LXP - NYSE

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the LXP Industrial Trust Second Quarter Earnings Call and Webcast. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Heather Gentry, Investor Relations. Please go ahead.

Thank you, operator. Welcome to LXP Industrial Trust Second Quarter 2025 Earnings Conference Call and Webcast. The earnings release was distributed this morning, and both the release and quarterly supplemental are available on our website at www.lxp.com in the Investors section and will be furnished to the SEC on a Form 8-K. 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 or 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 measure. 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, Will Eglin, Chairman and CEO; and Nathan Brunner, CFO, will provide a recent business update and commentary on second quarter results. Brendan Mullinix, CIO; and James Dudley, Executive Vice President and Director of Asset Management, will be available for the Q&A portion of this call. I will now turn the call over to Will.

Thanks, Heather, and good morning, everyone. We produced strong second quarter results, highlighted by the lease-up of our 1.1 million square foot development facility in Greenville-Spartanburg, same-store NOI growth of 4.7% and continued progress reducing our leverage with net debt to adjusted EBITDA of 5.8x at quarter end. Our performance reflects the resilience of our core business amid a continuing soft industrial real estate environment and uncertain macroeconomic backdrop. Overall, U.S. net absorption was approximately 30 million square feet in the second quarter. Of this absorption, 20 million square feet was in our 12 target markets, indicating our markets held up relatively well compared to the broader market, with net absorption in 5 of our markets exceeding 2 million square feet. Large corporate users and 3PLs were the primary drivers of overall absorption favoring higher quality properties. This trend bodes well for our portfolio, which is 92% comprised of Class A facilities with an average age of just over 9 years. New deliveries are at a 5-year low and are expected to continue declining. The construction pipeline in our 12 target markets is approximately 90 million square feet, down nearly 75% from the 2022 peak of approximately 330 million square feet. On the leasing front, year-to-date, we've leased approximately 2.4 million square feet with second-generation base and cash-based rent spreads of approximately 41% and 46%, respectively. We reached a significant milestone this quarter with the lease of our 1.1 million square foot development facility in the Greenville-Spartanburg market to a U.S. subsidiary of a global logistics company. This was a great outcome that resulted in immediate occupancy and low TI with annual cash base rent of approximately $6 million. Since 2019, we've developed 15 facilities totaling 9.1 million square feet, of which 74% has been leased at an average estimated stabilized cash yield of 7.1%. We have had users touring our other big box facilities in Indianapolis and Central Florida with the Indianapolis market much more active when compared to a year ago. Many of our 2025 expirations were addressed previously, and the remaining lease roll this year represents just 1.2% of our ABR with rents that are approximately 30% to 35% below market. We're forecasting lower tenant retention for 2025 with year-end same-store occupancy of approximately 97% to 99% and our current mark-to-market on leases expiring through 2030 remains attractive with in-place rents 17% below market based on brokers' estimates. On the investment front, during the quarter, we sold a property in Chillicothe, Ohio to a user buyer for approximately $40 million at a cash capitalization rate of 4.3%. This sale, along with another sale in the first quarter, bolstered our cash position. We accretively redeployed a portion of the Chillicothe sales proceeds to fund the repurchase of approximately $28 million of our floating rate trust preferred securities at a 5% discount to par. Based on the discounted purchase price, the current yield on the repurchased securities was approximately 6.6%. The transaction market for individual properties and small portfolios has been resilient. Given the stability we are seeing in the investment sales market, we are evaluating some modest capital recycling opportunities outside of our target markets for reinvestment that we would expect to be largely earnings neutral. We continue to concentrate our investment strategy in 12 target markets in the Sunbelt and select lower Midwest states, which account for approximately 85% of our gross assets. With a more focused geographic approach, we have the ability to scale and continue deepening our expertise and relationships within these markets, which provides both investment and operational advantages. Our target markets are experiencing positive demographic trends and are continuing to see investment in the onshoring of advanced manufacturing, reflecting business-friendly government policies and high-quality logistics infrastructure, among other attributes. In fact, in a recent CNBC report ranking the top states for business, 10 of our 12 target markets are in the top 10 states and all 12 are in the top 20, further validating our investment thesis that our target markets stand to outperform. With that, Nathan will now discuss our financials, leasing and balance sheet in more detail.

Thanks, Will. Adjusted company FFO in the second quarter was $0.16 per diluted common share or approximately $47 million. This morning, we tightened our 2025 adjusted company FFO guidance to a new range of $0.62 to $0.64. The low end was increased with the lease-up of our 1.1 million square foot facility in Greenville-Spartanburg, which is expected to contribute $3.7 million of base rent and operating expense reimbursement in 2025. The high end of the range has been revised given where we are in the year as time lines continue to be elongated regarding tenant decision-making processes. We are now including approximately $2 million of GAAP rent contribution from prospective leasing activity across the remaining development facilities for the second half of the year. During the quarter, we produced same-store NOI growth of 4.7% with our same-store portfolio 98% leased at quarter end. Our same-store NOI growth guidance for full year 2025 remains unchanged at 3% to 4%. This guidance assumes year-end occupancy for the same-store pool of approximately 97% to 99%. We reported second quarter G&A of approximately $9.6 million, and our expectations for 2025 G&A are unchanged at $39 million to $41 million. On the leasing front, we increased our portfolio occupancy in the second quarter to 94.1%, up from 93.3% as of first quarter. As Will mentioned, we leased our 1.1 million square foot development facility in the Greenville-Spartanburg market during the quarter for an initial lease term of 2 years with 2 5-year renewal options. The initial base rent is $5.50 per square foot with 3.25% annual rent bumps. The tenant took occupancy of the facility in late May and cash rent commences August 1. The estimated stabilized cash yield on our cost basis is approximately 8%. We also renewed our approximately 101,000 square foot lease in the Atlanta market and an outdoor storage facility in Minneapolis, both of which were 2025 expirations. We increased both the base and cash base rents at the Atlanta facility approximately 38% and extended the lease for 5 years with 3.5% rental bumps. The Minneapolis outdoor storage facility was encumbered by a 5-year fixed rate renewal option. We successfully negotiated a 10-year renewal with the tenant at the current in-place rent to enhance the marketability of this property as it is a near-term disposition candidate. We had 2 tenant move-outs at quarter end, which included our 248,000 square foot facility in Houston and our 355,000 square foot facility in Savannah. We collected 2 months of holdover rent at the Houston facility during the quarter and have prospective activity at both buildings. We currently have approximately 600,000 square feet of redevelopment projects underway. This includes a 350,000 square foot redevelopment in Orlando, which commenced in the quarter and a 250,000 square foot redevelopment in Richmond. Both facilities are anticipated to complete in the first quarter of 2026 and produce yields on cost in the low teens. Moving to balance sheet. We continue to execute on our plans to reduce leverage and increase the proportion of hedged and fixed rate debt. As a reminder, in September 2024, we capitalized on a favorable market window and executed interest rate swaps to lock in fixed rates on $250 million of floating rate bank term loan and $83 million of our trust preferred securities, leaving approximately $47 million of trust preferred securities unhedged in anticipation of potential opportunities to repurchase the securities. During the quarter, we repurchased approximately $28 million of trust preferred securities at a 5% discount to par. This transaction, along with the $50 million term loan repayment in January, increased our hedged and fixed rate debt to 99% of debt outstanding in 2025 and 2026 with a weighted average interest rate of 3.9%. Net debt to adjusted EBITDA was 5.8x at quarter end, down 0.4 turns over the last 12 months. Reducing leverage remains a key focus for the company as we pursue our business plan and grow EBITDA. At quarter end, we had approximately $71 million of cash on balance sheet. With that, I'll turn the call back over to Will.

Thanks, Nathan. In closing, we're pleased with our second quarter results. We believe our portfolio of modern logistics facilities with strong tenant credit and a geographic footprint aligned with advanced manufacturing investment is highly desirable in the current market environment. We will continue to focus on creating value for our shareholders by increasing occupancy, marking rents to market, raising rents through annual escalators and concentrating on our 12-market investment strategy. With that, I'll turn the call back over to the operator.

[Operator Instructions] We'll take our first question from Anthony Paolone at JPMorgan.

Great. Just first question on disposition. Can you talk about what drove the low cap rate on the sale?

Yes. I mean the situation there really involved finding a user that wanted to own that building. So the execution was much better than if we sold that into the investor marketplace.

Okay. And then also on capital markets then, can -- you mentioned still potentially selectively selling some things. Can you give us a sense as to maybe order of magnitude that you have in the market to sell in the near term? And also just some broader comments on depth of market for your assets, maybe where cap rates are, what types of buyers and what types of product do folks want right now?

Yes. I think we would test the market with about $100 million of dispositions going forward. And I would say that after Liberation Day, we were a little bit concerned that there would be volatility in the investment sales market, and it's really held up very well. So we'll be back and the business is creating some liquidity from our asset base that's outside of our 12 target markets, and I think we're optimistic that we'll do very well.

Okay. And then just last one. Can you talk about just what traffic has been like for leasing up some of the larger empty boxes?

Sure, Tony. This is James. So I'll start with Indy. So Indy has been -- has really picked up really since fourth quarter of last year. There's been a lot of big box activity. There were 2 really good deals that got signed in not in a particular submarket, but in one of the major submarkets in Indy. Subsequent to quarter end, there are a couple of 800s that have gotten done. There's a 1.2 that's in process of getting done. So we've had some competition get taken off. And we've had a number of RFPs, a number of tours, and we're feeling confident that we're going to land one. It really hasn't been a building issue. It's been a size issue. We've just been kind of in the middle of the sizes that have been leased. So optimistic on Indy. Central Florida generally has just been a little bit slower on the big box. We have had some renewed interest recently. We've got some interest from a full-building user that just kind of came across, and there are some deals that are in the works in the smaller kind of $0.5 million size. So things seem to be picking up there, but promising activity for sure in Indy and then hopeful activity in Central Florida.

We'll move next to Todd Thomas at KeyBanc.

First question, with -- I wanted to ask about the comments you made around the year-end lease rate target for the same-store pool in the 97% to 99% range. The portfolio is 98% leased today. You have 4 remaining expirations that represent a little over 100 basis points of occupancy. Can you provide an update on some of those expirations, the 380,000 square footer in Indianapolis that's scheduled to expire tomorrow? And curious if you have an update on the remaining 3 as well.

Sure. So the 380,000 you just mentioned is a no move-out. We expect that we're going to get a little bit of holdover rent from them. Going back to the Indy market, there's been a significant amount of activity on that asset. So we're hopeful that we're going to be able to backfill that space relatively quickly. We'll see. But like I said, good activity there. Then we've got the 2 small 80,000 square footers. Those are both also move-outs, one in Savannah and then one across the street or across the highway in Indianapolis. We have those out in the market. And then the last one is still unknown. It's 160,000 square feet in Phoenix. If the tenant stays great, there's a potential they may. It's across the street from one of their manufacturing plants. But if we get the building back, that's a pretty tight market with a really strong mark-to-market of around 50%. It's got 40-foot clear and right on the 303.

Okay. And then for 2026, any sense how -- I mean, you commented that tenant retention was going to be a little bit lower in 2025. Any sense what tenant retention may look like in '26 at this point? And are there any known move-outs that are worth discussing right now?

So most of our lease expirations are kind of back end of the year in '26. We have started some dialogue with probably 25% of the tenants. And I would say, for the most part, it's really positive on renewal. There are a couple of situations where tenants are contemplating their supply chain and whether or not the market that they're in is what fits for them. And then we have one situation with a small 3PL in Memphis that isn't sure the size still fits. So I think we're going to have strong retention, but we may have a few tenants here or there that move out. But overall, 19% mark-to-market next year, and we think we're going to have a successful overall outcome.

Okay. And then I wanted to shift to the land bank. It sounds like the build-to-suit market is stronger than it's been or getting stronger, I should say. Curious if you're seeing that and if there are opportunities within the land bank that could materialize.

This is Brendan. Yes, we've continued to respond to build-to-suit interest at both our Phoenix site and our Columbus site. I don't have anything further to report on that today, but I will comment that we've seen more potential interest of late at our Columbus site, where we have about 69 acres remaining. That the immediate market area around our site there has tightened significantly. We recently had a 1.2 million square foot building there in the market lease so there's good activity there, Columbus is looking strong. The decision-making on build-to-suit is a little bit like what we've seen with other -- and commented on other large space decisions. So it's been kind of protracted. In some cases, we -- in Phoenix, we've had cases where we've competed against existing spec product where there may be motivated landlords who can be competitive on pricing. And then in some other cases, we've had situations where RFP processes that we've responded to where the tenants defer decision and then schedule constraints may favor existing buildings versus taking completion risk on newbuilds. But there's certainly build-to-suit interest out there. So we're optimistic that we'll land something in that space.

We'll move next to Vince Tibone at Green Street.

As you think about capital recycling, could either of the cold storage or office JV properties or potential candidate's for sale? Or should we consider those properties or businesses you'll stay in for at least the foreseeable future?

I think for modeling purposes, you should think of those portfolios as being pretty static. I think there is one opportunity in the office JV that may turn into a sale candidate. But for the most part, I would think of them as being static portfolios.

No, that makes sense. And then just continuing on the point of capital recycling. I mean, is there a point where you would potentially shift from selling to purchase properties to consider buying back shares here in some form of leverage neutral fashion, just given where stock trades on a discount to NAV or main valuation metric. It seems like that could be an interesting avenue over further acquisitions. Curious how you're thinking about that opportunity and trade-off.

Yes, I think so. I think the #1 priority for us that's going to improve our valuation the most is generating more EBITDA from our vacancy and reducing net debt to EBITDA. If we can drive that down to 5x, we have visibility on that, it's varying a time lines to get there. But I think that's the thing that will help the valuation the most. In the context of share repurchase, if we could do some of both, that would be fine. I do think it's an important longer-term priority to recycle the capital out of our nontarget markets and really focus on the 12 that are our core strategy. And there will be some tax implications where we want to complete some 1031 exchanges in order to protect our basis. But share repurchase could be part of the mix, but I really want to stay committed to reaching that 5x net debt-to-EBITDA leverage point.

Got it. And maybe just last one for me. I just wanted to clarify a comment from Nathan earlier about, I believe it was $2 million included in the '25 guide from future leasing activity. Is that solely -- that $2 million directly tied to either the 2 vacant million square footers? Or is that any vacant property right now. So that would be kind of $2 million from any existing vacancy that you're able to lease through year-end. Just kind of curious where you -- if you could elaborate on that, kind of just get a sense of where you're -- how you're thinking about just the new leasing opportunity through year-end.

Yes, Vince, the $2 million really relates to the total opportunity set of the 2 big boxes. We also have another development that's 2 buildings, 1 half leased in Central Florida. It's really those 3 projects that opportunity relates to. And when you look at those 3 projects and you think about the annual run rate potential of those projects, it's something like $15 million of cash-based rent and OpEx reimbursement. And so I think that's important context. So sort of $2 million of contribution out of a pipeline that has $15 million of annual run rate when it's leased. But just to be crystal clear, it does not include any other second-generation vacancies.

Next, we'll take Mitch Germain at Citizens Capital Markets.

So I'm curious about the move-outs in the back part of this year. And I think you referenced 3 with that you weren't sure about. I'm curious how many of those 3 were always kind of known move-outs? Or was any of that a result of some of the recent macro and legislation issues?

So I guess I can run through them real quick. So the 380,000 in Indy, they moved to a competitive building that had tax abatement. So they were able to get tax abatement when we didn't have it. So it was an operating expense issue. The other 2 moved into new space where they actually consolidated. So the 80,000 square feet in Indianapolis moved one of their operations from Buffalo and moved into a 350,000 square foot building in Plainfield. And the smaller one in Savannah moved from 88,000 square feet into 800,000. So it was a size requirement and in a particular situation with tax abatement.

Got you. That's super helpful. And you previously had suggested sales are off the table, and it does seem like activity has picked up more than you anticipated. I'm curious if that same phenomenon that's happening in the investment sales market is also happening within the leasing markets where while you anticipated things would be a little bit slower and you're seeing a little bit more resiliency?

I would say activity has definitely picked up. The -- it's really about getting it from activity to across the finish line and getting signed. There seem to be a whole lot of starts where you're having conversations with tenants, you're even getting through the RFP process, you feel like a tenant is ready to sign and then you get a pause. So I think there's a lot more tire kicking. I think there's still concern over macro uncertainty. And I think if tenants can put decisions off, they are. I think you've also seen a lot of 3PL activity. It's really driven the market. And I think that's also indicative of the fact that tenants are concerned about uncertainty and maybe looking to 3PLs, both to cut costs and to give them flexibility.

Great. That's helpful. Any -- last question for me. Any update on Phoenix and the opportunity there?

No, not beyond what I commented on early, further in the conversation. So continuing to see interest there and be optimistic about the potential there.

Great.

Thanks, Mitch.

And we'll move next to Jim Kammert at Evercore ISI.

I guess, Nathan, you mentioned some pretty attractive returns on redevelopment activity. Could you refresh my memory, what kind of dollar volume of redevelopments could LXP be looking at in the next 12 to 18 months?

Nathan?

Yes, sure. I can. The 2 redevelopments that were announced, just to summarize those. One, the larger project is a redevelopment project in Orlando that follows on an investment that we made last year where we acquired the interest in the land beneath the 205,000 square foot building that we own there. That was also encumbered by a below-market building lease of -- that was at $2.48 a square foot. So in addition, we bought an expansion of that building that our tenant had owned. So today, we own a 351,000 square foot building, very well located in Southwest Orange County submarket of Orlando, which is outperforming the rest of the market. The budget there is $9.4 million on the redevelopment. And then the second project that we've announced is in Richmond. It's a 252,000 square foot building that was originally developed as part of a 4-building campus for a single user. There, the tenant exercised an early termination right that they had for this particular building. And the benefit there to us is that was encumbered by below-market lease as well. So we removed that encumbrance. There, the estimated cost of redevelopment is $3.7 million, which is principally just to separate the building systems and do some additional upgrades, expanding parking and things like that for the building to operate more independently from the other buildings. As Nathan shared in his prepared remarks, both projects are anticipated to complete in the first quarter of next year and produce yields on cost in the low teens.

Right. No, that's extremely helpful. I'm sorry, I probably imposed the question probably. I'm thinking beyond those you disclosed, what would you say just in the portfolio, can you identify material amounts of redevelopment opportunities is a better way to phrase, I'm sorry, beyond what you've already identified as a source of opportunity for Lexington?

I think that there's additional opportunity in the portfolio. We're not quantifying it today.

All right. That's fair enough. And then finally, you're very helpful the comments in Indianapolis still regarding lease-up. It's more a question of just a large box, there haven't been too many users. But for that and in the Florida large lease-up, are you seeing the competing landlords panic in any regard, sort of dropping rents? Or it's not something that we should be concerned about that sort of race to the bottom here just a lack of demand, but no one is sort of blinking yet on rents?

There are some landlords that are willing to do that. But typically, when they do that, and I can think of 2 in Indy right now, it's because they have something that's functionally wrong with their building or they're in a location that's not desirable. If you're down the middle with your asset, I think rents are going to continue to hold. I think where you'll see the softness in the market will be in free rent and tenant improvements rising.

Sure, good.

And that concludes our Q&A session. I will now turn the conference back over to Will Eglin for closing remarks.

Well, we appreciate everyone joining our call this morning, and we look forward to updating you on our progress over the balance of the year. Thanks again for joining us today.