to make the most of every negotiation to do what's right for each asset.
spk01: Okay. And just final question for me. In your opening remarks, you commented on higher lease escalators signed on new leases. Could you comment what it is on a portfolio level?
spk02: Sure. We're at about 2.4% at the moment. On leases that we completed this year, we had 3.4% on about 4 million feet. And we have signed some recent leases with 4% escalators. So that's still continuing to move in our favor overall.
spk01: Okay. Thank you for taking my questions.
spk02: Great. Thank you.
spk04: Again, if you would like to ask a question, please press star 1.
spk00: There are no further questions at this time. I now turn the call back over to Will Eglin for closing remarks.
spk02: Well, once again, we thank you for joining us this morning, and we encourage you to 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 any other member of our senior management team with any questions. Thanks again, and have a great day.
spk00: This concludes this conference call. You may now disconnect.
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