Good morning. My name is Rob and I will be your conference operator today. At this time I would like to welcome everyone to the LXP Industrial Trust First Quarter 2023 Earnings Call and Webcast. [Operator Instructions] After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Heather Gentry, Investor Relations, you may begin your conference..

Thank you, operator. Welcome to LXP Industrial Trust’s first quarter 2023 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 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 statement. 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 unit holders 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; Beth Boulerice, CFO, Brendan Mullinix, CIO; and Executive Vice President, James Dudley will provide a recent business update and commentary on first quarter results. I will now turn the call over to Will..

Thanks Heather. And good morning everyone. Our year is off to a good start with positive first quarter operating results and excellent year-to-date leasing outcomes underscored by significant rental increases and further progress stabilizing our development projects.

In the quarter, we leased over two million square feet raising our base and cash base rents approximately 45% and 29% respectively. Notably, we achieved base and cash base rental increases of approximately 59% and 42% respectively when adjusted to exclude one fixed renewal.

Average annual increases of 3% for these leases or 3.5% when adjusted for the fixed renewal continue to highlight the upward trend of our escalators and improvement in our internal growth prospects.

Our view of our mark-to-market opportunity remains favorable and we look forward to a period of more active lease rollover for leases expiring in 2024 and beyond as the year progresses. Subsequent to quarter end we had a great success leasing our recently completed 1.1 million square foot Columbus development project to an investment grade tenant.

We achieved a stabilized cash development yield of 7.3%, excluding our development partner promote, which was well in excess of our original guidance on yield. Our remaining development pipeline is in various stages of completion with all projects expected to be completed this year.

We are working diligently to stabilize the remaining 4.3 million square feet, which represents roughly 7% of our overall portfolio, and we now expect to achieve stabilized cash yields in the 6% to 6.5% range after development partner promotes.

Moving to dispositions, we sold our remaining industrial asset in Detroit for $28 million during the quarter. As part of our overall business plan to commit capital to our target markets, we may exit certain non-core industrial markets over time with our industrial assets in these markets being viewed as potential sources of liquidity.

We are actively seeking to dispose of our remaining office assets and look forward to finishing this plan as soon as possible. Our fee owned office portfolio of four assets, which we believe has an estimated value of approximately $75 million, currently generates approximately $12 million of annualized NOI.

In addition, our Palo Alto office facility, which generates $0.02 per share of FFO, is subject to a ground lease that expires in December of this year with no renewal options. Moving to the balance sheet, net debt to adjusted EBITDA at quarter end was 6.3 times.

Our net debt to adjusted EBITDA would be 6.1 times, including pro forma stabilization of the Phoenix facility leased in the quarter and the subsequently leased Columbus project, I mentioned earlier.

As we continue to stabilize developments, we expect EBITDA to improve an overall leverage to decline over time to be within a target range of five to six times net debt-to-adjusted EBITDA. On the ESG front we continue to make important progress.

In April we were named a 2023 Green Lease Leader with Gold recognition by the Institution for Market Transformation and the U.S. Department of Energy's Better Buildings Alliance for our green lease practices and policies.

We are pleased to receive this recognition and look forward to increasing our green lease square footage through existing and new leases. Finally, we'd like to express our appreciation to Richard Frary, who has served as our Lead Independent Trustee since 2017 and is stepping down in May.

He has provided significant support and insights through our portfolio transformation with a commitment to enhancing shareholder value. We look forward to welcoming Jamie Handwerker into this role following the Annual Meeting in May and benefiting from her valuable industry leadership and experience.

With that, I'll turn the call over to Brendan to discuss our investments in more detail..

Thanks Will. During the quarter, we funded approximately $31 million in our six ongoing development projects. We anticipate spending an additional $76 million on these projects over the balance of the year, excluding any potential promotes. We're excited to see all of our development projects nearing final completion.

In the first quarter we substantially completed our 1 million plus square foot projects in Ocala and Indianapolis as well as the 400,000 square foot pre-lease facility and our two property Phoenix development.

The Phoenix property has been placed into service subject to a 10-year lease with 3.5% annual bumps and a stabilized cash yield of 7.4%, excluding partner promote. Subsequent to quarter end we completed construction of our 1.1 million square foot facility in Greenville, Spartanburg.

We expect our remaining projects including our South Shore development and the final facilities in our Phoenix and Greenville, Spartanburg projects to complete over the next several months.

Additionally, as Will mentioned we lease the entire 1.1 million square foot newly completed warehouse distribution facility at Ohio to an investment grade tool manufacturer. We achieved significantly better terms than our original underwriting with a starting rent of $4.85 per square foot and 3.5% annual bumps for just over 10 years.

JD and his team are working diligently to stabilize our remaining development assets and we continue to receive tenant interest for all the sites. We continue to keep our preference [ph] on current market dynamics and are exploring a handful of built to suit opportunities. With that, I'll turn the call over to James to discuss leasing..

Thanks Brendan. We had an active quarter of leasing with volume of 2.3 million square feet leased. It is certainly encouraging to see tenant demand and leasing remain strong despite some market specific softness. Rents in our target markets grew approximately 18% in the first quarter compared to the same time period in 2022.

As of the first quarter we estimate our industrial portfolios in-place rents for leases expiring through 2028 to be approximately 22% below market with in-place rents forecasted to grow approximately 38% on average or 28% net of contractual rent escalations based on independent broker estimates.

Our industrial portfolio was 99.5% leased at quarter end. We have one remaining 2023 expiration and continue to address 2024 expirations with estimated 2024 expiring rents expected to increase 20% to 30% based on current negotiations and third-party broker estimates. We achieved several strong leasing outcomes during the quarter.

The tenant in our 742,000 square foot facility in Indianapolis exercised their fixed rate option to renew for five years with annual rent increases of 2% per year through the January 2029 extended term. In the Atlanta market we renewed the tenant in our 676,000 square foot facility for seven years.

We substantially exceeded our original underwriting by securing a new starting rent of $5.20 a square foot or a 66% increase over the previous per square foot rent. And increasing annual rent bumps from 2.5% to 4%, demonstrating the strong fundamentals of the Atlanta market.

Finally, we executed a seven year lease on a March 2024 expiration with a tenant at our 851,000 square foot industrial facility in Cleveland, Tennessee at a starting rent per square foot of $4.10 or 25% over the existing rent with 3% annual bumps up from 1.2%. We believe this is a fantastic outcome for this property.

With that, I'll turn the call over to Beth to discuss financial results..

Thanks James. First quarter revenue was approximately $85 million with property operating expenses of roughly $$15 million, of which approximately 94% was attributable to tenant reimbursement. Adjusted company FFO for the quarter was $0.17 per diluted common share or approximately $50 million.

We are maintaining our current adjusted company FFO guidance within a range of $0.66 to $.70 per diluted common share. As a reminder, this guidance considers the timing of development lease up and sales volume amongst other items discussed on today's call. G&A for the first quarter was approximately $9 million.

We expect 2023 G&A to be within a range of $35 million to $37 million. Our same store industrial portfolio was 99.8% leased at quarter end, and same store industrial NOI increased 5% quarter-to-date compared to the same time period in 2022. We continued to anticipate our 2023 industrial same store NOI growth to be within a range of 4% to 5%.

At quarter end approximately 98% of our industrial portfolio leases had escalations with an average annual rate of 2.6%. We had full availability on our $600 million unsecured revolving credit facility as of March 31, 2023.

Additionally at quarter end, our consolidated debt outstanding was approximately $1.5 billion with a weighted average interest rate of 3.2% and a weighted average term to maturity of 6.3 years. Approximately 91.4% of the debt is fixed which is beneficial in mitigating exposure to higher interest rates.

Lastly, our unencumbered NOI remains exceptionally strong at over 93% of our total NOI. With that I'll turn the call back over to Will..

Thanks Beth. I'll now turn the call over to the operator who will conduct the question-and-answer portion of this call..

[Operator Instructions] And your first question comes from the line of Todd Thomas from KeyBanc Capital Markets. Your line is open..

Hi. Thanks. Good morning.

Just first question on the development leasing, is the Columbus lease commencement is that anticipated for the second quarter of this year? And then can you talk about demand for other ongoing developments and whether there are any other commencements embedded in the full year guidance?.

Sure. So the commencement won't be a second quarter commencement. However, the rent won't start until November on the Columbus lease, so there's a little bit of a pre-rent period. And then as far as the demand goes on the others, I mean, we have varying degrees of demand on all the assets that are under construction or just completed.

We've got some that are pretty close to having a deal, and we have others where we've got RFP activity out but nothing imminent on. So it's across the board, but good demand across all the properties..

Okay. And the increase in the stabilized development yields to 6% to 6.5%, I think that was from the mid-5% range previously.

Is that related to the Columbus lease primarily or do you see upward pressure on the cash yields across the pipeline more broadly?.

No, that's really forward looking, Todd. So I mean, the passage of time has helped us with market rent growth and we'd prefer to air on the side of being conservative to begin within the context of guidance.

And then with cap rates having come up a little bit, the cost of us buying out our development partner upon stabilization has also sort of worked in our favor, so it's a combination of things..

Okay. And then Will the $75 million value I think you mentioned for the office portfolio is that right? And which assets are you including in that specifically? Can you describe that value? And those comments a little bit more.

And then can you speak to any updates around 1701 Market Street and also the two adjacent Charlotte office assets?.

Sure. Those valuations are from potential buyers of those assets. So it's not – it's not our estimate and it's not like a broker's estimate, it's actually based on inbound interest. 1701 Market is included in that number and then it is under contract at the moment, but with a lot of contingencies.

So that includes the four buildings, 1701 Market, the flood simulator facility in New Jersey and the two Wells Fargo properties. So we don't have an update on Wells ongoing need with respect to occupancy in either of those buildings at the moment.

But we expect in the relatively short-term that that we'll know the outcome there and that'll facilitate moving forward and monetizing those assets..

Okay.

And are there any additional details on 1701 Market, either related to the contingencies or the potential timeline there, what should we be thinking about?.

I don't think there's more to add other than a closing like that is a lengthy process, but we would be optimistic about being able to bring it in before the lease expires next January..

Okay. All right. Thank you..

Thanks, Todd..

Your next question comes from a line of Jim Kemmer from Evercore. Your line is open..

Thank you. Good morning.

Looking at the operating portfolio, it's about a 6.1-year WALT, I'm just curious what is your strategy now thinking about trading term versus escalators? Just trying to get a sense that says a goal to kind of raise that or what's the ambition for the operating assets in terms of releasing?.

Sure. Thanks, Jim. I think the weighted average lease term will migrate shorter over time. Most renewal discussions are in the context of three and five-year leases, but it's not unusual for the development pipeline to end-up with a 10-year lease with the first user.

So it'll be a mix of outcomes would probably get a little bit shorter as we approach our heavy period of mark-to-market starting next year..

No, that's fair. But I'm curious, you know, you think at this point of cycle you're comfortable, obviously if some are extensions, it's out of your control.

But your preference is to continue to sort of focus on that five to seven-year horizon and take advantage of the growth in the market you don't feel you need to extend duration?.

Well, I think it really depends on the asset. There's some where if we can lock in some longer duration term with today's escalators, we think that's a good outcome. Often the lease on a development project, the term is really negotiated for by the tenant who's often making a big investment in the building.

So it's – I think it's a mix of outcomes simply in our position. We're just trying to optimize what's best for each asset..

Great.

And finally, looked like the second generation CapEx and TIs are pretty low, but I guess that's really a function that two of the leases were really just options and extensions so you can have a lot of CapEx sees anomalously low this quarter?.

Yes. It's just, it's a matter of timing and when projects come online as far as if we're going to do any kind of CapEx regarding maybe a roof or something like that, so it's really just a matter of timing..

Thank you..

But that's right. One of the – one of the extensions was a fixed rate extension that came with no TI, and then the other two opportunities we were able to keep the TI down to a $1 on the extensions..

Terrific. Thank you..

Thanks Jim..

Your next question comes from the line of Mitch Germain from JMP Securities. Your line is open..

Thanks for taking my question. I'm just curious about future development.

Is it market specific or is it really going to be driven by leasing at this point?.

I think it's principally driven by leasing. We're very focused on stabilizing what we've got. It doesn't mean we're not willing to look at new projects, but I think a rule of thumb where we're trying to stabilize more projects compared to what we might look at committing to going forward.

I think that's thematically I'd like to see a little more stabilization before we think about starting something new, but we're happy. In Phoenix, for example, our land bank we think is very valuable. There could be some opportunity there and Columbus looks good to us also..

Great. That's helpful.

Obviously you sold an asset industrial property in Detroit, and I'm curious what you learned from that process with regards to bidding pool demand pricing, what do you take away from that process?.

Well, the bidding pool was pretty deep on that one, but it was a long-term lease with flat rent. So, the capitalization rate was high there. That didn't reflect a shortage of bidders. It really reflected the term and the lack of growth. We thought it was a good sale because it was $147 a foot. So no, there is capital out there to sell into for sure.

But longer duration leases have really become more a function of leveraged IRR and require positive leverage..

That's helpful.

And then the last one for me, the Indi renewal, I know it's a fixed rate, was the rate higher or was it just market or can you provide some perspective there?.

It's below market. I mean, it's a 2% escalation over the five years, so annual escalation. And that was something that was negotiated into the original lease that we acquired..

Excellent. Thank you guys..

Okay, thanks Mitch..

[Operator Instructions] Your next question comes from the line of Vince Tibone from Green Street. Your line is open..

Hi, good morning..

Good morning..

Given the strong yield in excess of 7% on the Columbus and Phoenix development, do you expect to promote payment to your partner? And if so, how will that change the yields that LXP would achieve?.

Yes, there will be a promote payment, it hasn't been determined as of the moment, but, I think, you should think of Columbus probably landing in sort of the 6.5 area or maybe a little bit above there. So still a very good outcome for us beating our guidance by about a 100 basis points and that promote..

Got it. And then on the Phoenix, it doesn't sound like you are expecting a promoter. Can you just maybe take a step back and just kind of walk us through now that especially given you increased your development yields there low to mid 6s for the rest of the pipeline? Hopefully there is upside there.

Like at what point does a promote potentially get paid and just if you could help us think a little bit about that that would be helpful..

Sure. This is Brendan. Yes, the Phoenix development is actually a two-building development. So the promote will be determined upon leasing in the second building.

I think that in terms of the guidance that we gave for the remaining portion of the pipeline that's yet to stabilize, that's 6 to 6.5, I think, Phoenix will be at the upper end of that range probably in the mid 6s to above that. The different joint ventures have different promote structures.

But it's fair to say that in all of the projects that are yet to stabilize with the guidance that we've given, there is a promote that's being paid..

Got that. That's helpful. Thank you. And then one just thing to clarify gets around guidance and disposition plans.

Are you still marketing the non-core market industrial assets is that incorporated into 2023 guidance? And then should we expect cap rates on any industrial sales to be similar to the levels you achieved on the Detroit disposition or was that a little bit of a higher cap rate asset versus the overall mix of stuff targeted for sale on the industrial side?.

No, Detroit was very high because of the term and the lack of rent growth. So, we will have some things in the market to sell and we're really looking at where we want to land the year-end balance sheet with our revolver clear. So, there will be some sales in that portfolio that we have identified. But the number and volume are yet to be determined..

Got it. So it seems like it's fair to say though that the cap rate of life would be lower on their any other potential industrial sales and you got on Detroit.

Is that a fair – and I don't want to put a range or number [indiscernible] that it’s going to be lower?.

Yes, that's a fair assumption for sure..

Great. All right. Thank you. Appreciate the time..

Thank you..

Thanks Vince..

And your next question comes from a line of Steven Messakh [ph] from Ladenburg Thalmann. Your line is open,.

John Massocca, but good morning..

Hey John, thanks for the clarification..

I just have a bigger picture question and sorry I dropped from the call, so if you already addressed this, my apologies.

But have you seen an influx of kind of proposals from development partners as a result of some of the regional banking stress that's been out there recently? And has that impacted kind of your return hurdles at all? Is that part of what's driving this or is the increase more just about rent and interest rates?.

No well, I guess to address first the question about the increase in guidance, as I indicated with over the last couple of quarters between market rent growth that we've seen during construction and higher exit cap rates reducing promotes, we thought that there was a potentially good opportunity to exceed the original guidance.

And as we've gotten closer to completion and leasing we're raising our guidance today as we have. We are seeing more inbound inquiries from developers looking for capital partners. And it's both a function of challenges in the debt market, but there are also challenges in the equity markets in terms of merchant buildings finding equity capital.

I do think that that will present opportunities for us to expand our relationships. Also as it relates to the portfolio we are seeing, and I think, everyone in the market is seeing a very significant slowdown in new starts which, I think, will ultimately drive more rent growth in our existing portfolio in our pipeline that's underway.

So, that's encouraging..

And then you mentioned there were a couple submarkets that maybe had a little bit of kind of supply concern in the near term.

I guess how long are the legs on some of that supply delivery in maybe some of those tougher markets, if you will?.

Yes, so I mean if you just kind of look at the broad horizon, you had net absorption nationally at $62 million and you had $129 million in deliveries. So yes, vacancy rising and if specific to our markets, we don't have a ton of exposure to submarkets with kind of the supply demand imbalance, but Indi is one.

I mean, we've got some softness in the Indianapolis market, but I think, the legs are pretty short-lived. I mean with what Brendan just mentioned about there not being another wave coming on, there is still a significant tenant demand. I think you're going to see strong leasing this year.

And I see – I think you're going to see an increase in the near term of vacancy, but then probably sometime next year into 2025, it's probably going to get tight again. So I think it's a short window..

Okay. And then on the development kind of construction cost side, it seems like there has been a bit of mixed messaging broadly about whether that's starting to abate and even go backwards, or if kind of there's a little bit of a surprising kind of increase in kind of construction costs in certain areas.

I mean, what are you seeing today?.

I think as you described it as accurate, it's pretty mixed. I don't think there is a clear direction yet on whether we're going to see a reduction in construction costs..

Okay. That's it for me. Thank you very much,.

Sure..

And there are no further questions at this time. Mr. Will Eglin I'll turn the call back over to you for some final closing remarks..

Thanks again for joining us this morning. Please visit our website or contact Heather Gentry if you would like to receive our quarterly materials. And in addition, as always, you may contact me or any of the other members of our management team with any questions. Thanks again and have a great day..

This concludes today's conference call. Thank you for your participation. You may now disconnect..