Good morning, ladies and gentlemen, welcome to the LXP Industrial Trust Q4 2022 earnings call and webcast.
At this time, all participants are in a listen-only mode. Please be advised that this call is being recorded. After the speakers prepared remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. If you would like to withdraw your question, press star one again.
Now I'd like to turn the call over to Ms. Heather Gentry, Senior Vice President of Investor Relations. Ms. Gentry, please go ahead.
Thank you, operator.
Welcome to LXP Industrial Trust Q4 2022 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, will 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 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 Q4 results. I will now turn the call over to Will.
Thanks, Heather. Good morning, everyone.
Our Q4 operating performance was good across the board, with notable accomplishments in leasing, dispositions, and balance sheet management.
We continue to have tremendous success on the leasing front, raising industrial base and cash base rents on renewals approximately 38% and 43% in the Q4, respectively. Industrial leasing volume was exceptionally strong in 2022, with 4 million sq ft leased during the year at base and cash base rental increases of approximately 31% and 26%, respectively.
We are currently in discussions with many of our tenants whose leases expire through 2024, which we believe bodes well for strong tenant retention with the opportunity to raise rents as contract rents continue to be well below market.
Moving forward, a slowdown in overall leasing that is more in line with pre-pandemic levels is expected, but we believe the prospects for continued industrial rent growth are good as overall vacancy remains low.
We realized approximately $50 million of proceeds from dispositions in the Q4, including the sale of two industrial properties. These industrial sales are consistent with our strategy to dispose of assets in non-core markets that do not fit our growth objectives. Further, we continued to shrink our office joint venture during the quarter, disposing of three assets valued at approximately $37 million.
Subsequent to quarter end, we sold another joint venture asset in Houston for $82 million, which generated net proceeds of approximately $8 million for our 25% interest.
Total 2022 consolidated disposition volume of approximately $197 million at attractive 5.6% GAAP and cash cap rates produced favorable pricing in a year where cap rates increased. Our 2023 disposition plan contemplates marketing for sale up to seven industrial assets in certain non-core markets, including St. Louis, Detroit, Cleveland, Kansas City, and Philadelphia. Continued challenges in the office sales market delayed the disposition of several consolidated office assets originally slated for sale in the Q4.
We still intend to dispose of the remaining four office assets, excluding our Palo Alto property, as soon as practicable, this portfolio continues to produce strong cash flow with annualized NOI of approximately $11 million.
Moving to the balance sheet, at year-end we settled our $16 million common share forward equity transaction using the proceeds to repay amounts outstanding on our $600 million revolver, which was fully available at year-end. When adjusted for 2022 share repurchases, we issued a net $3.9 million common shares at $13.53 per common share in connection with that transaction.
Leverage declined from 7.1x at September 30 to 6.4x net debt to adjusted EBITDA at year-end, well within our current target leverage range of 6x-7x. As we look ahead to 2023, we anticipate development spend of approximately $125 million to be funded with sale proceeds, cash on hand, and line draws.
We may utilize any excess capital to reduce leverage further, while maintaining some capacity to deploy capital into our land bank and other investments should attractive opportunities arise.
Finally, we're excited to make further progress with our ESG program in 2023, as we prepare to submit to GRESB for the third time, enhance our framework transparency, expand our resiliency reporting, and implement a decarbonization program. We also look forward to sharing more details in our 2022 corporate responsibility report, which we will publish later this year. With that, I'll turn the call over to Brendan to discuss investments in more detail.
Thanks, Will.
During the quarter, we funded approximately $53 million in our six ongoing development projects. We completed construction of our previously leased facility in Greenville, Spartanburg in the Q4, with the tenant occupying the 800,000 sq ft facility upon the building's completion.
The larger of the two remaining properties in this project is expected to be completed in the Q1, and the smaller property is slated for delivery in the Q2. Total 2022 development spend was approximately $255 million for the six ongoing projects and the stabilized Greenville, Spartanburg property I just mentioned.
Moving to Phoenix, we expect completion of the leased facility in our spec development project later this quarter, with the second facility likely finishing in the Q2.
In Phoenix, as discussed last quarter, we ground leased 100 acres at our 420-acre Wolf Farms land parcel to a data center user for 20 years. The initial annual ground rent of $5.2 million with 4% annual rental increases is a fantastic outcome that is expected to produce an initial 5.2% annual return on our original purchase price.
Subsequent to quarter end, our Ocala and Indianapolis projects reached substantial completion, and we expect our South Shore Florida project to complete in the Q2. In Dallas, we anticipate closing on a $15 million forward purchase of a 124,000 sq ft spec build building in the first half of 2023. The project is being developed by the same developer who completed our PetMeds facility in Dallas, which is adjacent to this project.
We are actively marketing the space to lease and have found tenant demand to be strong for this size facility. Additionally, we continue to see active tenant inquiries at all of our ongoing development projects. With that, I'll turn the call over to James to discuss leasing.
Thanks, Brendan.
Rent growth in our target markets grew on average approximately 20% year-over-year through the Q4, while average vacancy declined marginally. Compared to the Q3, this represents a slight increase in our target market's rent growth despite a broader modest leasing deceleration. As of the Q4, for leases expiring through 2028, we estimate our industrial portfolio's in-place rents to be approximately 21% below market, with these in-place rents forecasted to grow approximately 34% on average or 24% net of contractual rent escalations based on independent brokers estimates.
Forecasted rent growth is likely to be slower going forward, which is more in line with the leasing environment pre-pandemic, as Will mentioned. We believe our mark-to-market opportunity remains strong for quality assets in key markets with access to an attractive tenant base.
Our industrial portfolio grew to 99.5% leased at year-end, a slight increase when compared to the Q3. There are only 2 remaining 2023 lease expirations, which are currently being addressed. Year to date, we have approximately 6 million sq ft of industrial space expiring in 2024, which provides us with a great opportunity to increase rents.
We estimate 2024 expiring rents to increase 20%-30% based on current negotiations and third-party broker estimates. During the quarter, we extended the 2023 lease expiration of our 510,000 sq ft industrial facility in Dallas for 3 years with 4% annual bumps for an increase of 43% over the prior term's cash base rent. Additionally, we leased the remaining 81,000 sq ft at our industrial facility in Greer, South Carolina, for just over 5 years.
Annual rental bumps of 4% and a starting rent of 17% above our original underwriting assumptions is a great outcome for this space. Subsequent to quarter end, the tenant in our 742,000 sq ft industrial facility in Indianapolis exercised their fixed rate option to renew for 5 years, increasing the annual rent 2% per year for the extended term. The renewal extends the lease through January of 2029.
With that, I'll turn the call over to Beth to discuss financial results.
Thanks, James. Revenue in the Q4 was approximately $81 million, with property operating expenses of approximately $13 million, 90% of which was attributable to tenant reimbursement.
Adjusted company FFO for the quarter of $0.17 per diluted common share, or approximately $48 million, brought our 2022 adjusted company FFO to $0.67 per diluted common share. Q4 G&A was approximately $10 million, with full year G&A of approximately $36 million, excluding certain advisory costs. We expect 2022 G&A to be within a range of $35 million-$37 million. During the quarter, we recognized $37.7 million of selling profit from sales-type leases. This primarily related to the recognition of an investment in a sales-type lease for the 100 acre ground lease in Phoenix that Brendan mentioned.
This ground lease was classified as a sales-type lease versus an operating lease under GAAP. In accordance with the guidance, we derecognized the land, measured the investment at fair value, and recorded an investment in a sales-type lease on the balance sheet and recognized a day one gain. This morning, we announced 2023 adjusted company FFO guidance within a range of $0.66-$0.70 per diluted common share.
This guidance considers the timing of development lease up and sales volume, amongst other items discussed on today's call. Our same store industrial portfolio was 99.8% leased at year-end, with same store industrial NOI growth of 6.7% quarter-over-quarter and 5.3% for 2022. We anticipate our 2023 industrial same store NOI growth will be in the 4%-5% range.
At quarter-end, approximately 96% of our industrial portfolio leases had escalation with an average annual rate of 2.5%. We settled our forward common share sale contracts in December with aggregate net proceeds from this transaction of $183.4 million. As of December 31, 2022, we had full availability on our $600 million unsecured revolving credit facility.
We continue to experience minimal exposure to rising interest rates. At quarter-end, consolidated debt outstanding was approximately $1.5 billion, with 91.4% of this debt fixed. Our total consolidated debt had a weighted average interest rate of 3.2% and a weighted average term to maturity of 6.5 years at quarter-end. Finally, at year-end, our unencumbered NOI remains favorable at over 93% of our total NOI.
With that, I'll turn the call back over to Will.
Thanks, Beth.
I will now turn the call over to the operator who will conduct the question and answer portion of this call. Hello.
Thank you, Mr. H. Anthony Paolone, your line is open, sir.
O kay. Thanks, good morning.
Hey, Anthony.
Yes. First question. Can you provide any color on what the yield on the development delivered in the Q4 was perhaps, net of any maybe promote? Also maybe just give us an update on kind of where you think the overall pipeline as it stands today will end up being. That would be great.
Okay, sure. Hey, it's Brendan. The development yield on the stabilized asset that delivered on a cash basis is in the mid 5 range, 5.5. Just as a refresher, we are developing that in a joint venture with a merchant builder partner. For most, if any, will be calculated once the 3 buildings are 80% stabilized. But that is the development yield.
With respect to the balance of the portfolio, we've guided to, similar yields in the low to mid 5s. With that said, there may be opportunities to exceed that just based on rent growth that's occurred during the development process. In a rising cap rate environment, the promotes, would be expected, all other things being equal to, be lower, which will increase our post-promote yields.
Okay. Got it. On the disposition side, You mentioned selling seven industrial properties this year. Just any order of magnitude? I don't know if you mentioned the dollar amounts or not.
We did it. The NOI from that pool is about $18.3 million, Tony. we want to have enough assets in the market to cover our development spend this year. Hopefully we can keep working our leverage down a little bit too. I think we have to wait and see in terms of giving guidance to valuation. I would expect those dispositions to probably be backloaded as the year progresses.
Okay. I guess my last one maybe relates to still dispositions. You mentioned the tougher office environment in terms of sales, but I think 1701 Market Street was going to a condo converter or a resi converter of some sort. Did that fall out or is it just taking longer?
What's happening there?
I would characterize that transaction as having fallen out, despite media coverage. That asset is fully leased and providing a lot of cash flow to us, which we're happy to collect. We're certainly open to, if that transaction comes back together, which is certainly possible, we're happy to transact.
As I said, just continue to collect the rent and, see what other options are available to us.
Okay, great. Thank you.
Thanks, Anthony.
Thank you. Just a reminder ladies and gentlemen, star one please for any questions. We go next now to Todd Thomas of KeyBanc Capital Markets.
Hi. Thanks. Good morning. Just following up first, I guess on dispositions. Can you share the cap rate on the Houston office disposition that was completed after the end of the year? Then, just around the, some of the delays that you mentioned, regarding additional office asset sales. realize, the market there is a little bit fluid, but can you just maybe provide us with an update on, the sort of the timeline more generally for additional office asset sales? j ust, looking for a little bit more color there perhaps that would be helpful.
Hey, Todd. It's Beth. On the Houston sale, the cap rate there was 7.9%. That's a cash and GAAP cap rate on that one. We're working the sale. In this environment it's tougher than we had anticipated. We had hoped to be out by the end of 2022, we're hopeful to make progress this year with the range remaining four that we have.
Okay. With regards to the $11 million of annual NOI on those office assets, I realize that you don't have any lease role, in 2023. Are you expecting NOI, any change in NOI in that bucket of assets throughout the balance of the hold period, or do you anticipate that to be, relatively steady?
It's relatively steady for the year if they're not sold. If as they get sold, that number will come down.
Sure. Right. No, understood. Okay, just in, over to the development. Can you just talk a little bit about, the demand for the assets that are, the development assets. they're all expected to be, sort of completed here over the next couple of quarters. I'm just wondering if you could, talk a little bit about the pace of leasing and, the timeline for, re-rent commencements and sort of conversions to the operating portfolio.
Sure. This is James. It's a little bit of a mixed bag by market. The velocity in Phoenix is extremely strong. I think we anticipate having a leasing outcome there in the fairly near term. The Columbus asset also has quite a bit of activity. The other assets are a little bit slower. That's not to say that there isn't a long pipeline of potential tenants in the market.
I think the major change that we've seen in the market recently is just there was a feeding frenzy, in 21, in the beginning of last year for tenants concerned about not having space, that pace has slowed some and it seems to be a little more methodical. There continues to be a lot of interest. It's just a little bit slower moving.
I think, kind of generally across the board, it may take us a little bit longer. There may be a 6-12 month downtime on some of the assets, but would expect to have a couple of positive outcomes on the two assets I mentioned, hopefully much sooner than that.
Okay. those two, we might expect to see some some NOI come online in 2023, but for the balance of the portfolio, sounds like it would be, later 2023 or into 2024.
I think that's a good generalization.
Okay. All right, great. Thank you.
Thank you, Mr. Thomas. Ladies and gentlemen, just a quick reminder, star one please for any questions.
To the next now to Jon Petersen at Jefferies.
Great. Thanks. Maybe on the share buybacks. You guys did a little bit in the Q4. Can you talk to us about the decision making there on when you pull the trigger on buybacks?
Sure, John. It really reflects our view of NAV more than anything else. we've also wanted to keep an eye on our leverage and have a plan overall for the buyback to be leverage neutral. having that forward equity transaction available to us, provided us with some flexibility around the buyback last year and also the opportunity to start to bring our leverage back down. we did buy a little bit of stock at a low price at the beginning of the quarter, but since then, the share price has been grinding steadily higher, and we haven't been chasing the share price as the market has recovered.
Got it. All right. That's helpful. I guess where are you seeing private market cap rates move to? Maybe for Brendan. T he last time we spoke last quarter, it certainly seemed like you guys feel like you're getting better returns on development than acquisitions. With cap rates rising, like what are you guys looking for in terms of cap rates to I guess jump back into the acquisition market and view that as more attractive? Just at a high level, where have you kind of seen those cap rates move to?
Yeah. I'll say first that we're still very much in a period of price discovery, it's hard to generalize about cap rates. What I'll repeat what I've said before and others have commented on, probably the biggest factor is the mark-to-market opportunity. The shorter the lease and the better the mark-to-market opportunity, you're going to see a smaller impact on cap rates relative to where we were before the spike in interest rates. Prior to the move in rates, we talked about across our more primary markets to some of the yieldier ones, the market being kind of in the low 3s to 4s, and I think today it's sort of in the 4s and 5s, if that's helpful.
Again, it's hard to be too specific. The lower yields would be the more in that range, the more primary markets, and, or alternatively, a very quick mark-to-market opportunity.
Right. Okay. All right. Yeah, that makes sense. Just a point of clarification. On the 2024 maturities, you said a 20%-30% increase is expected. Is that on a cash or a GAAP basis? What kind of market rent growth are you expecting between now and then, to base those assumptions on?
Yeah, that's on a cash basis. That kind of includes escalations or market rent growth on average at 6.5% for 2023 and 4.2% through 2024.
Okay. All right. That's helpful. That's all for me. Thanks.
Great. Thanks, John.
Thank you, Mr. Petersen. Ladies and gentlemen, just a final reminder today, star one please for any further questions, and we'll pause for just a moment. We have a question now from John Massocca at Ladenburg Thalmann.
Good morning.
Hey, John.
How's it going? You kind of mentioned on the disposition side of things, just you're looking to sell out of a couple of markets. I guess maybe where kind of, just thinking about geography, the core markets you see in the portfolio today and, maybe what makes those attractive relative to either kind of larger gateway markets or some of the markets you're looking to exit?
Yeah. I guess I'd say the ones that we've identified as potential disposition exits are markets where we only have one or two assets and where we haven't been adding in our most recent portfolio repositioning. As example, we mentioned a couple assets in Detroit that we were looking at exiting, one of which closed. The primary differentiators would just be where we see the most potential for NOI growth. That's where we're focusing in terms of markets. Those markets that have the best access to growing populations and strong logistics that are attributes.
I guess maybe is there a differential in kind of the cap rate environment between some of those markets you're exiting versus areas where you're either doing, development or maybe even longer term attractive from an acquisition perspective?
Yes. We would expect that exiting a smaller market with less favorable rent growth prospects would trade in the market at higher yields. We do think it's important to continue to focus the portfolio and where we see the strongest growth opportunities.
Any kind of brackets on where that, cap rate differential is or?
There, in particular, I mentioned before that we're there's just been so few transactions in the market, it's really hard to peg it. I think that sort of divergence between markets is particularly tricky right now. I think it's a little early. As we work on thinking about the disposition plan, we'll give further guidance.
Okay. That's fair. That's it for me. Thank you very much.
Thank you.
Thank you. We'll take a follow-up question now from Anthony Paolone at J.P. Morgan.
Thanks. Just one follow-up item. On the data center lease, the land lease, prior to that, was that land basis, were you capitalizing interest against that, or was that just purely incremental in terms of the rent?
It's the rent. It wasn't. It was just in land before. There was no rent coming in before, any kind of income coming in.
Okay. Yeah. Great. It sounds like, especially with the GAAP accounting on sales-type lease or finance type lease, I guess it is, it sounds like that adds probably a couple pennies to earnings. Is that kind of fair?
Right. On a cash basis, it's going to generate $5.2 million a year. On a GAAP basis for 2023, it's going to generate $7.4 million.
Okay. Got it. Thank you.
Thanks, Anthony.
Thank you. Ladies and gentlemen, it appears we have no further questions this morning. Mr. Eglin, I'd like to turn the call back to you for any closing comments.
We appreciate everyone, joining us this morning. Please, don't hesitate to visit our website or contact Heather Gentry if you would like to receive our quarterly materials. In addition, as always, you may contact me or the other members of senior management with any questions. Thanks again.
Thank you, Mr. Eglin. Ladies and gentlemen, that does conclude the LXP Industrial Trust Q4 2022 earnings call and webcast.
We'd like to thank you all so much for joining us and wish you all a great day. Goodbye.