Heather Gentry - IR:.

Will Eglin - CEO:.

Brendan Mullinix - CIO:.

James Dudley - EVP:.

Beth Boulerice - CFO:.

Anthony Paolone - JPMorgan:.

Todd Thomas - KeyBanc Capital Markets:.

Mitch Germain - Citizens JMP:.

Camille Bonnel - Bank of America:.

James Kammert - Evercore ISI:.

Jon Petersen - Jefferies LLC:.

Thank you for standing by. My name is Christa and I will be your conference operator today. At this time, I would like to welcome everyone to the LXP Industrial Trust, Second Quarter 2024 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session. [Operator Instructions] I will now turn the conference over to Heather Gentry, Investor Relations. Please go ahead..

Thank you, operator. Welcome to LXP Industrial Trust's second 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 Investor 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 FFL 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 positions, 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 second quarter results. I will now turn the call over to Will..

Thanks, Heather, and good morning, everyone. We had excellent second quarter results, highlighted by robust leasing activity with continued success in raising rents and strong same-store NOI growth of 5%. Based on the leasing outcomes we've achieved to-date, we're raising same-store NOI growth expectations to a new range of 4.5% to 5.5%.

We're also pleased to report we've successfully completed our portfolio transformation with the sale of our two remaining consolidated office assets during the quarter, positioning LXP as a pure play industrial REIT.

Leasing activity picked up considerably in the second quarter, with 2.7 million square feet leased at base and cash base rental increases of 44.5% and 44%, respectively, excluding tenant improvement reimbursements on one expiring lease.

We continue to achieve strong mark-to-market outcomes on expiring leases, which speaks to the high quality of our portfolio, 88% of which are Class A facilities. Market conditions support annual rental increases in the 3% to 4% range, and on average, we obtained rental escalations of 3.6% on leases signed in the second quarter.

Post-quarter end, we leased an additional 96,000 square feet at attractive base and cash base rent spreads of 28% and 35%, respectively. Strong leasing activity continues, and we're in advanced negotiations on an additional 1.7 million square feet. Moving to the balance sheet, we ended the quarter at 6.2 times net debt to adjusted EBITDA.

We remain focused on moving towards the low end of our target leverage range of five to six times and are confident we can reach this target through a combination of leasing vacancy and raising rents.

In addition, we are exploring several asset sales in non-target markets that could accelerate leverage reduction or create liquidity for redeployment into new investments. Looking ahead, our focus is principally on taking advantage of the internal growth opportunities in our portfolio.

We estimate that our current rents are approximately 24% below market through 2029, and we have a total of 4.1 million square feet available for lease. We also continue to explore external growth opportunities, including build-to-suit projects to the extent they fit within our target market strategy.

Finally, we announced earlier this year that Nathan Brunner will be joining LXP as Executive Vice President of Capital Markets in September. He will transition into the CFO role effective March 1, 2025, when Beth shifts to an Advisory role at LXP.

Nathan's background speaks for itself, with many successful years in investment banking, particularly in the industrial and net lease sectors, and he has deep corporate finance and M&A experience. We're very excited to have him join us and look forward to his contributions.

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

Thanks, Will. During the quarter, we invested $35 million in our spec and build-to-suit projects. We have approximately $29 million left to fund in our remaining spec development projects, excluding any partner promotes, and $36 million in our build-to-suit project.

Turning to our development portfolio, we've leased approximately 60% of the square footage we've developed since adding this important growth avenue in 2019. On the remaining 3.7 million square feet left to lease, we continue to see activity, with 1.3 million square feet currently in final negotiations.

Our build-to-suit project in Greenville-Spartanburg is well underway, and we expect that project to complete near the end of the year. We continue to explore other opportunities with the best prospects currently at our land bank in Phoenix.

To Will's earlier point, we are valuing several non-core market dispositions as a source of liquidity, particularly as prices for these types of assets has become more attractive. Potential proceeds from these asset sales could be used for deleveraging or build-to-suit opportunities, depending on what is the most accretive at the time.

With that, I'll turn the call over to James to discuss leasing..

Thanks, Brendan. The industrial leasing market showed signs of improvement in the second quarter, with net absorption up as demand accelerated and construction starts continued to decelerate. This was evident in our portfolio as well, as we saw a pickup in leasing activity across our markets in the second quarter.

Leasing was strong during the quarter and included lease extensions for four 2024 expirations, one 2025 expiration, one 2026 expiration, and a vacancy. To date, we've marked 2024 expirations at 29%, excluding fixed-rate renewals. We anticipate raising rents on the 600,000 square feet of remaining 2024 expirations on average 20% to 30%.

On last quarter's call, we discussed two leases in the Memphis market with 2024 expirations. Both were renewed in the second quarter, totaling approximately 1.6 million square feet. These are strong leasing outcomes, resulting in five-year lease renewals at cash rental spreads of 29% and 25%, with average lease bumps of 3.25%.

We executed an early lease renewal on our 2025 expiration with Mars in Atlanta during the quarter, signing a 32-month extension with 4% annual bumps. The expiring rent had $4.68 per square foot in tenant improvement amortization. When excluding this amount, the renewal rent reflects a 63% increase in rent from $4.50 to $7.35 per square foot.

Including the loss of these TI reimbursements in the second quarter leasing numbers, base and cash-based rent still increased approximately 12% and 13%, respectively. The TI reimbursement burn-off for this lease expiration has always been accounted for in our mark-to-market estimates.

We don't have any similar leases in the portfolio where TI amortization has such a significant impact. Also, during the quarter, we signed a 10-year lease extension with 3% annual bumps at our 242,000 square foot industrial facility in the Philadelphia market.

This was an early renewal on a 2026 expiration that resulted in an 85% cash rental increase over the prior rent. Finally, we executed a new two-year lease with 3.75% annual bumps at our vacant 118,000 square foot facility in the Memphis market.

There was minimal downtime in getting the property leased up, with the new rent per square foot representing a 22% rental increase over the prior rent. With that, I'll turn the call over to Beth, to discuss financial results..

Thanks, James. Revenue in the second quarter was approximately $86 million, with property operating expenses of about $15 million, of which 90% was attributable to tenant reimbursement. Adjusted company FFO in the second quarter was $0.16 per diluted common share, or approximately $47 million G&A was $9.2 million in the second quarter.

As we mentioned on last quarter's call, we have been focused on operating efficiencies, which included shrinking our office footprint in New York as we transition some overhead costs to our Florida and Dallas offices.

As part of our efforts to operate more efficiently and made possible by the successful completion of our portfolio repositioning, 2024 G&A will now include one-time charges of approximately $1.7 million associated with employee severance costs. These employee changes will result in annual cost savings of approximately $1.2 million moving forward.

Further in 2024, we will have approximately $1 million in expenses related to the CFO transition. As a result, our 2024 G&A is now expected to be within a range of $39 million to $41 million. Our same-store portfolio was 99.4% leased at quarter end and same-store NOI increased 5% in the second quarter when compared to the same period in 2023.

At quarter end, approximately 99% of our portfolio leases had escalations with an average annual rate of 2.7%. During the quarter, we fully repaid the $198.9 million of 4.4% 2024 senior notes at maturity with proceeds from the issuance of the 6.75% 2028 senior notes we completed last November.

Our fixed rate debt percentage was approximately 92% at quarter end. As we've indicated previously, we expect 2025 interest expense to increase when the swaps on the term loan expire in January. We are considering other long-term fixed rate options or swapping some of this exposure later this year or early next year.

We anticipate this additional interest expense to impact 2025 adjusted company FFO by approximately $0.02 per diluted common share based on the current SOFR forward curve.

At quarter end, our total consolidated debt outstanding was approximately $1.6 billion with a weighted average interest rate of 3.81% and a weighted average term to maturity of six years. Finally, we ended the second quarter with our $600 million unsecured revolving credit facility fully available.

With that, I'll turn the call back over to the operator who will conduct the question-and-answer portion of this call..

[Operator Instructions] Your first question comes from the line of Anthony Paolone with JPMorgan. Please go ahead..

Thank you. Good morning. First question, I just wanted to get into the development leasing pipeline a bit more. I think you mentioned 1.7 million square feet of leasing in the pipeline.

And just maybe can you go over again how much of that do you think relates to some of the developments that have been delivered already and just prospect of leasing up some of these large million square footers?.

Tony, it's James. So just -- I'll just run through the portfolio and kind of where we stand. So I think we've talked about Ocala for a while. We continue to be close on Ocala with a prospective tenant that would take the entire facility. We also have another identified tenant for our 250 in Aetna, and we think we're close on getting a deal done there.

We've responded to a couple of full building RFPs on our Indianapolis facility. And then we have a partial building user that's looking at our South Shore Tampa facility. And then a couple of partial building users that have inquired about Greenville/Spartanburg.

So, I would say we're in a good spot on Ocala and Columbus right now and a little further away from having certainty on the others..

Okay.

And just any comments on just where you think yields will end up on those given what you're seeing and where the rents being discussed are?.

Yes. We're maintaining the prior guidance of 6% to 6.5% that we've previously guided to..

Okay. And then just one other question, maybe Beth. I think your same-store NOI guidance was 4% to 5% previously.

Just wondering if that's still kind of the number, if there's any changes there for the year?.

Yes, we've upped the guidance, Tony, to 4.5% to 5.5%..

Okay, great. Thank you..

Your next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please go ahead..

Hi, thanks. First question, Beth. You mentioned the $39 million to $41 million G&A guidance for ’24 that’s higher by $3 million, I believe, from the prior G&A guidance. I just wanted to clarify is that all as included in adjusted company FFO, it sounded like a portion was one-time in nature.

I just wasn't sure I heard the comments there, can you clarify..

Yes. So the severance charges of $1.7 million are going to be a one-time so they won't be an adjusted company FFO..

Okay. But the balance.....

The range I had last -- the range we said last time was $36.5 million to $38.5 million. So now we're saying $39 million to $41 million, so it's not quite $3 million, but less than that..

Okay. But the offset then, so you took up the same-store by 50 basis points.

What else sort of changed, what other assumptions should we think about as it pertains to the updated guidance and the low end coming up $0.01?.

It's really due to all of our leasing that we've done and the great outcomes that we've had in our spreads and being able to capture that GAAP rent, it's really the motivator for that..

Okay. And then I just wanted to ask also about... There were a handful of, I think, known move-outs that were included in the guidance, in the budget for the year, in the balance of ‘24. I think there was also some discussion around ‘25.

You talked about a 3PL in South Carolina, around a 75,000-square-foot warehouse, also a 58,000-square-foot warehouse in Carrollton, Texas.

Are those both still move-outs, and is there anything else in ‘24 or ‘25 that you're aware of at this time?.

So those are the two that are in ‘24, and we have promising activity on both of them. So I'm hoping that they'll be short-lived vacancies and the 58 maybe doesn't even become 1 because we replaced the tenant. And then we have 1 other 124 that's -- it's a March 2025 lease expiration that we know the tenant is moving out.

Fortunately, it's a multi-tenant building and the tenant that next door wants to expand. So also hopeful that we can minimize downtime there..

Okay. And just last one for me. The Cleveland asset that was sold subsequent to June 30.

Can you just share some details on that sale, the disposition proceeds or any other details on that asset sale?.

Sure. That was an asset that we had a known move-out coming, and we ended up selling it to a user for -- we thought was a really good price. It's a cap rate of a little bit above 7%, which sounds high, but for a 1996 facility with 24-foot clear height, it was really a very good sale for us..

Okay, all right. Thank you..

Your next question comes from the line of Mitch Germain with Citizens JMP. Please go ahead..

Thanks for taking my question.

Can you provide me some perspective on the math between a build-to-suit versus what you're seeing in the acquisition market today?.

Sure. Build-to-suit, we're targeting a range of 6.5% to 7%, just depending upon what the escalation structure is in term. And I would say in the existing market something a term is going to be in the high 5s to 6% kind of range..

Okay. That's super helpful.

And thinking about dispositions, is it markets where you don't have as much scale or is it assets where either there's some capital or some no move out? What's kind of added in that bucket?.

Look, it's really focused on markets where we don't have scale and don't plan to scale. And so we're being opportunistic about harvesting value where we can. We think the disposition market has probably improved in our favor about 50 basis points from a cap rate perspective since fourth quarter last year.

So we're in the market doing some price discovery on a handful of buildings, and we're getting good response..

That's super helpful. And last one for me, Beth. I apologize you get a lot of questions on G&A. I think you were just talking a little too quick for me. So just from your prepared remarks, can you just kind of -- I recognize the severance and then you talked about some savings of $1.2 million, and then I missed it.

I think there's some additional fees for the CFO change.

Can you just kind of go over that one more time, please?.

Yes. Sure, Mitch. No problem. Yes. So there's one time of $1.7 million for severance costs that are onetime, so they won't be impacting our FFO -- adjusted company FFO for 2024. But going into 2025, we anticipate that we're going to be saving about $1.2 million based on those changes.

But also for -- and also for 2024, we are anticipating about $1 million for the CFO transition that will impact 2024..

Great. That’s super helpful. Thank you so much, everyone..

Your next question comes from the line of Camille Bonnel with Bank of America. Please go ahead..

Hi, good morning. So the team has done a lot to term out and manage the floating rate exposure. But as Beth, you highlighted in your opening remarks, interest expense will still be a drag to the bottom line earnings growth.

And when you look at the pace of stabilizing your development asset, it seems like we're still a few quarters away, which implies further drag on 2025. So I'm wondering what your thoughts are on that and what you can do to improve this outlook while balancing potential dilution from your asset sales? Thank you..

Well, we're exploring different opportunities for the term loan. Right now, it's at 2.72% with the swaps that are in place right now. We're looking at potentially some fixed rate, maybe a potential bond offering or swapping today for some of that exposure. We're also -- potentially, we may pay down a portion of it as well.

And so going forward, you're right. Interest expense is going to be higher by about $0.02, as I mentioned in our remarks..

And as you explore those considerations in light of where your stock is trading today, which does seem much closer to NAV relative to peers. Just wondering how you're thinking about potential equity raises as a source of capital maybe to address capital requirement needs or investment opportunity..

Well, we are very pleased that the shares have performed well recently, but we're focused on what things that we can achieve that can improve the share value even more. And obviously, making more progress on stabilizing the development pipeline would be top of the list.

So things are certainly better from a cost of capital standpoint, but our focus is on, as I said, working in the portfolio, producing better leasing outcomes and improving our valuation further..

Okay. So it doesn't sound like it ranks very high at this point. And finally, I just wanted to pick up on your point about LXP being positioned as a pure-play industrial company. I believe you still have a small stake in a few office properties.

So are you planning to also wind that down? And are those assets included in the disposition strategy you outlined?.

Yes. That office joint venture has been basically in a liquidating mode since it was formed. So it shrunk a lot. It still has a handful of buildings in it. And we are winding that down as quickly as the market supports..

Okay. Thank you..

[Operator Instructions] Your next question comes from the line of Jim Kammert with Evercore ISI. Please go ahead..

Thank you. Good morning.

I know Will, did I miss it? Did you quantify maybe the potential sales that you would consider in terms of dollars and maybe you don't want to tilt your hand but a range of cap rates? The non-core assets that you're thinking?.

No. I mean I would think that what we have in the market right now is sort of more than $100 million, but less than $150 million.

And as Brendan was saying, cap rates for this sort of asset or arguably in the 5.75% to 6% area, that sort of space which is better than it has been, and those cap rates are certainly lower than our floating rate borrowing cost right now, although over time, it's certainly possible that so or we go down..

That's helpful. And then second question, I sold for counting.

But Beth, how much lease-up is assumed on the recently completed deals, where I presume you're no longer capitalizing interest, but how much sort of drag is in the remaining 2024 guidance for those assets? Are you assuming any leasing?.

The low end assumes no leasing at all, and the high end assumes a little bit in the fourth quarter..

Okay, thank you..

Your next question comes from the line of Jon Petersen with Jefferies. Please go ahead..

Good morning.

On Ocala and Columbus, are you guys able to -- can you give us like the annual like run rate FFO upside from leasing those two properties? Like how should we think about quantifying that since that seems to be the most likely upside in the near term?.

It’s about $0.03..

Okay.

And then on Ocala, because I think that's the one we've been talking about the longest here, can you characterize how the negotiations have evolved there? Is it just waiting for the potential tenant to sign the dotted line or is there a lot of back and forth on terms and that's what's holding it up?.

It's just waiting on the tenant at this point. Their internal process is incredibly long and we're working through it and we're trying to be patient, but hopefully we're going to have something done soon. I know we've been saying that for a couple of months now, but it continues to move in the right direction, just at a very slow pace..

That’s helpful. Thank you..

And that concludes our question and answer session. And I will now turn the conference back over to Will Eglinton for closing comments..

Well thank you everyone for joining our call this morning. I hope you'll take the time to 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 senior management with any questions. Thanks again..

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