Summary
- LXP Industrial is a REIT with an interest in over 100 consolidated real estate properties located in 21 states.
- Similar to their peers, the company is benefitting from soaring rental rates and lucrative mark-up opportunities due to robust demand on their industrial properties.
- Their share price performance, however, is lagging their peer set on both a YTD basis and over the past year.
- At current trading levels, the stock has upside potential of at least 20%. This would be in addition to a more attractive dividend yield in relation to their peers.
LXP Industrial Trust (LXP) has an interest in approximately 116 consolidated real estate properties, located in 21 states. These properties are primarily single-tenant warehouse/distribution assets. The company also has an interest in non-core office properties through existing joint venture agreements. This non-core footprint, however, continues to shrink via disposition.
At year end, about 77% of LXP's properties were in the top 25 industrial markets, with a focus on the Sunbelt and Lower Midwestern regions of the country.
Their sector exposure is also diversified, though the Consumer Products sector represents about a quarter of their total annualized base rents ("ABR"). And among their top tenants, Amazon ( AMZN ) accounted for just under 7% of ABR in 2022. Aside from AMZN, their remaining tenant base is comprised of well-capitalized entities. And a large share of them, 56.5% to be exact, are investment-grade rated.
YTD, shares are up 9%. While this outperforms the broader market index ( SPY ), it trails their peer set, which are all up double-digits over the same period.
The performance gap is even more significant over a one year time span, though they are not far off from the returns posted by Plymouth Industrial ( PLYM ).
LXP offers an above-average dividend yield for the sector. In addition, their share price performance appears to be too disconnected to peers, despite similar industrial fundamental tailwinds. The company does operate on higher leverage levels than their peers, overall, but the load is still lower than what PLYM operates on. At current pricing, shares are also fetching 16x forward funds from operations ("FFO"). This is discounted to their peers, except PLYM and STAG Industrial ( STAG ). For investors, LXP is one industrial that can outperform in the periods ahead.
Recent Performance and Current Portfolio Metrics
At year end, LXP's portfolio was 99.5% leased with a weighted average lease term of 6.2 years. Compared to peers, the remaining term is on the higher side. While longer terms are generally a positive in most sectors, this is not so in industrials, where the mark-to-market opportunity is material.
In 2023, for example, just 1.4% of leases are expiring.
In 2024, that jumps to 10.7%. But the forecasted rental growth on those leases is just 20-30% versus a projected increase of 40-50% in 2023.
Granted, that level of growth is still significant. This is due to a combination of low vacancy rates and elevated demand for space.
In the current year, the company increased base and cash rents on renewals by 38% and 43% in Q4. And for the year, the company's total volume amounted to 4M SF at base and cash rental increases of approximately 31% and 26%, respectively.
In their target markets, rents grew about 20% YOY, and in the fourth quarter for leases expiring through 2028, their overall portfolio in-place rents are estimated to be 21% below market.
Activity levels and the pace of growth are expected to moderate to pre-pandemic levels in the periods ahead, though the prospects for continued industrial rent growth remains positive due to record low vacancy rates.
Aside from the leasing pipeline, the company continues to make headway on their development pipeline and in their disposition efforts on their non-core assets. For the year, the company realized +$197M in proceeds at 5.6% cap rates, with approximately +$50M earned in Q4.
And on the year, the company spent +$255M on six ongoing developments. For 2023, total development costs are expected to be just over +$100M, with total spend estimated to be around +$125M.
Liquidity and Debt Profile
LXP operates on a higher degree of leverage than their peer set. At year end, for example, net debt as a multiple of EBITDA stood at 6.4x. This is notably down from the 7.1x at the end of the third quarter. In addition, the ratio is within the midpoint of their targeted range.
But at the same time, most of their industrial peers operate between 4x and 5x, save PLYM, which is the exception, operating near that 7x range.
Offsetting their higher operating leverage is their favorable debt stack, which is weighted towards the later years.
The weighted average interest rate on their existing debt load is relatively low as well, at 3.2%. As such, they're able to maintain strong coverage ratios on their debt servicing obligations.
As it pertains to their required covenants, fixed charge and debt service coverage stood at 3.1x and 5.4x, respectively, for their bank loans and bonds, alike. Furthermore, the total composition is primarily unencumbered and fixed rate, both overall credit positives.
Their existing liquidity is also sufficient to meet their reoccurring obligations, which, aside from their debt servicing obligations, consists of their funding needs for their development pipeline and their dividend payouts, as well as opportunistic share repurchasing activity.
In 2023, the company expects to incur approximately +$107M in development costs. In addition, they paid out approximately +$140M in cash dividend payments in 2022.
Currently, they have full access to their +$600M revolving credit facility. Furthermore, they had nearly +$60M in cash on hand. Tapping into either is one source of funding for their 2023 obligations.
They could also utilize their at-the-market ("ATM") program if the share price rose to levels at which it would make sense to do so. In 2022, the price was in the mid-$13s, which is a sizeable premium to where shares are currently trading.
And on top of all existing sources of cash, LXP is also generating about +$200M in annual operating cash flows. Moreover, they have a sizeable disposition pipeline, which if completed, could enable them to recycle capital into their development activities.
As such, despite higher overall leverage than peers, LXP remains adequately capitalized to meet both their short and long term obligations.
Dividend Safety
In 2022, LXP paid out +$142M in cash dividends. This was up from +$128M in 2021 and +$118M in 2020. As a percentage of their operating activities in the current year, the total payouts were about 73% of the total. It's also worth noting that about +$131M of shares were repurchased during the year. This provided a partial offset to the +$215M issued during the year.
Currently, the quarterly payout stands at $0.125/share. At current pricing, this represents a yield of about 4.5%. Compared to their industrial peers, the payout is competitive, with most others yielding below 3.5%.
The payout is also backed by a solid track record of growth in recent years. However, one should note that there was a cut in 2019 from $0.1775/share to $0.1025/share relating to their strategic repositioning initiative.
But since then, the dividend has grown at a 3-YR compound rate of about 5.5%
The payout ratio does run higher than in prior years. Nevertheless, the ratio is still within sector averages, which typically tracks at about 75%.
Final Thoughts
LXP's YTD performance is currently lagging their peer set. This is despite posting Q4 results that were largely in-line with expectations for the industry. That is, double-digit rent spreads, maximum occupancy levels, and a positive outlook on their ongoing developments.
While their operating presence is in top markets across the country, the footprint of their operating regions is less densely populated than their competitors. They lack a presence in Southern California, for example, which is one of the most supply-constrained markets in the country. This exposes them to greater risks pertaining to overdevelopment.
In addition, they carry a higher degree of leverage than most peers. This ties up capital on debt servicing that could otherwise be deployed to development or other accretive opportunities. Furthermore, they also have an interest in office-related properties that, though fully occupied, are more difficult to recycle out of due to the lack of investor interest.
Despite these considerations, the upside in the shares still outweighs the risks. At 16x forward FFO, shares are more reasonably priced than many of their peers. Current Wall Street price targets peg shares at $11.50. This is essentially unchanged from current trading levels.
However, the company recently completed a forward sale in the mid-$13s and has been buying back shares in recent periods. Shares also have a healthy degree of inside ownership .
At an estimated target price of $13.50, shares would have upside of about 20% and would trade at a forward multiple of 20x. That would size up the company more in-line with their peers, which is reasonable since there is little to justify shares being valued less than that.
For investors weeding through the industrial yard for value, LXP is one worth further attention.
For further details see:
LXP Industrial: One Industrial Worth Further Consideration