2023-05-08 07:09:04 ET
Summary
- LXP Industrial shares many of the same characteristics as its peers but continues to be a sector laggard.
- This is despite higher occupancy levels, a more modest development pipeline that is progressing as expected, and a higher dividend payout.
- They do operate on higher leverage levels, but they have ample liquidity and no near-term maturities.
- The continued stabilization of their recently completed projects should also contribute to lower overall debt levels in future periods.
- At current trading levels, I am bullish on LXP's future outlook.
LXP Industrial Trust ( LXP ) operates primarily in the Sunbelt and the lower Midwestern region of the U.S.
At 12.3% of annualized base rents ("ABR"), Phoenix is their largest operating region, followed by Greenville and Atlanta, at 9.5% and 8.6%, respectively.
Q1FY23 Investor Presentation - Summary Of Top Operating Markets
Among their top tenants are Amazon ( AMZN ), Nissan ( OTCPK:NSANY ), and Kellogg ( K ), to name a few. At 6.7% of ABR, AMZN is their single largest tenant and only one to account for over 5% of ABR.
Q1FY23 Investor Presentation - Top Tenant Listing
As an industrial real estate investment trust ("REIT"), LXP has and continues to benefit from sector tailwinds. This includes high occupancy rates and significant mark-up opportunities upon lease expiration.
Share performance, however, significantly lags their peer pool. YTD, for example, shares are down over 5.5%. This compares to positive returns among all others included within the peer set.
Seeking Alpha - YTD Returns Of LXP Compared To Peers
The poor performance is also not limited to recent periods. Over the past three years, shares have returned a disappointing negative 3%. This compares to double-digit returns elsewhere.
Seeking Alpha - 3-YR Returns Of LXP Compared To Peers
The stock, as one would expect, resultantly trades at a discount to the sector, at about 14.2x forward estimates for funds from operations ("FFO"). It's worth noting, however, that close peer Plymouth Industrial ( PLYM ), trades at an even further discount, at just 11.5x. While I am bullish on both , I view LXP as a better opportunity for income-focused investors, as its payout currently yields over 5%. This compares favorably to the sector average, which tracks in the upper 2% and low 3% range. Recent results and forward guidance were also largely positive. As such, I continue to view LXP as a value addition to any portfolio with industrial concentration.
An Active Quarter, Despite Near-Full Occupancy Levels
At the end of the first fiscal quarter, portfolio leased rates stood at 99.5%. Despite the near-full nature of their portfolio, it was an active first three months of the year for LXP.
They leased over 2 MSF of space. And on this, they realized cash spreads of 29% or 42% when adjusted for one lopsided fixed renewal. Additionally, in their target markets, rents grew approximately 18% on a YOY basis.
While spreads were arguably lower than what some may expect for a fully-leased industrial portfolio, there was notable strength in certain pockets. In Atlanta, for example, they renewed one tenant in a 676K SF facility at 66% spreads.
Rising Annual Escalators Provides Offset To Unfavorable Lease Expiration Schedule
In addition, they were able to increase the annual rent escalations from 2.5% to 4% in their Atlanta market. This compares to average escalations across the portfolio of approximately 2.6%. At present, about 98% of their industrial portfolio contains these escalation provisions.
The annual escalators provide an offset to both their expiration schedule and their longer weighted average lease terms, which I view as unfavorable.
Currently, they have just one remaining lease expiration for 2023. Their mark-up opportunity, therefore, at a time when rents are increasing at double-digit rates is limited.
Q1FY23 Investor Supplement - Lease Expiration Schedule
The expiration schedule is more favorable beginning in 2024. And on the 2024 expirations, management expects expiring rents to increase anywhere from 20% to 30%. But this, of course, would be dependent on market conditions then, which may not be as they are now.
Longer out, for leases expiring through 2028, management estimates in-place rents to be approximately 22% below market, with in-place rents forecasted to grow about 38% or 28% net of contractual escalations.
A Modest Development Pipeline That Is Progressing As Expected
In the development pipeline , most projects are nearing final completion. And during the quarter, there were a number of projects delivered.
This includes a 1 MSF facility in Central Florida and another 1 MSF facility in Indianapolis, as well as their 400K SF pre-lease facility and their two properties in Phoenix. The property in Phoenix was placed into service on a 10-year lease, with 3.5% annual escalators and a stabilized cash yield of 7.4%.
Subsequent to quarter end, they leased their recently completed development in Columbus, Ohio, to an investment grade ("IG") tenant and realized a stabilized cash development yield of 7.3%.
Looking ahead, there is 4.3 MSF remaining to stabilize, which represents about 7% of their overall portfolio. For these, management expects to achieve stabilized yields in the 6% range.
From a funding standpoint, approximately +$31M was applied to their six ongoing development projects during the quarter. And for the remainder of 2023, management expects to spend +$76M on these projects, excluding any potential promotes.
I don't view funding as a concern, considering they currently have full availability on their +$600M credit facility. In addition, they continue to make progress on disposing of non-core properties. In the transactional markets, for example, they sold their remaining industrial asset in Detroit for +$28M during the quarter.
And looking ahead, additional exits of non-core industrial markets are possible, as the focus turns more towards their largest operating regions.
Furthermore, management is actively seeking to dispose of their remaining office assets. At present, the estimated value of their fee owned portfolio of four assets is estimated to be +$75M. And collectively these projects generate +$12M in annualized NOI.
Total Leverage And Dividend Coverage Is Adequate
At period end, net debt as a multiple of adjusted EBITDA stood at 6.3x. This is above their targeted range of between 5x and 6x. But total leverage is expected to tick down as their developments continue to stabilize.
When including pro forma stabilization of their Phoenix facility, for example, which was leased in Q1, as well as the subsequent leasing of their Columbus project, net debt would be down two clicks to 6.1x.
Their quarterly dividend payout of $0.125/share is also appropriately covered, as adjusted FFO during the quarter came in at $0.17/share. And looking ahead, management sees full year adjusted FFO landing at a midpoint of $0.68/share, which is unchanged from their prior outlook. This would represent a payout ratio of just under 75%.
Why LXP Is A Buy
At 99.5%, LXP's overall industrial portfolio runs at higher leased rates than many of their peers, who typically track between 98% and 99%. Their pricing power, however, isn't as strong, especially when considering their near-full occupancy levels.
Cash spreads, for example, came in at 42% on an adjusted basis. Terreno Realty ( TRNO ), on the other hand, was able to drive cash rents by nearly 70% on occupancy levels of 98.1%. Similarly, First Industrial ( FR ), logged increases of 58.3% on 98.7% occupancy levels.
This lower pricing strength is due in part to their geographic operating presence, which is primarily centered around the Sunbelt and the Midwestern region of the U.S, markets that generally are at higher risk of overbuilding. TRNO and FR, meanwhile, have exposure to the more supply-constrained coastal and infill markets.
Forward same-store NOI guidance is also lighter than peers, at 4.5% forecasted growth at the midpoint. This is after growth of about 5% in Q1. Most others are projecting growth in the upper single-digits, nearly 10% in the case of Rexford Industrial ( REXR ).
Limited lease expirations in 2023 and longer overall weighted average lease terms are inherent headwinds, though this is offset in part by their annual escalators, which are embedded in 98% of their industrial portfolio and average about 2.6%.
It's even higher in some markets. In their Atlanta market, for example, escalators have increased from 2.5% to 4%. In addition, signings in the current quarter included average annual bumps of 3.5% on an adjusted basis.
LXP's overall debt load runs higher than peers, save PLYM. That and lower growth rates are perhaps one reason shares currently trade at a discount to the sector. But I am not concerned by leverage, considering over 90% of their load is fixed rate and unencumbered. Furthermore, there are no incoming maturities, and the company continues to maintain a sizeable liquidity position, which is reinforced further by their mostly fully funded development pipeline.
This provides LXP the flexibility to provide a dividend payout that tracks ahead of the sector. In my view, the over 5% yield is an attractive supplement to the share price upside potential of approximately 14%, based on consensus estimates. For investors seeking a reasonably priced industrial, LXP is one that continues to warrant more attention than it's currently receiving.
For further details see:
LXP Industrial: Higher Yielding Than Peers And Modest Upside Potential