LXP Industrial Trust

The speaker's remarks, there will be a question and answer session. To ask a question, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Heather Gentry, Investor Relations. Please go ahead.

Thank you, operator. Welcome to LXP Industrial Trust, first quarter of 2020 for 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. 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 are 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 measures. 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 positions, or cash flows. On today's call, Will Eglin, Chairman and CEO, Beth Fulleris, CFO, Brendan Mullinick, CIO, and Executive Vice President James Dudley will provide a recent business update and commentary on first quarter results. I will now turn the call over to Will.

Thanks, Heather. Good morning, everyone. First quarter results were consistent with our expectations, and we continue to focus our efforts on development leasing, marketing rents to market, and capitalizing on -to-suit investment opportunities while we manage towards lower leverage. After a slow start to the year, we leased approximately 1.6 million square feet after quarter end, and we anticipate continued strong second quarter volume with active lease renewal negotiations in process on approximately 1.4 million square feet. In addition, we are responding to RFPs or to further negotiation on approximately 1.3 million square feet in our development pipeline. This activity is promising, although there is no guarantee that any leases will be executed. Renewals continue to take longer to negotiate, partly due to the continued uncertainty in the macroeconomic environment and the disconnect between market rents versus tenants' perspectives on their bargaining power. Overall, we believe that we are in a position of negotiating strength due to our high-quality Class A properties that feature modern specs, including high clear height, ample dock doors, and auto and trailer parking spots, and easy access to highways, airports, and ports, all of which make our assets among the most desirable in our target market. As a result of second quarter leasing, we now expect our 2024 same-store NOI will be in the range of 4 to 5 percent, an increase from our previous range of 3.5 percent to 4.5 percent. On another positive note, our average annual escalators increased to 2.7 percent in the quarter, up from 2.6 percent. In addition to these contractual escalators, future earnings growth is supported by our estimates of below market rents through 2029 in our portfolio and the stabilization of our remaining spec development pipeline. Based on our current estimates of below market rents, as of quarter end, these -to-market outcomes are estimated to increase initial cash rent by $36 million, or 12 cents per share through 2029, while stabilization of the development pipeline is estimated to produce initial cash rent of $20 million, or 7 cents per share, as the developments lease up. On the investment side, during the quarter, we committed to an approximately 625,000 square foot build the suit project in Greenville, Spartanburg. This investment provides us the opportunity to recycle capital into a newly constructed asset in one of our target markets on a creative terms. The build the suit market is our main area of focus, and we will continue to pursue and act on growth opportunities that fit our investment criteria. Moving to the balance sheet, we have good liquidity and have effectively extended our maturities out to 2027. We ended the quarter at 6.1 times net debt to adjusted EBITDA, and we are focused on moving towards the low end of our target leverage range of five to six times, which will be driven by occupancy gains in our development pipeline and rent group. With that, I'll turn the call over to Brendan to discuss investment activity in more detail.

Thanks, Will. We invested approximately $25 million in the first quarter in development, with approximately $35 million left to fund in our remaining spec development projects, excluding any partner promotes, and $65 million in a build the suit project. We placed our approximately 488,000 square foot previously leased Phoenix facility into service during the quarter. The facility was leased for seven years with 4% average annual escalations at a starting rent of $9.60 per square foot and an estimated stabilized cash yield of 8.3%, excluding partner promote. We also completed the base building construction of our 250,000 square foot Columbus development project in January. We are currently in these negotiations on approximately 60,000 square feet at the facility and are responding to tenant interest for the balance of the building. On the investment side, with build the suit projects our primary focus, we are reviewing a number of projects in our target markets, including inquiries involving our Phoenix land bank. As Will mentioned, we committed to a build the suit project for an international auto parts manufacturer during the quarter on 59 acres in the Greenville Spartanburg market. For initial purchase price of approximately $74 million, had an estimated cash capitalization rate of 7.04%. The approximately 625,000 square foot cross-dock warehouse distribution facility will be built to modern specs, including 40 foot clear height. The facility can also be expanded by 174,000 square feet. We expect the project to complete late in the fourth quarter or first quarter of 2025. The initial lease term of 12 years with 3% annual escalators will commence at project completion. We expect capital needs for the project and any future build the suit projects to be funded with capital recycling proceeds, including our share of the $87 million of potential proceeds we are estimated to receive in the event the data center user that previously leased the 100 acre Phoenix land parcel exercises their option to purchase the land in the fourth quarter. With that, I'll turn the call over to James to discuss leasing.

Thanks, Brendan. Leasing volume was slow in the first quarter, mirroring the market dynamics currently taking place across the country. Nationally, the average vacancy rate was up quarter over quarter, with net absorption significantly down. Rent in our target markets continue to be higher than they were a year ago, but flat quarter over quarter. That said, the continuing decrease in new spec construction starts should help with the supply demand imbalance over time. We're also encouraged by the commentary across our markets that activity feels better as inquiries and tours pick up. In the first quarter, we finalized a three-year extension with 4% annual rental bumps for approximately 120,000 square feet at our 396,000 square foot facility in the Atlanta market, with a cash rental increase of approximately 28%. The remainder of the facility is currently leased through 2031. We had two notable leasing outcomes in the Memphis market after quarter end. This included a five-year extension with 3% annual bumps at our approximately 928,000 square foot facility at a cash rental increase of approximately 30%. Additionally, we executed a five-year renewal with .5% bumps at our 700,000 square foot facility for an estimated cash rental increase of approximately 25%. A portion of our remaining 2024 expirations and several of our 2025 lease expirations are included in the additional 1.4 million square feet currently in negotiations. We still expect our remaining 2024 expirations to produce a 20 to 30% cash rental increase based on our current market conditions. Our industrial stabilized portfolio was .5% leased at quarter end. The change versus the previous quarter is primarily attributable to approximately 2.1 million square feet of non-lease industrial development entering the stabilized portfolio pool. With that, I'll turn the call over to Beth to discuss financial results.

Thanks, Jane. First quarter revenue was $86 million with property operating expenses of about $15 million, of which 93% was attributable to tenant reimbursements. We produced adjusted company FFO of 16 cents per dilute common share, or approximately $49 million in the first quarter. GNA was $9.5 million in the first quarter. We have been focused on operating efficiencies, including shrinking our footprint in New York as we transition overhead costs to our Florida and Dallas offices. During the quarter, we subleased our approximately 20,000 square foot Penn 1 office space through March 2026. We expect rent expense to decline initially by approximately $600,000 annually and by roughly $1 million annually after March 2026. We now anticipate 2024 GNA will be within a range of $36.5 to $38.5 million. Our same store industrial portfolio was .2% lease at quarter end, and same store industrial NOI increased .5% in the first quarter when compared to the same period in 2023. Approximately 98% of our industrial portfolio leases had escalations with an average annual rate of 2.7%. At quarter end, net debt to adjusted EBITDA was 6.1 times, and our $600 million unsecured revolving credit facility was fully available. We're happy to report that Moody's removed their negative outlook from our credit rating, changing their outlook back to stable, and reaffirming our BAA2 rating. Our consolidated debt outstanding was approximately $1.8 billion at quarter end with a weighted average interest rate of .87% and a weighted average term to maturity of 5.5 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.

At this time, I would like to remind everyone in order to ask a question, simply press star, then the number one on your telephone keypad. Your first question is from the line of Todd Thomas with KeyBank. Please go ahead.

Hi, good morning. This is AJ on for Todd. I appreciate you guys taking my question. First off, maybe for James. So you placed the Florida and Indy Unleased Million Footers into service during the quarter. I just wanted to see if you could provide a bit of color around the interest specifically regarding those buildings and what you're seeing kind of on the ground regarding leasing.

Sure. So specific to those buildings, I mean, we've got some good activity in Florida right now. We'll see if it ultimately results in a deal, but we're hopeful that we're going to have something there soon. But you never know until you kind of get something done. On Indy, we've had a couple of really close calls. Indy's been really frustrating. There are a couple of tenants that are showing up in the market, one recently that decided to consolidate into Louisville instead of executing Indy. There's been activity, just unfortunately nothing really in that market of size has landed yet. And then I guess I would just, the commentary I put around just leasing in general, you know, we continue to renew tenants at a high cliff. We continue to push rents on renewals. I think the slowness in the market on those renewals is really around, you know, kind of Will's commentary about having to educate the tenants that the rent really has gone up and everyone's hearing that there's all this new supply. But if the supply isn't in your particular sub-market, then you still have a pretty hefty market to market that needs to happen. And it's just taking longer to convince the tenants that that's a reality and that they're going to have to pay a higher rent. You know, on the spec side where we do have some exposure to some of the markets where there's a lot more supply right now, you know, things are slow. And I do think that we and other landlords are going to have to get a little bit more aggressive as the deals do come along just because there aren't a lot of them in the hopper.

Okay, that's helpful. And then I guess a little bit more to that last point. So guidance last quarter that you guys had provided assumed at the low end that there was no lease up while the high end assumed that there was some lease up coming online in the fourth quarter. You maintained guidance, but you took up the same sort of NOI growth forecast. So how should we be thinking about the development assumptions? Should they remain the same or, you know, could you just provide a little bit more color on those?

Yeah, I think the development assumptions should remain the same. The same store is mostly driven by just some uncertainty around the renewals that we executed post quarter. There were a couple of really big ones that we weren't 100% sure that we were going to get renewed and now that we have them renewed, it allows us to tighten up the guidance.

Okay, that's helpful. Thank you.

Your next question comes from the line of John Peterson with Jeffries LLC. Please go ahead.

Oh, great. Thanks. Well, maybe I'm misunderstanding. I just wanted to follow up on that. So you increased the same store guidance overall. I guess why doesn't it flow through to a FFO increase? Is there an offset there, maybe higher interest expense with where rates are at?

Exactly, exactly, John. It's interest expense and it's also the development deals that have been placed into service that have come online. They're not in the same store pool yet.

Got it. Can you talk about the tenant types that you're seeing interest in some of the development, Lisa, but maybe even just more broadly in the portfolio? Is the type of tenants that are out in the market right now different than maybe what you expected when these developments were started a year or so ago?

I don't know that it's different than what we expected. Certainly there's a big e-commerce tenant that pops up, you know, in different markets. And then there are some 3PLs that kind of follow along with them. I mean, Phoenix is a good example where that tenant took down some space and their 3PL is probably going to take down another big piece of space. Continue to see food and beverage, you know, construction. So it's still pretty broad, also just major retailers. So it continues to be a broad look. It's really about, you know, getting these deals across the finish line in some of these markets and hopefully creating some momentum.

Got it. And I'm just curious, on the leverage, maybe Beth, what will that pro forma leverage move to once these developments are leased up? And then where does that put you relative to your long-term targets?

Yeah, once they get leased up, we're projecting we'll be down into the mid-five range. And it's right in the middle of our range of five to six times where we're

comfortable. Got it. Oh, one other question for me. I noticed on the press release that the location of the company is now West Palm Beach, Florida. Is there any relocation costs that are going into GNA or anything we should think about from that?

No. And in fact, there's going to, you know, be some savings with us subleasing our New York office space.

Okay. All right. Great. Thank you. Thanks, John.

Your next question is from the line of Vince Tibone with Green Street. Please go ahead.

Hi. Good morning. Could you discuss your current yield expectations for the five unlapped speculative projects and how these have changed, if at all, since the beginning of the year?

Yeah. With regard to those unleased development assets and the pipeline, we're not changing our guidance from the six to six and a half after promote that we've guided to previously. You know, while the recent lease outcomes have exceeded that in Columbus and in Phoenix, there's a little less visibility at the moment for a couple of the larger to be stabilized buildings. So we're going to keep that six

to six and a half. Okay, great. And then kind of a follow up related to that. How are owners of competitive spec projects in the markets where you're developing, behaving? Like, are you starting to see others, you know, reduce face rent or offer elevated concessions to try to lease up faster? If you could just touch on some of the kind of competitive dynamics or even how many buildings you think you're competing with in certain markets would be would be interesting.

It varies from owner to owner. Yeah, we certainly have seen some other owners get a little bit more aggressive, I would say specifically in Indy, as I mentioned before, with the tenants that were there, there was a process that was run that went from basically 13 options down to six before the tenant decided to go to Lowell. But yeah, we saw some some aggressive rents there. And we also I would say more so it's concessions right now. You're definitely seeing more free rent being offered. You're seeing higher TIs being offered. So, yeah, there is some compression on the rent. I would say that it's more concessions. And I think we're going to continue to see that because as this goes on longer and building to take and people are going to want to become more aggressive to try to get their buildings leased.

No, I think, I guess this last one is how do you guys respond in that environment? Do you think, you know, there's an advantage to cutting rent as well? I mean, you mentioned your yield expectations are unchanged. Like, how do you how do you guys plan to approach this environment where others may be trying to just cut rent to get tenants on an effective basis? So how do you guys plan to kind of respond or handle that situation?

We play to an extent, but we also feel like in all three of our large building markets that we have the best asset. We have some physical attributes and indeed that we think are superior to our competition with a private drive and truck court where the only ones that have all concrete truck courts, you know, because we're a long term owner with our development partners, we do things a little bit differently than some of our competition. So we do think that we have some advantages in that regard. In Greenville, we've got the best location and really what we believe to be the only class a park and similar in Ocala. So we don't feel like we have to go as low as maybe some of our competition because we have some attributes that prospective tenants want. But yeah, I mean, if we want to play, we are going to have to get aggressive relative to what, you know, what's going on in the market.

Julia Bacolor, thank you.

Thanks, Vince. Once again, if you would like to ask a question, please press star one on your telephone keypad. Your next question is from a line of Camille Baumel with Bank of America. Please go ahead.

Good morning. Every week, something new on the geopolitical front pops up, adding to supply chain disruption. So can you speak to what tenants are saying in terms of how they're thinking about dealing with this and managing inventory levels, facing these risks?

Hey, Camille, I think there has been a change. Well, one, I think the supply chain is still resilient. You're right. There have been some disruptions that have slowed things and certainly caused tenants to take pause and think about their supply chain. But what we're hearing from tenants are that they're moving forward with taking down additional space, trying to get closer to the consumer, maybe moving away from the safety stock that we kind of heard through COVID. But that's really what the commentary is, is continuing to move forward with shoring up the supply chain by getting closer to consumers.

OK, and Amazon has been getting more active in the market. That's been pretty interesting. Have you had any recent conversations with them and have a sense of the type of space requirements they're looking at, whether that be size or type of distribution strategy that they're focused on?

It ties into what I what I just said about the broader market. They seem to be pursuing more regional distribution centers to shore up their proximity to consumer so that they can do more of the same day type delivery. But yeah, they've been in the market with a couple of different requirements, some smaller and some of the larger variety.

That's helpful. And just finally, data centers still quite a hot topic. Outside of Phoenix, do you see any other opportunities in your land bank?

This is Brendan. The best potential opportunity would be in Phoenix in terms of our holdings. I would note our target and core markets. Columbus is another market that's been very active for data centers as well.

Thank you. And at this time, there are no further questions. I will now turn the call back over to Mr. Will Egland for closing remarks.

Well, thanks to all of you for joining our call this morning. Please visit our Web site or contact Heather Gentry if you'd like to receive our quarterly materials. And in addition, as always, you may contact me or the other members of our senior management team with any questions. Thanks again and have a great day.

This concludes the LXP Industrial Trust First Quarter 2024 earnings call and a webcast. Thank you for joining. You may now disconnect.