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LXP Industrial Belief (NYSE:LXP) Q2 2024 Earnings Convention Name July 31, 2024 8:30 AM ET
Firm Members
Heather Gentry – IR
Will Eglin – CEO
Brendan Mullinix – CIO
James Dudley – EVP
Beth Boulerice – CFO
Convention Name Members
Anthony Paolone – JPMorgan
Todd Thomas – KeyBanc Capital Markets
Mitch Germain – Residents JMP
Camille Bonnel – Financial institution of America
James Kammert – Evercore ISI
Jon Petersen – Jefferies LLC
Operator
Thanks for standing by. My title is Christa and I will likely be your convention operator at the moment. Presently, I want to welcome everybody to the LXP Industrial Belief, Second Quarter 2024 Earnings Convention Name and Webcast. All traces have been positioned on mute to stop any background noise. After the speaker’s remarks, there will likely be a query and reply session. [Operator Instructions]
I’ll now flip the convention over to Heather Gentry, Investor Relations. Please go forward.
Heather Gentry
Thanks, operator. Welcome to LXP Industrial Belief’s second quarter 2024 earnings convention name and webcast. The earnings launch was distributed this morning and each the discharge and quarterly supplemental can be found on our web site within the Investor part and will likely be furnished to the SEC on a Kind 8-Ok.
Sure statements made throughout this convention name relating to future occasions and anticipated outcomes might represent forward-looking statements inside the that means of the Personal Securities Litigation Reform Act of 1995. LXP believes that these statements are based mostly on affordable assumptions, nevertheless, sure elements and dangers, together with these included in at the moment’s earnings press launch and people described in experiences that LXP information with the SEC occasionally may trigger LXP’s precise outcomes to vary materially from these expressed or implied by such statements. Besides as required by regulation, LXP doesn’t undertake an obligation to replace any forward-looking statements.
Within the earnings press launch and quarterly supplemental disclosure bundle, LXP has reconciled all non-GAAP monetary measures to essentially the most instantly comparable GAAP measure. Any references in these paperwork to adjusted firm FFL confer with adjusted firm funds from operations obtainable to all fairness holders and unit holders on a totally diluted foundation. Working efficiency measures of a person funding will not be supposed to be seen as presenting a numerical measure of LXP’s historic or future monetary efficiency, monetary positions, or money flows.
On at the moment’s name, Will Eglin, Chairman and CEO, Beth Boulerice, CFO, Brendan Mullinix, CIO, and Government Vice President James Dudley will present a latest enterprise replace and commentary on second quarter outcomes.
I’ll now flip the decision over to Will.
Will Eglin
Thanks, Heather, and good morning, everybody. We had wonderful second quarter outcomes, highlighted by strong leasing exercise with continued success in elevating rents and powerful same-store NOI development of 5%. Based mostly on the leasing outcomes we have achieved to-date, we’re elevating same-store NOI development expectations to a brand new vary of 4.5% to five.5%. We’re additionally happy to report we have efficiently accomplished our portfolio transformation with the sale of our two remaining consolidated workplace property throughout the quarter, positioning LXP as a pure play industrial REIT.
Leasing exercise picked up significantly within the second quarter, with 2.7 million sq. ft leased at base and money base rental will increase of 44.5% and 44%, respectively, excluding tenant enchancment reimbursements on one expiring lease. We proceed to realize robust mark-to-market outcomes on expiring leases, which speaks to the top quality of our portfolio, 88% of that are Class A amenities. Market situations assist annual rental will increase within the 3% to 4% vary, and on common, we obtained rental escalations of three.6% on leases signed within the second quarter.
Publish-quarter finish, we leased a further 96,000 sq. ft at enticing base and money base lease spreads of 28% and 35%, respectively. Sturdy leasing exercise continues, and we’re in superior negotiations on a further 1.7 million sq. ft.
Transferring to the steadiness sheet, we ended the quarter at 6.2 occasions web debt to adjusted EBITDA. We stay centered on transferring in the direction of the low finish of our goal leverage vary of 5 to 6 occasions and are assured we are able to attain this goal via a mix of leasing emptiness and elevating rents. As well as, we’re exploring a number of asset gross sales in non-target markets that would speed up leverage discount or create liquidity for redeployment into new investments.
Trying forward, our focus is principally on benefiting from the interior development alternatives in our portfolio. We estimate that our present rents are roughly 24% beneath market via 2029, and we’ve got a complete of 4.1 million sq. ft obtainable for lease. We additionally proceed to discover exterior development alternatives, together with build-to-suit tasks to the extent they match inside our goal market technique.
Lastly, we introduced earlier this 12 months that Nathan Brunner will likely be becoming a member of LXP as Government Vice President of Capital Markets in September. He’ll transition into the CFO function efficient March 1, 2025, when Beth shifts to an Advisory function at LXP. Nathan’s background speaks for itself, with many profitable years in funding banking, significantly within the industrial and web lease sectors, and he has deep company finance and M&A expertise. We’re very excited to have him be a part of us and sit up for his contributions.
With that, I am going to flip the decision over to Brendan to debate funding exercise in additional element.
Brendan Mullinix
Thanks, Will. Through the quarter, we invested $35 million in our spec and build-to-suit tasks. We have now roughly $29 million left to fund in our remaining spec growth tasks, excluding any companion promotes, and $36 million in our build-to-suit venture.
Turning to our growth portfolio, we have leased roughly 60% of the sq. footage we have developed since including this vital development avenue in 2019. On the remaining 3.7 million sq. ft left to lease, we proceed to see exercise, with 1.3 million sq. ft presently in remaining negotiations. Our build-to-suit venture in Greenville-Spartanburg is properly underway, and we anticipate that venture to finish close to the top of the 12 months. We proceed to discover different alternatives with the most effective prospects presently at our land financial institution in Phoenix.
To Will’s earlier level, we’re valuing a number of non-core market inclinations as a supply of liquidity, significantly as costs for a majority of these property has grow to be extra enticing. Potential proceeds from these asset gross sales could possibly be used for deleveraging or build-to-suit alternatives, relying on what’s the most accretive on the time.
With that, I am going to flip the decision over to James to debate leasing.
James Dudley
Thanks, Brendan. The economic leasing market confirmed indicators of enchancment within the second quarter, with web absorption up as demand accelerated and building begins continued to decelerate. This was evident in our portfolio as properly, as we noticed a pickup in leasing exercise throughout our markets within the second quarter.
Leasing was robust throughout the quarter and included lease extensions for 4 2024 expirations, one 2025 expiration, one 2026 expiration, and a emptiness. To this point, we have marked 2024 expirations at 29%, excluding fixed-rate renewals. We anticipate elevating rents on the 600,000 sq. ft of remaining 2024 expirations on common 20% to 30%.
On final quarter’s name, we mentioned two leases within the Memphis market with 2024 expirations. Each had been renewed within the second quarter, totaling roughly 1.6 million sq. ft. These are robust leasing outcomes, leading to five-year lease renewals at money rental spreads of 29% and 25%, with common lease bumps of three.25%. We executed an early lease renewal on our 2025 expiration with Mars in Atlanta throughout the quarter, signing a 32-month extension with 4% annual bumps.
The expiring lease had $4.68 per sq. foot in tenant enchancment amortization. When excluding this quantity, the renewal lease displays a 63% improve in lease from $4.50 to $7.35 per sq. foot. Together with the lack of these TI reimbursements within the second quarter leasing numbers, base and cash-based lease nonetheless elevated roughly 12% and 13%, respectively.
The TI reimbursement burn-off for this lease expiration has at all times been accounted for in our mark-to-market estimates. We have no related leases within the portfolio the place TI amortization has such a major influence. Additionally, throughout the quarter, we signed a 10-year lease extension with 3% annual bumps at our 242,000 sq. foot industrial facility within the Philadelphia market. This was an early renewal on a 2026 expiration that resulted in an 85% money rental improve over the prior lease.
Lastly, we executed a brand new two-year lease with 3.75% annual bumps at our vacant 118,000 sq. foot facility within the Memphis market. There was minimal downtime in getting the property leased up, with the brand new lease per sq. foot representing a 22% rental improve over the prior lease.
With that, I am going to flip the decision over to Beth, to debate monetary outcomes.
Beth Boulerice
Thanks, James. Income within the second quarter was roughly $86 million, with property working bills of about $15 million, of which 90% was attributable to tenant reimbursement. Adjusted firm FFO within the second quarter was $0.16 per diluted frequent share, or roughly $47 million
G&A was $9.2 million within the second quarter. As we talked about on final quarter’s name, we’ve got been centered on working efficiencies, which included shrinking our workplace footprint in New York as we transition some overhead prices to our Florida and Dallas places of work.
As a part of our efforts to function extra effectively and made potential by the profitable completion of our portfolio repositioning, 2024 G&A will now embody one-time fees of roughly $1.7 million related to worker severance prices. These worker modifications will end in annual value financial savings of roughly $1.2 million transferring ahead.
Additional in 2024, we can have roughly $1 million in bills associated to the CFO transition. Because of this, our 2024 G&A is now anticipated to be inside a variety of $39 million to $41 million. Our same-store portfolio was 99.4% leased at quarter finish and same-store NOI elevated 5% within the second quarter when in comparison with the identical interval in 2023. At quarter finish, roughly 99% of our portfolio leases had escalations with a mean annual charge of two.7%.
Through the quarter, we absolutely repaid the $198.9 million of 4.4% 2024 senior notes at maturity with proceeds from the issuance of the 6.75% 2028 senior notes we accomplished final November. Our fastened charge debt share was roughly 92% at quarter finish. As we have indicated beforehand, we anticipate 2025 curiosity expense to extend when the swaps on the time period mortgage expire in January.
We’re contemplating different long-term fastened charge choices or swapping a few of this publicity later this 12 months or early subsequent 12 months. We anticipate this extra curiosity expense to influence 2025 adjusted firm FFO by roughly $0.02 per diluted frequent share based mostly on the present SOFR ahead curve. At quarter finish, our whole consolidated debt excellent was roughly $1.6 billion with a weighted common rate of interest of three.81% and a weighted common time period to maturity of six years. Lastly, we ended the second quarter with our $600 million unsecured revolving credit score facility absolutely obtainable.
With that, I am going to flip the decision again over to the operator who will conduct the question-and-answer portion of this name.
Query-and-Reply Session
Operator
[Operator Instructions] Your first query comes from the road of Anthony Paolone with JPMorgan. Please go forward.
Anthony Paolone
Thanks. Good morning. First query, I simply wished to get into the event leasing pipeline a bit extra. I believe you talked about 1.7 million sq. ft of leasing within the pipeline. And simply possibly are you able to go over once more how a lot of that do you suppose pertains to a number of the developments which were delivered already and simply prospect of leasing up a few of these massive million sq. footers?
James Dudley
Tony, it is James. So simply — I am going to simply run via the portfolio and form of the place we stand. So I believe we have talked about Ocala for some time. We proceed to be shut on Ocala with a potential tenant that might take your complete facility. We even have one other recognized tenant for our 250 in Aetna, and we expect we’re shut on getting a deal finished there. We have responded to a few full constructing RFPs on our Indianapolis facility. After which we’ve got a partial constructing person that is our South Shore Tampa facility. After which a few partial constructing customers which have inquired about Greenville/Spartanburg. So, I’d say we’re in a great spot on Ocala and Columbus proper now and a bit of additional away from having certainty on the others.
Anthony Paolone
Okay. And simply any feedback on simply the place you suppose yields will find yourself on these given what you are seeing and the place the rents being mentioned are?
Brendan Mullinix
Sure. We’re sustaining the prior steering of 6% to six.5% that we have beforehand guided to.
Anthony Paolone
Okay. After which only one different query, possibly Beth. I believe your same-store NOI steering was 4% to five% beforehand. Simply questioning if that is nonetheless form of the quantity, if there’s any modifications there for the 12 months?
Beth Boulerice
Sure, we have upped the steering, Tony, to 4.5% to five.5%.
Anthony Paolone
Okay, nice. Thanks.
Operator
Your subsequent query comes from the road of Todd Thomas with KeyBanc Capital Markets. Please go forward.
Todd Thomas
Hello, thanks. First query, Beth. You talked about the $39 million to $41 million G&A steering for ’24 that’s larger by $3 million, I consider, from the prior G&A steering. I simply wished to make clear is that every one as included in adjusted firm FFO, it seemed like a portion was one-time in nature. I simply wasn’t certain I heard the feedback there, are you able to make clear.
Beth Boulerice
Sure. So the severance fees of $1.7 million are going to be a one-time so they will not be an adjusted firm FFO.
Todd Thomas
Okay. However the steadiness….
Beth Boulerice
The vary I had final — the vary we mentioned final time was $36.5 million to $38.5 million. So now we’re saying $39 million to $41 million, so it isn’t fairly $3 million, however lower than that.
Todd Thomas
Okay. However the offset then, so that you took up the same-store by 50 foundation factors. What else form of modified, what different assumptions ought to we take into consideration because it pertains to the up to date steering and the low finish arising $0.01?
Beth Boulerice
It is actually as a result of all of our leasing that we have finished and the nice outcomes that we have had in our spreads and with the ability to seize that GAAP lease, it is actually the motivator for that.
Todd Thomas
Okay. After which I simply wished to ask additionally about… There have been a handful of, I believe, identified move-outs that had been included within the steering, within the price range for the 12 months, within the steadiness of ‘24. I believe there was additionally some dialogue round ‘25. You talked a few 3PL in South Carolina, round a 75,000-square-foot warehouse, additionally a 58,000-square-foot warehouse in Carrollton, Texas. Are these each nonetheless move-outs, and is there anything in ‘24 or ‘25 that you simply’re conscious of right now?
James Dudley
So these are the 2 which are in ‘24, and we’ve got promising exercise on each of them. So I am hoping that they’re going to be short-lived vacancies and the 58 possibly would not even grow to be 1 as a result of we changed the tenant. After which we’ve got 1 different 124 that is — it is a March 2025 lease expiration that we all know the tenant is transferring out. Fortuitously, it is a multi-tenant constructing and the tenant that subsequent door needs to broaden. So additionally hopeful that we are able to decrease downtime there.
Todd Thomas
Okay. And simply final one for me. The Cleveland asset that was bought subsequent to June 30. Are you able to simply share some particulars on that sale, the disposition proceeds or some other particulars on that asset sale?
Will Eglin
Positive. That was an asset that we had a identified move-out coming, and we ended up promoting it to a person for — we thought was a extremely good worth. It is a cap charge of a bit of bit above 7%, which sounds excessive, however for a 1996 facility with 24-foot clear peak, it was actually an excellent sale for us.
Todd Thomas
Okay, all proper. Thanks.
Operator
Your subsequent query comes from the road of Mitch Germain with Residents JMP. Please go forward.
Mitch Germain
Thanks for taking my query. Are you able to present me some perspective on the maths between a build-to-suit versus what you are seeing within the acquisition market at the moment?
Brendan Mullinix
Positive. Construct-to-suit, we’re focusing on a variety of 6.5% to 7%, simply relying upon what the escalation construction is in time period. And I’d say within the current market one thing a time period goes to be within the excessive 5s to six% form of vary.
Mitch Germain
Okay. That is tremendous useful. And excited about inclinations, is it markets the place you do not have as a lot scale or is it property the place both there’s some capital or some no transfer out? What’s form of added in that bucket?
Brendan Mullinix
Look, it is actually centered on markets the place we do not have scale and do not plan to scale. And so we’re being opportunistic about harvesting worth the place we are able to. We expect the disposition market has in all probability improved in our favor about 50 foundation factors from a cap charge perspective since fourth quarter final 12 months. So we’re out there performing some worth discovery on a handful of buildings, and we’re getting good response.
Mitch Germain
That is tremendous useful. And final one for me, Beth. I apologize you get plenty of questions on G&A. I believe you had been simply speaking a bit of too fast for me. So simply out of your ready remarks, are you able to simply form of — I acknowledge the severance and you then talked about some financial savings of $1.2 million, after which I missed it. I believe there’s some extra charges for the CFO change. Are you able to simply form of go over that yet one more time, please?
Beth Boulerice
Sure. Positive, Mitch. No drawback. Sure. So there’s one time of $1.7 million for severance prices which are onetime, so they will not be impacting our FFO — adjusted firm FFO for 2024. However going into 2025, we anticipate that we will be saving about $1.2 million based mostly on these modifications. But additionally for — and in addition for 2024, we’re anticipating about $1 million for the CFO transition that can influence 2024.
Mitch Germain
Nice. That’s tremendous useful. Thanks a lot, everybody.
Operator
Your subsequent query comes from the road of Camille Bonnel with Financial institution of America. Please go forward.
Camille Bonnel
Hello, good morning. So the staff has finished rather a lot to time period out and handle the floating charge publicity. However as Beth, you highlighted in your opening remarks, curiosity expense will nonetheless be a drag to the underside line earnings development. And once you have a look at the tempo of stabilizing your growth asset, it looks as if we’re nonetheless a couple of quarters away, which means additional drag on 2025. So I am questioning what your ideas are on that and what you are able to do to enhance this outlook whereas balancing potential dilution out of your asset gross sales? Thanks.
Beth Boulerice
Nicely, we’re exploring completely different alternatives for the time period mortgage. Proper now, it is at 2.72% with the swaps which are in place proper now. We’re probably some fastened charge, possibly a possible bond providing or swapping at the moment for a few of that publicity. We’re additionally — probably, we might pay down a portion of it as properly. And so going ahead, you are proper. Curiosity expense goes to be larger by about $0.02, as I discussed in our remarks.
Camille Bonnel
And as you discover these issues in mild of the place your inventory is buying and selling at the moment, which does appear a lot nearer to NAV relative to friends. Simply questioning the way you’re excited about potential fairness raises as a supply of capital possibly to handle capital requirement wants or funding alternative.
Will Eglin
Nicely, we’re more than happy that the shares have carried out properly lately, however we’re centered on what issues that we are able to obtain that may enhance the share worth much more. And clearly, making extra progress on stabilizing the event pipeline could be high of the listing. So issues are actually higher from a price of capital standpoint, however our focus is on, as I mentioned, working within the portfolio, producing higher leasing outcomes and bettering our valuation additional.
Camille Bonnel
Okay. So it would not sound prefer it ranks very excessive at this level. And eventually, I simply wished to select up in your level about LXP being positioned as a pure-play industrial firm. I consider you continue to have a small stake in a couple of workplace properties. So are you planning to additionally wind that down? And are these property included within the disposition technique you outlined?
Will Eglin
Sure. That workplace three way partnership has been mainly in a liquidating mode because it was shaped. So it shrunk rather a lot. It nonetheless has a handful of buildings in it. And we’re winding that down as rapidly because the market helps.
Camille Bonnel
Okay. Thanks.
Operator
[Operator Instructions] Your subsequent query comes from the road of Jim Kammert with Evercore ISI. Please go forward.
James Kammert
Thanks. Good morning. I do know Will, did I miss it? Did you quantify possibly the potential gross sales that you’d take into account by way of {dollars} and possibly you do not need to tilt your hand however a variety of cap charges? The non-core property that you simply’re pondering?
Will Eglin
No. I imply I’d suppose that what we’ve got out there proper now could be form of greater than $100 million, however lower than $150 million. And as Brendan was saying, cap charges for this form of asset or arguably within the 5.75% to six% space, that form of area which is healthier than it has been, and people cap charges are actually decrease than our floating charge borrowing value proper now, though over time, it is actually potential that so or we go down.
James Kammert
That is useful. After which second query, I bought for counting. However Beth, how a lot lease-up is assumed on the lately accomplished offers, the place I presume you are not capitalizing curiosity, however how a lot form of drag is within the remaining 2024 steering for these property? Are you assuming any leasing?
Beth Boulerice
The low finish assumes no leasing in any respect, and the excessive finish assumes a bit of bit within the fourth quarter.
James Kammert
Okay, thanks.
Operator
Your subsequent query comes from the road of Jon Petersen with Jefferies. Please go forward.
Jon Petersen
Good morning. On Ocala and Columbus, are you guys in a position to — are you able to give us just like the annual like run charge FFO upside from leasing these two properties? Like how ought to we take into consideration quantifying that since that appears to be the probably upside within the close to time period?
Beth Boulerice
It’s about $0.03.
Jon Petersen
Okay. After which on Ocala, as a result of I believe that is the one we have been speaking concerning the longest right here, are you able to characterize how the negotiations have developed there? Is it simply ready for the potential tenant to signal the dotted line or is there plenty of forwards and backwards on phrases and that is what’s holding it up?
Brendan Mullinix
It is simply ready on the tenant at this level. Their inside course of is extremely lengthy and we’re working via it and we’re attempting to be affected person, however hopefully we will have one thing finished quickly. I do know we have been saying that for a few months now, however it continues to maneuver in the correct path, simply at a really sluggish tempo.
Jon Petersen
That’s useful. Thanks.
Operator
And that concludes our query and reply session. And I’ll now flip the convention again over to Will Eglinton for closing feedback.
Will Eglin
Nicely thanks everybody for becoming a member of our name this morning. I hope you will take the time to go to our web site or contact Heather Gentry if you would like to obtain our quarterly supplies. And as well as, as at all times, you might contact me or the opposite members of senior administration with any questions. Thanks once more.
Operator
This concludes at the moment’s convention name. Thanks to your participation, and you might now disconnect.
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