All right. Good day, everybody, middle of the day. I'm Jonathan Petersen. I lead our research team at Jefferies. Really happy to have the LXP Industrial Trust team with me here up on the stage. So we have, to my immediate left, we have Will Eglin, the CEO of LXP, Beth Boulerice, the Chief Financial Officer, and Brendan Mullinix, the Chief Investment Officer. So thanks, guys, for being with us. Definitely we'll leave time, and people can interject with questions as they have them. Happy to kinda keep this open and interactive. But I thought maybe we could start, Will, if you could just talk about your approach to industrial real estate in your portfolio and how you differ from the peer group.
Sure. Well, it's great to be back here, and thanks for attending our presentation today. I think if we'd been here in previous years, we probably would've been talking quite a bit about office sales, and the good news is the last two office buildings in our consolidated portfolio are under contract and will sell this month. So I think we want to just talk specifically about what we did with the billions of dollars that we extracted from the office portfolio and what it's producing for shareholders now, and going forward. But we took all of this capital, and we built a sort of modern logistics portfolio, you know, with single-tenant net lease characteristics, but also with embedded mark-to-market opportunity as leases roll. So the capital was targeted primarily for Sun Belt logistics opportunities.
Over 70% of the portfolio is in the Sun Belt, with the balance in lower Midwest logistics markets, mainly Indianapolis and Columbus. As a result of those activities, our portfolio right now is less than 10 years old, which makes it really young of the public companies. And that is putting us in a position where, you know, tenant retention is relatively easy for us. Our rents are very inexpensive right now, about 24% below market. Facility utilization is really high, and credit quality is high. So by focusing on new construction, tenant demand has been, for the most part, with companies as businesses are growing.
So the risk of contraction in our portfolio is pretty low at the moment, where we've had move-outs this year have been in actually smaller facilities that our tenants have outgrown. So overall, very, very happy with, you know, the repositioning and how it's paying off. I think we see a lot of opportunities for organic growth inside the company with rents that are below market. Escalation structures are also getting a lot better. I've been in the business for a long time. I feel like for 20 or 25 years, lease escalations were in the 2% area. Now it seems like 3.5%-4% is more the norm. So, you know, as we roll rents up, we're also improving that internal growth profile, as well.
Another thing that we did with the redeployment of capital is we went into the development business, and we built 14 buildings. We've leased 9 of them very well. We have 5 to go, and we appreciate that that's creating some overhang in the share price right now. But I think that's also an opportunity from a value standpoint for people looking to enter the stock today. We've got 3.7 million sq ft yet to lease, but when we do that, the portfolio will be producing about $20 million more of EBITDA or $0.07. That'll have a good impact on our net debt to EBITDA ratio and, you know, start to bring our leverage down closer to the low end of our target range. So, overall, you know, operationally, things are really good.
There's been a lot of talk at this conference about, you know, what's happening with tenant demand, and there are sort of, I guess, macro risks. But a portfolio like ours, because it's young, because it has modern specs, high facility utilization, and good credit quality, should continue to perform pretty well.
That sounds great. So, you know, there's been a lot of talk just in the industrial space broadly about, you know, rents falling in some of the major warehouse markets, mostly like Southern California. But just curious, more details on what you guys are seeing in your markets, 'cause it, it feels like things are holding up a little bit better in, in kind of the Sun Belt and in Midwest markets.
That's been our experience. We had our two biggest boxes that had leases expiring this year, we renewed, and we rolled rents up about 27% on a cash basis. So we've been, you know, producing mark-to-market outcomes on renewals that have been above our underwriting and forecast. So, you know, so far so good, and I don't really feel like we're at risk of losing any of our tenants to less expensive opportunities in the submarkets that we own in.
Sounds good. Can we talk a little more about the, the five projects that are in lease-up? I don't know if you guys might go through them and, and kinda where you guys are at in the, in the lease-up process.
Yeah, I think of the three big ones, I would say that in Ocala, Florida, we're arguably closest to having that one resolved. But the process of getting tenants to commit and sign leases is, you know, taking longer than it has in recent years. In Indy, you know, there's more RFP traffic now than there was at the beginning of the year, so, you know, we're getting, I think, some good looks there. Our building competes very well from a quality standpoint, and we built it at a good basis. So I think that, you know, when we underwrote these development projects, we were sort of thinking in the context of maybe a 5.5% initial yield.
That was at a time when cap rates in the purchase market were arguably close to 4. I think our yields will probably turn out to be more in that 6-6.5 area going in, you know, with rent growth. So we're... I think that we'll end up doing better from a yield standpoint. Obviously, cap rates going up... so the profit margin is a little bit less. The third big building is Greenville, and that one has been, you know, slower than we thought. We built three buildings in that park. We leased two of them that were smaller, and there's some competition in Greenville, so, you know, we'll see.
We've got some interest in that building, but it's not for a million-foot user, so that might argue in favor of dividing that facility up for multi-tenant.
Okay, that sounds great. I guess, thinking about your appetite for spec development going forward, versus build-to-suit, can you talk about how you would prioritize opportunities and what kind of opportunities you're seeing?
Yeah, I think at the moment, we would not be looking to start anything on a spec basis. But build-to-suit is quite interesting to us, and it typically is in an environment of you know, limited capital and also limited new supply of spec construction coming online. If you're a tenant and you're thinking that you wanna be sure of having a certain size box in a certain market, looking say, 12-15 months ahead, this is a market where we would see build-to-suit opportunities that are interesting to us. And when I say interesting to us, a build-to-suit where we end up with a pretty generic modern warehouse in a market that we want to be invested in, that's a good opportunity.
Build-to-suit is often, you know, could mean it's a highly specialized piece of real estate with above-market rents, so you have to be worried about residual value. Or it could mean that it's being built in a tertiary market where there isn't enough supply to, you know, sort of meet tenant demand. So, that's an interesting opportunity for us. It's probably in the sort of 7% cap rate area with escalations, and if we could put some of our land bank into production via build-to-suit, I think that would be really great for us. You know, right now, the spec development pipeline and land bank is arguably being valued at zero in our share price, so progress in that area would be key.
Yeah, I don't think a lot of people appreciate the land bank you guys have. Can you talk a little more about what markets that's in, how much square feet it can support?
Sure. Brendan, do you wanna-
Yeah, a little over... Sorry, a little over 500 acres. The largest portion of it is in Phoenix, in the Southwest Valley. We have about 320 acres there. So that's the most exciting land position we have. In addition, we have land parcels adjacent to our ongoing projects in Columbus and in Indianapolis. You know, in terms of the potential for those sites, it tends to vary quite a bit, depending on what your ultimate site plans wind up being. However, you could, you know, build as much as seven million sq ft in, on that land bank, so it's quite significant.
Got it. Maybe, Beth, can we talk about, you know, I guess, funding the development pipeline or what's kind of left of it, and then kind of funding the business going forward and where you're at on your leverage targets?
Sure. So we have about $100 million as of March 31st that was left to fund on our development projects, including the new build-to-suit that we mentioned. So you'll see us doing some capital recycling. We have some one-off buildings and markets in the Midwest, where we don't want to really grow our portfolio in, so we will be doing some price discovery on those, and they would be a source of liquidity for us. As you know, Will mentioned, our leverage right now is a little higher than what we have traditionally like to have our leverage. We've said we'd like to operate in the 5-6x, with closer to 5x. So we are very mindful of that metric, and we want to get closer to that.
As these projects come online, and we can tap into the EBITDA, it will naturally come down, but we wanna be conscious of that and not add any more leverage to the portfolio.
Okay, and that might be the answer to my next question, but how do you... You know, we get questions on share buybacks, and you talked about selling buildings. Like, how do you, how do you think about that?
Yeah, I mean, we always think about share, share buybacks, but in the context of leverage, that's, that's our main focus right now.
Yeah. Okay, that makes sense. And then, maybe one other thing on maybe dividend policy. You know, how do you guys think about when and the frequency of increasing the dividend?
Yeah, we've been basically increasing the dividend every year, typically announcing it with the third quarter earnings. I think that, given the fact that the portfolio's been positioned to sort of steady same-store NOI growth at this point, that regular dividend growth, you know, it should be expected by shareholders. So we... Over time, I think we'll probably target an AFFO payout ratio in the 75%-80% area. We're a little bit above that at the moment, but we're sort of looking beyond this period where we need to stabilize the development pipeline. So I think we should be in a position for steady dividend growth, but we also wanna make sure that the payout ratio is declining as cash flow grows, and we're maximizing retained cash flow as well.
Great. Any questions? We're about halfway through. Yes. Yeah, go ahead.
Talk about like-
Oh, we have a microphone if you wanna wait for that to come around. Make sure everybody can hear it.
Could you just talk about, like, solar on the rooftops, those types of initiatives and so forth, that we're hearing from some of the other industrial companies and, you know, what your thoughts are and so forth?
Yeah, I mean, to begin with, in most net lease structures, the tenant controls the roof. So if they want solar, it may be that they're already acting on that opportunity as well. And in a lot of the Sun Belt markets, energy's already pretty cheap. So there've been, I would say, limited opportunities for us to exploit that as an opportunity. But we're, you know, we're always talking to our tenants about that sort of thing. But it's, you know, where it makes sense economically is one thing, but we can't, you know, can't sort of force it on them.
Yeah.
What would it take to move your stock back above $10 a share?
Well, the good news is, any one of a number of things. I think that, our share price, because we're at leverage at roughly 6x net, that the EBITDA, not 5, we've been more sensitive to interest rates than others. So if the Fed ever gets around to cutting interest rates, that would help us a lot. But the big thing from my perspective is, you know, if you look at how far rents are below market, you know, if rents don't grow, and we just mark rents to market in the next 5 years, we're going to have another two, you know, whatever, $0.12 of funds from operations. And then the big thing is, with this overhang from the development pipeline, how soon can we turn that empty real estate into cash flow production?
I would say that, you know, that's a big lease or two and a rate cut or two, and the share price is going to do very well.
I guess, on that upside, can you talk about the leasing spreads in, in percentage terms, what you guys are expecting over the next few years?
Yeah, I think, this year I feel good about them landing in the 20%-30% area. And then the question for us is, I mean, like-
That's on a cash basis or...?
That's on a cash basis.
Cash basis.
Cash basis. Next year is a relatively light year from a rollover standpoint, but then we have more, about 26% of the portfolio turning over in 2026 and 2027. And in 2026 especially, we've got really inexpensive rents. So if between here and there, this sort of a little bit of excess supply in the market gets soaked up, and there's limited new construction starts, like, we're already in a position of pricing power with our tenants, and it's going to get better at a time when we're going to have more, you know, more, more active role.
What about on the rent escalators that are embedded in current leases? What are you doing today versus what's in place on the portfolio?
Yeah, overall, we're at 2.7% in the portfolio, and last year, escalators averaged about 3.7% on new leases, and I think for the most part, it's probably a 3.5% escalation market, and in some cases, we're getting 4%. Would we live with 3% if we were leasing one of our empty one million sq ft buildings? For sure. But landlords have a lot of pricing power with, you know, in the escalation structure, and that's continuing.
Got it. I mean, as inflation comes down, do you expect those negotiations on escalators to change at all?
I think it'll take a long time. You know, we'll see about inflation.
Yeah. Okay. Okay.
We'll, we'll see. 2% seems a long way away to me, but we'll, we'll see.
Okay. Do you want to forecast inflation and interest rates and everything while we're up here? That's always a fun game. Okay. All right, sounds good. Well, maybe, Beth, back to you on the balance sheet side. I know you guys have some swaps burning off later this year. Maybe just talk about some of the debt refinancing needs that you have.
Sure. So in the fall, we effectively pushed out our long-term maturities to 2027, so we have nothing coming due until then at this point, other than we do have a bond that's due this month, that we effectively funded back in November when we did another bond deal. So we've invested the proceeds, so we'll pay that off this month, so nothing is due until 2027. We have a term loan that is swapped right now at 2.7%, all in, and that will burn off in January, that swap, and then we will be floating at one month SOFR for two years. So, you know, we've been in discussions and looking into potential swapping on that.
Gotcha. Okay. Before we came up here, Will, you and I were talking about all the manufacturing growth and investment that's happening in the United States right now. I know you've been getting that question a lot. This stuff can be a little hard to quantify, but, I mean, how do you guys view your portfolio positioned for a lot of this manufacturing investment that's happening in the economy right now?
We think we're, excuse me, we think we're really well positioned for it. The areas specifically that we've seen a lot of activity across our markets are in those industries that have a lot of federal stimulus behind them. So chips is one of the biggest ones. So, speaking to our specific markets, Taiwan Semi has a enormous project going on right now in Phoenix. In our Columbus market, Intel has another substantial chip manufacturing process. In addition, there's a lot of stimulus around green technologies, so you've seen that in EV, batteries related to EV and in solar. So the... You know, what needs to happen first is the manufacturing, and then the requirements that we would seek to benefit from would be the warehouse distribution that follows.
So it's lagging, and we expect it to lag, so that's what makes it a little difficult to, to quantify. In terms of, you know, where that activity is going, our positioning in the Sun Belt, I, I think you'll see those investments disproportionately favor the, the Sun Belt. However, we've seen it in the lower Midwest as well.
Yeah. Are there any markets from a supply-demand perspective that you think are, I guess, I don't know, maybe imbalanced relative to the MI manufacturing investment that's happening there? Like Indianapolis has a lot of warehouses, so maybe it can handle it, but maybe Greenville or something like that can't. I don't know.
I mean, I think that there'll be incremental demand as a result of these manufacturing, even in some of these markets that are currently supply-challenged.
Okay.
But we'll see.
Okay. Any other questions from the audience?
What do you think is, like, your riskiest tenants? Do you see any tenants that are causing a credit quality or might have some financial problems or anything?
Yeah. Who's on the watch list?
That was on your-
Yeah.
That was your question, too. Right now, we don't have any tenants on our watch list that we're concerned about. As Will mentioned, we're 50% investment-grade rated, and so we do have some tenants that are lower rated than others or shadow ratings that we put on them based on our own internal ratings. So those are the ones that are... We watch closely to make sure that they're paying on time, but they're all paying. And even during COVID, we collected 99.8% of our rents.
Does the guidance assume a certain amount of credit loss?
At this point, it does not.
Okay. Any other questions?
What's the status of Amazon these days? What's their appetite or stickiness there? Similar to, you know, on the CHIPS Act, how and when do you see that rolling through to demand for your properties?
Well, you wanna take it? I mean, starting with Amazon, you know, it's been reported. There was reporting in the Journal, I think it was last week, that spoke to a significant uptick in activity by Amazon. We've seen Amazon in a number of our markets. They've been active both in large space leases, so that'll represent the biggest chunk of that activity, but also in last mile-type facilities. So it looks like Amazon is making moves again in the market and expanding their footprints. Again, it's, you know, in that interest of getting closer to the consumer, which is, you know, that e-commerce tailwind that we expect to continue to feed demand in our space.
Then, with respect to CHIPS and what the impact will be, that really is what I was getting at in my prior comments on it. It's been... The industry hasn't been able to quantify it yet. Those, in particular, the chip manufacturing facilities are. It's very involved in precise manufacturing, right? And so those facilities are multi-year projects, so they're not done yet. And then the, you know, sort of 3PL activity and the people on the input side and then the output side, those demands, I think are still yet to be seen in the markets because the manufacturing facilities themselves haven't completed.
Sure, go ahead.
The industrial REIT group seems to be getting very, very large and very popular. Do you see any new directions for industrial REITs?
It wouldn't surprise me if you saw, you know, more cold storage in the public space from an industrial standpoint. But it's, you know, it's a really great group of companies, all of which have a little bit different strategy. So, I can't think of any company that's going to evolve its strategy a lot, but it's, you know, it's a fantastic asset class, and the shares have gotten, you know, much less expensive than they were a couple of years ago when, you know, things were going so strongly. But, I think, you know, all the industrial companies are really good opportunities for investors.
Yeah, sure. Over here.
The cold storage, would they come into the big Pharma or healthcare interactions?
Do you guys have any cold storage left in your portfolio? You guys sold most of it, right?
No, we... Yeah, we put our cold storage into a joint venture at the end of 2021, 'cause we really just wanted to focus our core business on warehouse.
But yeah, I mean, it's true. There's also... I think a lot of people think about food, but there are requirements related to pharmaceuticals that require a controlled space.
Have you had those clients or?
No, we're not working on it-
Oh
... on any projects currently, no.
Then you guys announced a transition in the CFO role this past week. Can you give us a little more commentary on that, Mr. Will or Beth?
Sure. I'll start. So I said to Will after the 10-K that I'd like to do other things. For personal reasons, I'm going to be stepping down. I'm gonna be here through March of next year, through the next 10-K, but it was for personal reasons and, you know, want to spend more time with family, et cetera. So then we started the search for my replacement, and Nathan is going to be joining us in September, after his garden leave from J.P. Morgan. We're very excited for him to come on, and we'll be able to work together for several closing cycles before he takes over for me in March.
Okay. Sounds great. All right, any other questions? All right, well, thanks for your time. Appreciate it.