Q1 2024 LXP Industrial Trust Earnings Call

Participants

Heather Gentry; Investor Relations; LXP Industrial Trust

T. Wilson Eglin; Chairman of the Board of Trustees, President, Chief Executive Officer; LXP Industrial Trust

Brendan Mullinix; Executive Vice President, Chief Investment Officer; LXP Industrial Trust

James Dudley; Executive Vice President, Director - Asset Management; LXP Industrial Trust

Todd Thomas; Analyst; KeyBanc

Jon Petersen; Analyst; Jefferies LLC

Vince Tibone; Analyst; Green Street

Bill Bonello; Analyst; Bank of America

Presentation

Operator

Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the LXP Industrial Trust first-quarter 2024 earnings call and webcast. (Operator Instructions)
I would now like to turn the conference over to Heather Gentry, Investor Relations. Please go ahead.

Heather Gentry

Thank you, operator, and welcome to LSC Industrial Trust's first-quarter 2024 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 Investors section and will be furnished to the SEC on a Form 8K. Certain statements made during this conference call regarding future events, 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 Alex be filed with the SEC from time to time could cause these actual results to differ materially from those expressed or implied by such statements, except as required by law, unless he does not undertake a duty to update any forward-looking statements in earnings press release and quarterly supplemental disclosure package.
Alexey has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures. 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 is Will Eglin, Chairman and CEO; Beth Boulerice, CFO; and then my next CEO and Executive Vice President, James Dudley, who will provide a recent business update and commentary on first quarter results. I will now turn the call over to Will.

T. Wilson Eglin

Thanks, Heather, and good morning. Everyone. first quarter results were consistent with our expectations, and we continue to focus our efforts on development, leasing, marking rents to market and capitalizing on build-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 volumes 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's 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 the 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 markets. As a result of second quarter leasing, we now expect our 2024 same store NOI will be in the range of 4% to 5%, an increase from our previous range of 3.5% to 4.5%.
On another positive note, our average annual escalators increased to 2.7% in the quarter, up from 2.6%. 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 mark-to-market outcomes are estimated to increase initial cash rent by $36 million or $0.12 per share through 2029.
While stabilization of the development pipeline is estimated to produce initial cash rents of 20 million or $0.07 per share as the developments lease up on the investment side, during the quarter, we committed to an approximately 625,000 square foot build-to-suit project in Greenville Spartanburg. This investment provides us the opportunity to recycle capital into newly constructed assets in one of our target markets on accretive terms, the build-to-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 growth.
With that I'll turn the call over to Brendan to discuss investment activity in more detail.

Brendan Mullinix

Thanks. Well, we invested approximately $25 million in the first quarter and developed with approximately $35 million left to fund in our remaining spec development projects. Excluding any partner promotes and $65 million in a build to 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 promotes. We also completed the base building construction of our 250,000 square foot Columbus development project in January. We are currently in lease negotiations on approximately 60,000 square feet at that facility and are responding to tenant interest for the balance of the building on the investment side with build-to-suit projects, our primary focus, we are reviewing a number of projects in our target markets, including inquiries involving our Phoenix land bank.
As Bill mentioned, we committed to a build-to-suit project for international auto parts manufacturer during the quarter on 59 acres in the Greenville Spartanburg market for our 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 heights. 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 a project completion. We expect capital needs for the project and any future build-to-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 to 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.

James Dudley

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. Rents 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 and balance over time.
We're also encouraged by the commentary across our markets. That activity feels better as inquiries and tours pickup. 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% through 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 that are approximately 928,000 square foot facility at a cash rental increased by approximately 30%.
Additionally, we executed a 5-year renewal with 3.5% 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 negotiation. We still expect our remaining 2024 expirations to produce a 20 or 30% cash NOI increase based on our current market conditions.
Our industrial stabilized portfolio was 95.5% 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.

Heather Gentry

Third-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 $0.16 per diluted common share or approximately 49 million in the first quarter. G&a 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 one 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 2024. We now anticipate 2020 for G. and A. will be within a range of $36.5 million to $38.5 million.
Our same-store industrial portfolio was 99.2% leased at quarter end and same-store industrial NOI increased 6.5% 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 B double A2 rating. Our consolidated debt outstanding was approximately $1.8 billion at quarter end with a weighted average interest rate of 3.87% 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, we'll conduct the question and answer portion of this call.

Question and Answer Session

Operator

(Operator Instructions) Todd Thomas, KeyBanc.

Todd Thomas

Hi, good morning. This is Ajay on for Todd. I appreciate you guys taking my question first off maybe for James. Obviously you placed the Florida and India and these 2 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?

T. Wilson Eglin

Sure. So specific to those buildings and when we've got some good activity in Florida right now. We'll see if it ultimately result in the deal. But we're we're hopeful that we're going to have something there soon. But you never know until you kind of get something done on Endy?
We've had a couple of really close calls and there's been really frustrating. There are a couple of tenants that have shown up in the market one recently that decided to consolidate into Lu will answer to execute an IND. There's been activity just unfortunately, nothing really in that market of size has landed yet and then I guess I would just come to the commentary I put around just leasing in general. We continue to to renew tenants at a high clip. We continue to push rents on renewals.
I think the slowness in the market on those renewals is really around your kind of 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 is in your particular submarkets and you still have a pretty hefty mark 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 on the spec side where we do have some exposure to some of the markets where there's a lot more supply right now. 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.

Todd Thomas

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

T. Wilson Eglin

Yes. I think the development assumptions should remain the same and the same stores, 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 a hundred percent sure that we were going to get renewed and that we haven't renewed them. It allows us to tighten up the guidance.

Todd Thomas

Okay, that's helpful. Thank you.

Operator

Jon Petersen, Jefferies LLC.

Jon Petersen

Great, thanks. I will maybe Amazon and I just want to follow up on that. So you increase the same-store guidance overall I get why doesn't flow through to a FFO increase? Is there an offset there maybe higher interest expense with where rates are at?

T. Wilson Eglin

Exactly. Exactly, John. It's interest expense and also the development deals that have been placed into service that have come online that not they're not in the same-store pool yet. You talked about the tenant types that you're seeing interest in some of the development lease-up and maybe even just more broadly in the portfolio as is the type of tenants that are out in the market right now, different than maybe what you expected when when these developments were started a year or so ago now that is different than what we expected.
And certainly there's a big e-commerce tenant that pops up 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 out some space and are 3PLs probably going to take yet another big piece of space and continue to see food and beverage construction. So it is still pretty broad also just major retailers. So continues to be a broad look, it's really about getting these deals across the finish line in some of these markets and hopefully creating some momentum.

Jon Petersen

Can you I'm just curious on the leverage would be bad. What what will that pro forma leverage move to once these developments are leased up? And then where where does that put you relative to your long-term targets?

T. Wilson Eglin

Yes. 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 about it.

Jon Petersen

But one other question for me. I noticed on the press release that the location of the company has now West Palm Beach, Florida. Is there any relocation costs that are going into G&A or anything we should think about from a from that now.

T. Wilson Eglin

And in fact, there's going to be some savings with us subleasing our New York office space Great.

James Dudley

Thank you.

T. Wilson Eglin

Thanks, John.

Operator

Vince Tibone, Green Street.

Vince Tibone

Hi, good morning. On. Could you discuss your current yield expectations for the five unless speculative projects and how these have changed, if at all, since the beginning of the year. And yes, with regard to those unleased development assets in the pipeline we're not changing our guidance from the 6 to 6.5 after promote that we've guided to previously. While the recent lease outcomes have exceeded that in Columbus and in Phoenix there is a little less visibility at the moment for a couple of the larger to be stabilized building.

T. Wilson Eglin

So we're going to keep that 6 to 6.5 g grade and then kind of a follow-up related to that, how our owners have competitive back projects in the markets? Where are you developing behaving? Like are you starting to see others reduce space rent or offer elevated concessions to trying to lease up faster? If you could just touch on some of the kind of competitive dynamics or even how many buildings you're competing with in certain markets would be would be interesting.
It varies from other Downer, yes, we certainly have seen some some other owners get a little bit more aggressive. I would say specifically and indeed, 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 local. But yes, 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 TI.'s being offered.
So yes, there is some compression on the rent, but 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 sit vacant and people are going to want to become more aggressive to trying to get the buildings leased non-exempt I guess this last one is how do you guys respond in that environment? They're using their 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 rents to get tenants on a net effective basis or 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, Andy, that we think are superior to our competition with a private drive into our core. We're the only ones that have all concrete truck cord. And 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. And Greenville, we've got the best location in really what we believe to be the only class A. Park and similar in O'Charleys. So we don't feel like we have to go as low as maybe some of our competition because we do have some attributes that prospective tenants want. But yes, I mean, if we want to play we are going to have to get aggressive relative to what what's going on in the market.

Vince Tibone

That's really helpful color. Thank you.

Operator

(Operator Instructions) Bill Bonello, Bank of America.

Bill Bonello

Combining every week something new on the geopolitical front pops up adding to supply chain disruptions. 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?

T. Wilson Eglin

Camille, I think there has been a change at well, one, I think the supply chain is still resilient. You're right. There have been some disruptions that have slowed things and then 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 continuing to move forward with shoring up the supply chain by getting closer to consumers.

Bill Bonello

Okay. And Amazon has been getting more active in the market, and 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.

T. Wilson Eglin

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 fee added. They've been in the market with a couple of different requirements, some smaller and some of the larger variety.

Bill Bonello

That's helpful. And just finally, data centers still quite a hot topic outside of Phoenix. Do you see any are there opportunities in your landbank?

T. Wilson Eglin

And this is Bryan and the best potential opportunity would be in Phoenix in terms of our holdings, I would note on our target 10 core markets. Columbus is another market that's been very active for us, data center as well.

Bill Bonello

Thank you.

Operator

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

T. Wilson Eglin

There will thanks to all of you for joining our call this morning. Please visit our website 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.

Operator

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