All right, good afternoon, everybody. My name is John Peterson. I lead our real estate research team at Jefferies. Really happy to have the LXP team here with us today for their formal company presentation. To my right is Will Eglin, CEO, and to his right is James Dudley, EVP and Director of Asset Management for LXP. Why don't we jump in? Will, maybe if you could just give us a brief intro into LXP and talk about how your portfolio is positioned compared to the peer group.
Sure. Our business strategy is focused on warehouse and distribution facilities in 12 markets, three of which are in the Lower Midwest, and the balance of our markets are in the Sun Belt. Our markets are characterized by very great logistics infrastructure, positive demographics, and they are in states which have a friendly regulatory environment. There is no surprise to us, given these attributes, that these markets are also attracting a lot of investment in manufacturing. We think that the footprint of our portfolio probably matches up best with a lot of the reshoring initiatives that are underway in the United States. If you think of our business, it is pretty much large box distribution facilities. Our portfolio is less than 10 years old, so it is very young. It has very modern characteristics that are attractive to many different kinds of users.
About half of the portfolio, from a credit standpoint, we have investment-grade tenants. There are a lot of very favorable attributes from that standpoint. If we were here a year ago, we probably would have celebrated our final exit from the office business. A year later, we would probably celebrate what that means from an operational perspective. We've been putting up exceptional mark-to-market leasing spreads since then and generating very good same-store NOI growth. Some of the themes that we've been talking about at the conference here have been the impact of tariffs on tenant decision-making. We've also spent a fair amount of time talking about the building blocks that we have for organic growth. At the moment, our leases have annual rental escalations in them of 2.8% through 2030. We think our rents are about 18% below market.
As we turn leases over, we're going to have an opportunity to continue to mark revenue up, as we have in recent years. We do have a couple of big boxes that we developed that haven't leased yet. There's an opportunity for occupancy gains that will produce even more growth. We think we're very well positioned from an organic growth standpoint. As those assets lease up and more EBITDA is produced, our leverage will come down and our payout ratio will start to decline as well. We think all of that combines to make a very good case that the outperformance that we've demonstrated compared to the peer group since we exited the office business will continue. The development business has been very good for us. We've had the three buildings that we were focused on leasing to sort of finish out leasing those buildings.
We had one great success recently where we leased a building in Greenville, South Carolina, at an 8% development yield. I think that's been viewed very positively by the market with about what we think is 400 basis points or so of outperformance since we announced that lease. That suggests to us if we can get a couple of big leases done, there's going to be more asymmetric upside in our shares. We think the company is very well positioned at the moment and are very excited about what we can do for shareholders going forward.
Great. Why don't we maybe dwell on that development lease? Congrats on the big development lease in Greenville. Maybe can you just talk a little bit more about how that came together, what type of tenant it is, and maybe a little more on the economics behind that?
Yeah, sure, John. So we have a 1 million sq ft , a little under 1.1 million in Greenville, Spartanburg, that we recently did this leasing deal on. It's a very fast-paced deal. DHL is the tenant, and their ultimate user is First Solar. It was a need to bring solar panels into space. It was a hedge against potential tariffs and rising tariffs to begin with. They wanted to change a little bit as far as the flexibility goes of their potential use. They went from a five-year deal to a two-year deal, which you look on the surface, you'd prefer to have term. I think in this circumstance, it was helpful for us for a couple of reasons. One, free rent is pretty typical right now in big box leasing.
We were able to limit that free rent and get income coming in almost immediately from the tenant. It also lowers the tenant improvement amount that we provide to the tenant. It is a lower CapEx outlay for us. We are able to get a higher rent because short-term deals typically will yield a higher rent. It was also a very fast-paced deal. Probably from RFP coming in to getting the deal signed took about six weeks. We are excited about that opportunity. In addition to that, just kind of given the overbuilding in the big box market and a lot of these markets that we are in, it gives us a good opportunity to potentially bridge from maybe a weaker market to a stronger market here in a couple of years when hopefully there is some more demand and absorption of the space that we are competing with.
Okay, great. Can you talk about what the NOI yield was on that project? You kind of alluded to the better economics in the two-year deal, what it might have been on a five-year deal. What is kind of the spread?
We were at 8%, which is what Will mentioned before. It probably would have come down to the high sixes on a five-year. That is related to a little bit of a compression in the market rent for a longer-term deal and then also the additional CapEx that we would have had to spend to keep the tenant.
Okay, great. All right, maybe just step back a little bit more on the macro side. There's a lot of talk here about tariff and trade policy. Are you seeing any different tenant behaviors around that or anything that you expect to see? Yeah, maybe.
Sure. I'd put our tenant behavior into three buckets. Bucket number one was the pull forward, which we benefited from, where some tenants want to get as much of their product into space as possible to mitigate against the tariff risk going forward. Two would be we're hitting the pause button because we're not sure what's going to happen. We've seen some of that. That's typically where there's China exposure. Hitting the pause button, let's see what ultimately happens, and then we'll reevaluate. Third is really just plowing through because there are broader supply chain requirements that these tenants have. We've seen that with some of their really big credits, Amazon continuing to pursue space both from a leasing and an acquisition perspective. Walmart doing the same. They're continuing forward with their path kind of regardless of what happens with the macro.
Okay, sounds good. What about maybe just some other macro trends that have been out there, kind of e-commerce and onshoring demand? Is there anything to point out too that you've seen in terms of onshoring supply chain demand?
I think Will pointed out our markets are definitely going to benefit. I think it's early on in that process. I'll point out a couple. Phoenix is one of our largest markets. You have Taiwan Semiconductor. And part of that is coming online now, but there's still additional phases that need to come on. And their ultimate building out of that, it went from a $40 billion investment to now they've announced, I think, $165 billion in different phases. We've started to see some of the suppliers come into Phoenix. But it hasn't been a huge story of the demand driver yet, but we think it's coming. Hyundai and Savannah is another good example. We haven't had any direct leasing that's occurred in our second-generation property, but we did acquire a property there that has a supplier to Hyundai. So we know it's coming.
We know it's going to be a factor in demand going forward and hopefully tightening of these markets as more of this manufacturing comes online.
Okay. Maybe a final question on maybe tariff policy. Are you seeing or do you expect to see retailers and suppliers build inventory with all this uncertainty?
I do. I think to a degree. I think it's the smart thing to do to make sure that you have the ability to fulfill the needs of your customers.
Got it. Okay. Maybe coming back to the development leasing. So now you have a couple of large million sq ft projects, one in Indianapolis, one in Central Florida. Can you talk about what the activity has been like around those projects?
Sure. Indianapolis, for those who aren't familiar, was definitely very overbuilt in 2023. They delivered about 30 million sq ft in that year. The big box leasing got really slow. There was nothing that was really leased up until late last year of anything over 500,000 sq ft from January of 2023. Recently, there's been a massive pickup in big box activity there. In our particular submarket, there's been a large 800,000 sq ft lease that was signed, another one that's on the finish line, and some acquisition activity that would really start to shrink the availability in that submarket. Generally speaking, I think you have the FedEx hub there, and it's a huge logistics market that's going to continue to attract large users because it can reach such a large portion of the population within a day's truck drive.
I think it was a little bit of a blip in the market, but activity has definitely picked up there. Moving to Florida, Central Florida's big box activity has been a little bit slower than we'd like. We've had tire kickers here and there on that particular box, but nothing that's stuck yet. We are very bullish on Florida overall. It's going to continue to be a population growth story and a move to consumer because historically, you have a situation like where Atlanta would essentially supply Florida, but with the population growth and the need to be closer to consumer to meet those delivery needs, there will be a continuation of big box need in Florida to follow that population.
Okay. I guess, how do we think about development in the future? How might you approach future development projects? Are you only looking to do build-to-suit? What would it take to build on a speculative basis?
At the moment, we have a preference for build-to-suit because we can essentially get development yields without taking the leasing risk. We do have a land bank of over 500 acres. There will be a time and place where putting that into service via spec is appropriate. I do not think that rents are quite there to justify construction costs at the moment, but that will be an opportunity for us to put the land bank into use and produce yields above where we can find them in the auction market. When we restart the development business, we probably will start with some smaller boxes in the sort of 150,000 sq ft-350,000 sq ft area. That seems to be where the math is going to pencil soonest with respect to spec development beginning to make sense for us.
I think in the near term, leasing those two big buildings, I think, would be preferable compared to starting new spec at the moment.
Okay. How are you seeing supply growth trend across your markets right now? Are there areas where it's getting better, quicker, where some of the more pressure points in terms of oversupply?
I don't know about, well, supply is still constrained. We haven't seen a lot of new supply come out of the ground. There still is the tail from the big slug of supply that should hopefully deliver this year, ultimately coming down from there being about 750 million sq ft underdeveloped and to now under 300. There still is a little bit coming on. The good news about it is even if the supply-demand dynamics kind of correct themselves, which we think they will over the near term, over the next 12 months and start to get a little bit tighter where it would make sense from a supply-demand dynamic to start building again, you have these other major drivers that make it more difficult with all the data center development you have going on, the advanced manufacturing.
Those things are going to keep prices high and also take away some of the ability to move quickly. I think we've probably got a window of a good 18 months-24 months kind of minimally before we start to see anything of any real significance.
Okay. Got it. On the last call, you guys talked about a redevelopment that you commenced on a 250,000 sq ft building in Richmond, Virginia. You just talk a little more about that, what kind of returns you're expecting and what the impetus was for that investment?
Sure. It was part of a million sq ft four-property site that we had that was leased to Philip Morris in Richmond. They had the ability to give one of the properties back. We bought it at a really low rental basis, which was great. We put it into our redevelopment pool because we need to do some things from a power perspective, from a truck parking and speculative office perspective to make it stand alone. We are really excited about that project because it is an opportunity to take a very low rent and then turn it into probably a 70+ rent mark to market.
Got it. Okay. Where would you put the gap between market rents and replacement rents now with kind of rising costs of material and labor?
I think it's dependent on the property type and the location and kind of the risk profile around what you're looking to do, but I'd peg it between 10% and 20%.
Okay. Do you have any questions from the group that I have with you? Yeah, sure. Go ahead.
Yeah. At what cap rates are you guys a buyer of properties?
The question was, at what cap rate are you guys a buyer of properties?
Last year, we purchased at around a 6% cap rate. That was close to in line with some things that we sold out of that were outside of our 12-market focus. We want to continue to do some capital recycling where we're creating liquidity from assets that are outside of our target markets and getting more scale in our target markets. We haven't bought anything this year. When we got to liberation day, we sort of took a pause. We made a couple of really good sales at close to 4% cap rates earlier in the year. There would have been an accretive redevelopment into real estate, but we decided that cash was a better asset for us to hold at the moment.
Even on cash right now, you can earn a little bit more than 4%, and it creates more options for us going forward. We will revisit that stance as the year progresses. We have sort of taken a wait-and-see attitude on both dispositions and purchases for the moment.
Yeah. Yeah. Brendan.
How much would rents have to increase where it would make sense to start construction for projects?
The question is, how much would rents have to increase to justify new construction?
Yeah. I think, again, it goes back to what I said before about kind of the risk profile of what you're doing and what the size is. I still like that kind of 10%-20% range.
Okay. Just one more thing?
What kind of escalators are you able to get leased today? That is going to vary by market product type, but maybe just the general escalators you are seeing the least today versus five years ago.
Probably maybe more than five years ago, but historically, warehouse escalators were 2%. They were 2% forever. Then we had the real tightening of the market where you were getting those 2% were turning into 4%, 3.5%. As you mentioned, it also depends on the size too. There has been some downward pressure depending on the market that you have right now, but they are still north of 3%. On the really big boxes, you are going to see somewhere probably between 3%-3.5%. On the 250-350, if you are in a good tight market, you can still get 3.5%-4%. Our in-place escalators right now are 2.8%. We are trending towards getting into the threes going forward.
Sure.
Do you see any consolidation among the public players?
I honestly don't see a great fit between any of the public industries. They're all slightly different, have slightly different strategies. I don't think there's much of an argument that there should be any consolidation.
Jim?
Yeah. One next question. Your business is fairly dependent on consumer health. With big box retailers, have you seen a significant decline in your business this year versus last year in terms of from the consumer end? Are there any other major factors in that way? I'm curious if you would expect to reignite the consumer health?
No is the short answer. I haven't seen any major changes. The major retailers are very active right now and taking down additional space. Yeah, consumer spending is a huge, I mean, that would be the one thing that would kind of stop the bus, right? We haven't seen any activity that leads us to believe that they're anticipating that that's coming.
Consumer credit.
Yeah. I'm not sure about the consumer credit piece of it.
I wanted to ask about your same-store guidance for the year is 3%-4%. Can you give us the kind of the guideposts, the key variables that would push you towards the upper and lower end of that range?
It's really driven by occupancy more than anything else. I think the low end of the range contemplates occupancy declining by about 150 basis points, and the upper end is 75 basis points. There aren't many moving pieces at this point.
Okay. Maybe in a more direct way to ask about that, how are you feeling about the lease expiration schedule for the balance of the year? What are kind of the big leases that need to be renewed?
The good news is we do not have much roll, which I think has been helping us relative to our peers. We will have some move-outs in the back half of the year. We think our mark to market this year is about 30%-35%. There may be some delay in terms of reletting real estate, but all the real estate, if we get any back, we have a really good opportunity to lease it well. I do not know if you want to comment on anything more specific.
No. I think you covered it. Okay. A couple of balance sheet questions. So the leverage is at 5.9x today. Can you give us kind of an indication on where that might go once the Indy and Central Florida projects are leased and kind of where's the long-term goal for leverage?
Yeah. I mean, we're trying to move our leverage down to about 5x . We think that that will be very good for the valuation of our shares from a multiple standpoint. Leasing those two buildings, and we have a couple of other small developments still to lease, but that gets you down below 5.5x . If you have a couple of years of good contractual rent growth and mark to market, we can get to five organically without having to do anything around selling assets or doing anything dilutive to do so. We've got good visibility on that path.
Okay. I was curious how you guys approach dividend policy. Your current payout ratio is very conservative, but does that kind of put a lot of upward pressure on where that dividend might need to grow to as AFFO grows?
I think we've been growing the dividend at sort of 0.02 a year. If we can get our payout ratio down sort of below 80%, that might mean that we revisit dividend growth with an eye toward more growth than that. That level of dividend increase has been consistent with what we've done in recent years.
Okay. Any other questions from the audience? All right. In terms of markets where you maybe can you talk a little more about the markets that you find most attractive to deploy capital? I think in some of our conversations in the past, you guys had talked a lot about the Sun Belt markets. Has anything evolved there? Is there any maybe specific markets that you find particularly attractive right now?
Yeah. About 75% of the portfolio is in the Sun Belt markets. And we have varying degrees of appetite for all of them. Phoenix is our biggest market, and it is where we have our biggest land bank. And we love the market. We have more appetite for there. But we would invest in Houston and Dallas and Atlanta. Savannah's got some supply issues at the moment, but we recently looked at a build-to-suit in Savannah that was very interesting to us, but somebody else liked it at a better price. The nice thing about having a 12-market focus is we feel like we have got the market knowledge and the relationships to deploy capital across a whole range of opportunities regardless of lease term or occupancy point. We can be a capital allocator to the best return opportunities in these markets by being specifically focused on them.
Okay. Sure.
Any new markets that you might consider or are starting to develop?
Not at the moment. I think our focus really is on, as I said, moving our capital that isn't in these markets into deeper positions. If we look at a market, we want it to be one that is attractive for certain reasons, but also one where we think we can get meaningful scale. That is not easy everywhere. We would not go to a market just to do one piece of business. We would want to make a commitment to it for a long time.
Yeah, go ahead.
Did you talk about market rent growth for the 12 markets that you're in? What are the top three markets and the bottom three markets? What is rent growth in those markets?
Yeah, sure. Market rent growth is funny because it's really a sub-market question more than it is an overall market question because I would point to Dallas. I would point to Phoenix. However, if you kind of look at the overall market, there's some exposure to big box there that we don't have. There's also a massive amount of development in those markets that's going on. If you look at what we have in those markets, we have the right size with a really good rental basis. We're looking at significant double-digit rental growth for our particular properties in those markets. We continue to like those markets.
To expand on what Will said before about the markets we want to invest in, we're really looking for logistics-friendly markets that have a lot of pro-logistics attributes: airports, intermodal ports to an extent, but also massive population growth that's going to continue to drive the need for product.
You guys, I think among industrial peers, you have the highest percentage of IG-rated, investment-grade-rated tenants. Can you talk about that as a priority long-term when you think about signing leases in the future, how you kind of factor in credit quality into the tenants that you choose to lease to?
Honestly, I think it's more a byproduct of what we invest in. When we did all the recycling of capital out of office, the focus was to invest in new construction. We were often buying buildings that might have been spec that turned into a single-tenant investment during the construction period or shortly thereafter. What kind of tenancy is attracted to things that are newly built tends to be a company that's growing and has a good business. Since our focus is on larger boxes, our average facility size is a little bit less than 500,000 sq ft, there are substantial businesses in them. We don't really have a target from a credit standpoint. The important thing is to own real estate that good companies want to be in for whatever reason.
That makes sense. All right. I think that's a good place to end it. Thanks, Will. Thanks, James.
All right. Thanks, everybody.