LXP Industrial Trust (LXP): A REIT Focused on Class A Warehouse and Distribution Investments

Published on November 01, 2024 | Ticker: LXP

Business Overview and History

LXP Industrial Trust (LXP) is a publicly traded real estate investment trust (REIT) that focuses on acquiring, owning, and operating Class A warehouse and distribution facilities across the United States. The company has a well-diversified portfolio of industrial properties located in key logistics hubs and Sunbelt markets, positioning it as a leading player in the industrial real estate sector.

LXP Industrial Trust was founded in 1993 as a REIT focused on acquiring and managing industrial properties. The company started with a small portfolio primarily located in the Northeastern United States. Over the next two decades, LXP steadily grew its portfolio through strategic acquisitions and developments, expanding into new geographic markets in the Midwest and Sunbelt regions and building up its presence in key logistics hubs.

During the global financial crisis in the late 2000s, LXP faced challenges but worked to strengthen its balance sheet and reposition its portfolio. The company shed lower-quality assets and focused on acquiring and developing Class A industrial properties, which positioned it well for the growth in e-commerce and demand for modern logistics real estate in the following years.

In the 2010s, LXP continued to expand its footprint, entering new Sunbelt markets like Phoenix, Atlanta, and Dallas, and increasing its investments in build-to-suit and speculative development projects. The company's strategic shift towards industrial assets culminated in 2023 when it divested its remaining office properties to become a pure-play industrial REIT.

As of June 30, 2024, LXP's portfolio consisted of approximately 117 consolidated industrial properties, totaling 58.2 million square feet, with a 93.5% occupancy rate. The company's investments are primarily located in the Sunbelt and Midwest regions, which have experienced robust demand for industrial real estate due to favorable demographic and economic trends.

Financial Performance and Metrics

LXP has demonstrated strong financial performance in recent years. For the full year 2023, the company reported annual revenue of $340.5 million and net income of $30.4 million. The company's adjusted company funds from operations (Adjusted Company FFO), a key metric for REITs, was $102.9 million, or $0.35 per diluted share.

Financials

For the full year 2023, LXP reported:

Revenue: $340.50 million
Net income: $30.38 million
Operating Cash Flow (OCF): $209.45 million
Free Cash Flow (FCF): $191.51 million

For the most recent quarter (Q2 2024), LXP reported:

Revenue: $85.79 million
Net income: $4.80 million
Operating Cash Flow (OCF): $39.75 million
Free Cash Flow (FCF): $37.00 million

The increase in net income attributable to common shareholders of $13.50 million in Q2 2024 compared to Q2 2023 was primarily due to a decrease in impairment charges, an increase in gains on property sales, and an increase in non-operating income, partially offset by an increase in interest expense.

As of June 30, 2024, LXP had a strong balance sheet, with total assets of $3.89 billion and total debt of $1.57 billion, resulting in a net debt to adjusted EBITDA ratio of 6.2x. The company's fixed-rate debt represented approximately 92% of its total debt, reducing its exposure to interest rate fluctuations.

Liquidity

LXP maintains a solid liquidity position as of June 30, 2024:

Debt/Equity ratio: 0.73
Cash: $48.68 million
Available credit line: $600 million revolving credit facility fully available
Current ratio: 1.12
Quick ratio: 1.16

These metrics indicate that LXP has a strong balance sheet and ample liquidity to support its ongoing operations and growth initiatives.

Operational Highlights and Leasing Activity

During the second quarter of 2024, LXP's leasing activity remained robust, with 2.7 million square feet of new leases and lease extensions executed. The company achieved base and cash base rental increases of 44.5% and 44%, respectively, on these transactions, excluding tenant improvement reimbursements on one expiring lease. This strong leasing performance reflects the high quality of LXP's portfolio, with 88% of its properties classified as Class A facilities.

The average fixed rent on the second generation new leases and extended leases was $5.22 per square foot compared to the average fixed rent on these leases before extension of $4.66 per square foot, representing a significant increase in rental rates.

The company's same-store net operating income (NOI) increased by 5% in the second quarter of 2024 compared to the same period in 2023, driven by higher rental rates and occupancy levels. LXP also placed two vacant warehouse and distribution facilities, totaling 1.2 million square feet, into service during the quarter.

Development and Capital Recycling Initiatives

LXP has a focused development pipeline, with approximately $117.3 million invested in consolidated development projects as of June 30, 2024. The company expects to incur an additional $65.6 million, excluding noncontrolling interests and potential incentive fees, to complete these projects, which are targeted to achieve stabilized yields of 6-6.5%.

During the second quarter of 2024, LXP invested an aggregate of $34.7 million in development activities, demonstrating its commitment to expanding its portfolio through strategic development projects.

In addition to its development activities, LXP has been actively engaged in capital recycling, disposing of its remaining office properties during the second quarter of 2024. The company sold its interests in its two remaining consolidated office properties for an aggregate gross sale price of $15.8 million. This transaction further solidified the company's position as a pure-play industrial REIT, aligning with its strategic focus on warehouse and distribution assets.

Guidance and Outlook

LXP has raised its guidance for the full year 2024:

Same-store NOI growth guidance has been increased to a range of 4.5% to 5.5%, up from the previous guidance of 4% to 5%. This upward revision reflects the strong leasing momentum and operational performance of its portfolio.

The company expects to generate adjusted company FFO in the range of $0.32 to $0.34 per diluted share.
LXP's 2024 G&A is now expected to be within a range of $39 million to $41 million, up from the previous range of $36.5 million to $38.5 million. This increase is due to one-time charges of $1.7 million for employee severance costs, offset by $1.2 million in annual cost savings.
An additional $1 million in expenses is expected in 2024 related to the CFO transition.

Looking ahead to 2025, LXP expects interest expense to increase by approximately $0.02 per diluted common share when the swaps on the term loan expire in January 2025.

The company's focus remains on capitalizing on the internal growth opportunities within its portfolio, with an estimated 24% mark-to-market potential on its existing leases through 2029. LXP also continues to explore external growth avenues, including build-to-suit development projects that align with its target market strategy.

Industry Trends and Market Position

The industrial real estate sector has seen strong demand and rent growth in recent years, driven by the growth of e-commerce and supply chain shifts. The Compound Annual Growth Rate (CAGR) for industrial rents in LXP's target markets has been approximately 3-4% over the past 5 years.

LXP's portfolio is located in 17 states, primarily in the Sunbelt and Midwest regions, which have experienced robust demand for industrial real estate. While the company does not provide a breakdown of performance by geographic market, its strategic focus on these high-growth areas positions it well to capitalize on favorable demographic and economic trends.

Risks and Challenges

Despite LXP's strong performance, the company faces several risks and challenges that investors should consider. These include rising interest rates, which could impact the company's borrowing costs and financial results, as well as potential softening in industrial demand or oversupply of new development projects in its target markets.

Additionally, the company's reliance on a limited number of large tenants and its exposure to the broader macroeconomic environment could pose risks to its financial stability and growth prospects.

Conclusion

LXP Industrial Trust has established itself as a leading player in the industrial real estate sector, with a well-diversified portfolio of Class A warehouse and distribution facilities. The company's strategic shift towards industrial assets, strong operational performance, and disciplined capital allocation have positioned it for continued growth and value creation.

With its robust financial position, strong leasing activity, and focused development pipeline, LXP is well-positioned to capitalize on the ongoing demand for high-quality industrial real estate. The company's recent guidance update and successful capital recycling initiatives further demonstrate its ability to execute on its strategic objectives and deliver value to shareholders.

Investors seeking exposure to the industrial real estate market may find LXP's compelling investment proposition worth further consideration, particularly given its focus on high-growth Sunbelt and Midwest markets and its track record of strong operational performance.