Hello, welcome to LXP Industrial Trust second quarter 2023 earnings 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. If you would like to ask a question during this time, simply press star one on your telephone keypad. I will now turn the conference over to Heather Gentry, IR. Please go ahead.
Thank you, operator. Welcome to LXP Industrial Trust second quarter 2023 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 FFO refer to Adjusted Company Funds From Operations available to all equity holders and unitholders 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 second quarter results. I will now turn the call over to Will.
Thanks, Heather. Good morning, everyone. We continued to make progress in all areas of our business during the second quarter, with excellent leasing results in our development portfolio and strong Same-Store Industrial NOI growth of 5.8%. Leasing volume of 1.6 million sq ft in our development portfolio included our 488,000 sq ft facility in Phoenix and 1.1 million sq ft facility in Columbus. These leasing outcomes produced an estimated average cash yield of 7.5%, excluding partner promotes, resulting in yields well in excess of our original guidance. We have strong tenant interest at our remaining 3.8 million sq ft of projects available for lease and expect to make more progress during the balance of the year.
Total cost for these remaining projects is approximately $293 million or 6% of our gross asset value, of which we have $45 million left to fund. Our development pipeline has been a valuable vehicle for adding single-tenant warehouse facilities to our portfolio. Since initiating our warehouse development program, we have leased seven industrial facilities. These positive results highlight our continued success in development leasing and our ability to deliver superior outcomes relative to the purchase market. Moving on to sales, we continue to anticipate that our Philadelphia and New Jersey office assets will be sold by year-end. Buyer due diligence is well underway at our 1701 Market Street property in Philadelphia. Our Whippany, New Jersey, asset is under contract, subject to standard closing conditions.
The two remaining facilities leased to Wells Fargo in South Carolina are to be marketed for sale later this year. Our Palo Alto office facility, which generates $0.02 of FFO per share, is subject to a ground lease that expires in December 2023, and as a result, this asset will no longer produce FFO after this year. Currently, we aren't expecting any additional sales activity this year, but continue to view certain industrial assets in non-target markets as potential sources of incremental liquidity. Turning to our balance sheet, net debt to Adjusted EBITDA at quarter end was 6.3x, and our $600 million revolving credit facility was fully available. Our net debt to Adjusted EBITDA would be 6x, including pro forma stabilization of our leased development projects.
Additional EBITDA will be realized as we continue to stabilize our development pipeline, and overall leverage is expected to decline as NOI comes online. We are targeting a leverage range of five-six times net debt to Adjusted EBITDA. With that, I'll turn the call over to Brendan to discuss our investments in more detail.
Thanks, Will. Reviewing the second quarter leasing outcomes in our development program, at our 488,000 sq ft Phoenix facility, we executed a seven-year lease with a starting rent of $9.60 per square foot and attractive annual rental bumps averaging approximately 4%. We also secured a 10-year lease with a starting rent of $4.85 per square foot and 3.5% annual escalations at our 1.1 million square foot project in Columbus. Both facilities require some additional build-out requested by the tenants. The tenants are expected to take occupancy when the build-outs are complete, which should be early November for the Columbus asset and early January for the Phoenix facility.
During the quarter, we completed the core and shell of the remaining buildings in our Greenville Spartanburg project, which included a 1.1 million sq ft and a 305,000 sq ft facility. We also completed the core and shell of one facility in our two-property South Shore, Florida project at the end of June. Subsequent to quarter end, we completed the second facility. Finally, in July, we completed the forward purchase of our 124,000 sq ft South Dallas project for approximately $15 million. With the leasing progress we've made to date, we commenced construction of a 250,000 sq ft project in the Etna Park 70 joint venture, which is in the Columbus market on land we already own. Market demand for this size facility remains strong.
The building will feature modern specs, including a 36 ft clear height with a rear load design. We expect the core and shell building to be completed in the first quarter of 2024 for an estimated cost of $29 million, and a projected stabilized cash yield of approximately 7%, excluding partner promote. We intend to continue utilizing our development pipeline as a way of adding single tenant warehouses to our portfolio at yields in excess of the purchase market. Our development strategy will continue to be responsive to tenant demand, which will include smaller facilities with staggered deliveries to help mitigate potential leasing risk. Additionally, our goal is to target our speculative, non-stabilized development pipeline to be around 5% of gross asset value or less. With that, I'll turn the call over to James to discuss leasing.
Thanks, Brendan. Overall, tenant leasing and demand continues to be solid across the United States, despite some submarket softness in certain markets with excess supply. In the second quarter, rents grew approximately 18% in our target markets compared to the same period in 2022. As we approach a more robust period of lease rollover in the coming years, our view of our mark-to-market opportunity has not changed, and we still expect ample rent growth compared to current rents. At quarter end, we estimate that our industrial portfolio's in-place rents for leases expiring through 2028 are approximately 23% below market. We expect in-place rents to grow approximately 39% on average, or 31% net of contractual rent escalations based on independent brokers' estimates. Our industrial portfolio at 99.5% leased at quarter end, with vacancy remaining very low.
Subsequent to quarter end, we signed a five-year lease renewal with a tenant in our 408,000 sq ft facility in Duncan, South Carolina, a cash rental increase of approximately 16%, with 3.5% annual bumps up from 2%. While the tenant exercised his three-year renewal option during the second quarter, their desire to increase the length of the lease pushed final negotiations into the third quarter, while also allowing us to secure better terms than we had originally anticipated. Year to date, we've completed 2.7 million sq ft of lease extensions at attractive base and cash base rental increases of approximately 41% and 26% respectively. When excluding one fixed renewal, base and cash base rent spreads were approximately 49% and 35% respectively.
We expect to see a pickup in leasing activity in the third and fourth quarters as renewal windows for 2024 lease expirations approach, and we complete negotiations. Currently, we're in negotiations on approximately 70% of our 2024 expirations and have meaningful activity on our small amount of remaining vacancy. Our estimates on 2024 expiring rents are still expected to be 20%-30% higher than in-place rents, based on current negotiations and brokers' estimates. We also have promising activity on a significant portion of the remaining spec development pipeline and hope to report additional leasing progress later this year. With that, I'll turn the call over to Beth to discuss financial results.
Thanks, James. Revenue in the second quarter was approximately $87 million, with property operating expenses of $16 million, of which approximately 95% was attributable to tenant reimbursements. Second quarter Adjusted Company FFO was $0.18 per diluted common share, or approximately $53 million. We are maintaining our current Adjusted Company FFO guidance within a range of $0.66-$0.70 per diluted common share. This guidance range considers the timing of development lease up and sales volume, amongst other items discussed on today's call. Second quarter G&A was approximately $9 million, and we still expect 2023 G&A to be within a range of $35 million-$37 million. At quarter end, our Same-Store Industrial portfolio was 99.8% leased, and Same-Store Industrial NOI increased 5.8% in the second quarter compared to the same period in 2022.
We continue to anticipate our 2023 industrial same-store NOI growth to be within a range of 4%-5%. At quarter end, approximately 98% of our industrial portfolio leases had escalations with an average annual rate of 2.6%. As Will mentioned, our $600 million unsecured revolving credit facility was fully available as of June 30th, 2023. Our consolidated debt outstanding was approximately $1.5 billion at quarter end, with a weighted average interest rate of 3.3% and a weighted average term to maturity of six years. Our fixed rate debt percentage remains at approximately 91.4%, which continues to mitigate our exposure to higher interest rates. Finally, our unencumbered NOI remains exceptionally strong at over 93% of our total NOI.
With that, I'll turn the call back over to the operator, who will conduct the question and answer portion of this call.
Thank you. If you have a question, please press star one on your telephone keypad. If you have queued up and wish to withdraw your question, you may press star one again. Your first question comes from the line of Anthony Paolone of JPMorgan. Please go ahead.
Thanks. Good morning. I was wondering if you could talk about just your appetite to just refill the development pipeline as you start to look to 2024, and, you know, what yields might look like on sort of the next round as you start things?
Yeah, I mean, I think, Tony, overall, we've been working on shrinking that exposure. In this quarter, we did 1.6 million feet of leasing and committed to a 250,000 sq ft project in Columbus that we think makes a lot of sense given the land that we own and the size facility that is relative to where we see tenant demand. I think overall, it's a net shrink to that position, and then over time, sort of target that 5% of gross asset value. I think that, you know, that sort of makes sense to us. Brendan, do you want to comment on where you see yields penciling these days?
Well, relative to the, to the announced project in Columbus that we just added to the program, we've modeled a number of single and multi-tenant scenarios, but there we anticipate that the stabilized yield to LXP will be in the 6.5%+ range, if that gives you an idea of where we would be.
Okay. Second question on the projects that are available to lease. You talked about, you know, activity there. Can you give us a little bit more color and depth as to, you know, how that's coming along? Anything that's changed in terms of tenant demand?
Hey, Tony, it's James. Yeah, I would say we're, we're in varying stages. We have activity on all the different properties. Some are further along than others. I would say that the demand has continued to be strong, but, I, I mean, I think it's pretty well known in, in the commentary across industrial companies, is that they're just taking longer to make decisions, and I think we would echo that. The process is just a little bit slower than it was 12 to 18 months ago, but continue to have activity.
Okay, great. That's all I got. Thank you.
Your next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please go ahead.
Hi, thanks. Good morning. Just first question, I guess last quarter you discussed the, the value of the foreign core office assets in $75 million range. You know, appreciate the commentary around, you know, the update on, on some of those assets. Has anything changed around the expected proceeds that you expect to generate? At Seventeen oh One Market Street in Philadelphia, can you just clarify whether that's under contract or, or maybe provide a little bit more detail around, you know, some of the contingencies or, or key items awaiting approval before executing an agreement?
Sure. I think there's been some erosion in the value of the office portfolio overall. While we have Seventeen oh One and Whippany under, under contract with deposits, I think we want to be a little cautious about pegging the value of the Wells Fargo assets until we have them under contract as well. I think we, you know, there has been some diminution of value from the $75 million, but I think we'll just have to wait to quantify that to see how we do with the Fort Mill assets. You want to comment on Seventeen oh One Market?
Sure. In both circumstances, you know, we've, we've moved the process along. We have earnest money, hard earnest money deposits and anticipate, you know, hopefully a smooth closing from here. They're not done until they're done in the current office sale environment.
Okay. On the, on the Wells assets, has there been, you know, any, any notification or decision around, you know, what they're looking to do with the 2 office assets, whether they're going to renew or vacate 1 or both of those assets?
No, they let the renewal period expire in terms of exercising any renewal options with respect to either facility. We'll move ahead and market them for sale, and it's possible during that, that process, Wells could change their mind or, or get back involved. You know, we're, we're moving to turn those assets into cash and, and finish the office sale process.
Okay. Got it. Then on the $15 million acquisition in the quarter, can you provide a cap rate and initial yield on that transaction? Then are you seeing more deals begin to surface, and what's the company's appetite like for additional investment opportunities?
Hi, it's Brendan. That acquisition was actually a forward purchase agreement. We, we acquired a shell. We negotiated that deal in early, early last year, early in the spring. This, the anticipated stabilized yield there is we're, we're looking at around 5 to low 5 range. In terms of additional acquisitions, again, that, that one was put under contract last year. While we're monitoring the purchase market, we remain, as I've said, very focused on stabilizing more of the development pipeline. As that happens, we, we, we may look to expand the pipeline in our land bank, as we announced this quarter with the Columbus transaction. Alternatively, we may revisit the purchase market.
Okay. Just, just last question, I guess, maybe Beth, you know, can, can you just remind us of, you know, sort of the policy in place to transition development into service? Just wondering if there's a timeline, either once completed, whether, whether leased or not, for, for some of the projects that are available for lease today that are, you know, complete or, or just about complete, you know, where, where they might be placed into service. In terms of the, the leasing, the additional spec leasing, I guess, you know, along with that, you know, do you expect to have leases executed before, before the, the projects are placed into service?
Yeah. Our, our policy is if the asset is 90% occupied or 1 year from substantial completion of the base building. When these assets, many of them are core and shell complete as of today, but they are not placed into service until that occupancy mark is met. That'll be later, you know, as time. We've put in our supplemental some estimates on when some of the leased properties are going to achieve that occupancy and placed-in-service date.
Okay, got it. So if I'm looking at, like, Mount Comfort and, and Ocala, in Central Florida, those would be transitioned. Whether they're leased or not, they would be transitioned into service in, during the first quarter of 2024. Is that, is that correct?
Exactly. Right, one year.
Okay. When we think about the progress on leasing for those projects, is there any, you know, anticipation of getting those projects into service without executed leases in place? Based on, you know, negotiations and the current leasing pipeline and demand, do you expect to have leases executed before they would be transitioned otherwise?
We'll see. You know, we're working on, on that now, time will tell on that.
Okay. All right. Thank you.
Once again, ladies and gentlemen, if you have a question, it is star one. Your next question comes from the line of Camille Bonnel with Bank of America. Please go ahead.
Good morning. If I caught it correctly in your opening remarks, the mark-to-market opportunity within the portfolio is around 30%? I guess my first question is, was this comment on a GAAP or cash basis?
It's on a cash basis, Camille. This is James. It's 23% today, and if you compare that to the ending rent, it's 39%. Then we also track the number. The 31% number is basically the ending rent, versus the rent, the in-place rent that is escalated by the escalators in place in the lease and compares the two. Three different numbers, but as of today, we think we're 23% below market.
Okay. Is it possible to expand on what this opportunity is within the portfolio, specifically for 2024? Just thinking about the lease expectations at Duncan, your South Carolina asset, which it seems to be tracking ahead of your expectations, that outcome. The sixteen-
Yeah.
% cash leasing spreads came well below the 35% you've been achieving year to date. Just trying to connect the dots there.
Sure. It, you know, it's, it's blended. We have 18 leases left. So some of them are, are very, very high, double digits, and some of them, we have a couple of fixed-rate renewal options, ones at, at 1% and 4%. So it's a blend over those 18 outcomes that gets us to the average of 20%-30%.
Okay. The ones excluding fixed increases, you're still seeing double-digit, like, spreads.
The 20%-30% includes those for the average.
Gotcha.
Yeah, our, our expectation is over those 18 outcomes, that we're going to see 20%-30% increase in rent.
Okay. Final one for me. I see your secured office loan on your Palo Alto asset is coming due at the end of the year. Just wanting to get your thoughts on your plans here.
Yeah, it, it fully amortizes. It'll be a zero balance. You know, 10 years ago, Xerox exercised a 10-year renewal option, and we essentially used all the rent payments to support a credit tenant lease financing. That was how we, we cashed out of the asset 10 years ago, and we have a ground lease that expires, so won't have any continued economic interest after the maturity. We won't, we won't owe anything either.
Thank you.
Your next question comes from the line of Mitch Germain with JMP Securities. Please go ahead.
Good morning. The 70% of the 2024 expirations that you're under discussion with is, I'm talking about, I guess I'm curious about the other 30%. Are they just kind of back weighted, and those tenants haven't started yet? Do we have some known move-outs that comprise some of that 30%?
Hi, Mitch, it's James. You're right on the first part. They're just back-end weighted. There's only 1 known move-out in 2024, which is an 18,000 sq ft facility in Olive Branch, Mississippi.
Okay, great. Maybe, Will, I, I, Just help me out with regards to the, I think you suggested, other than some of the office assets that are, you know, kind of under discussion, or under negotiation or, or a letter of intent, no more sales. I, I know you sold one industrial property in Detroit last quarter. I believe that you were gonna tap the sales market for a little more, based on what your original comments were. Was there anything that changed from your perspective?
Just observing that it's not a, a great time to be a seller, given how hard it is, you know, acquisition financing is, is not favorable. I think we'll just monitor the market. We have an interest in keeping our, you know, revolver balance low. I think we'll just be opportunistic about sale, sales opportunities versus, committing. It wouldn't surprise me if we test the market in the next few months on a handful of assets and see what we find, but I think that'll be our approach on that front.
Thank you.
Your next question comes from the line of James Kammert of Evercore ISI. Please go ahead.
Hi. Good morning. Thank you. Just a clarification on the 2 newly leased development pipe projects. It looked like the costs went up, but those rents you quoted and the costs that are now presented in the second quarter supplemental, those are the full in and reflect the additional tenant build-out requirements that I think you mentioned.
Exactly. That's exactly what it is, Jim. We've added in the, the TI amounts now.
Okay, okay, I just wanna make sure why the costs went up, particularly on Cotton, but that's, that's fine because the yield there is pretty attractive. Actually, it was just building off Mitch's question. I had similar thoughts. What is the typical sort of renewal notice requirement on the part of a representative 7-year lease? You know, how, how quickly or when do the tenants have to say, prior to expiration, to tell Lexington what their intentions are?
It's typically nine-12 months.
It's typically nine. Okay, this helps. Thank you.
Thanks, Jim.
Your next question comes from the line of Jonathan Petersen with Jefferies LLC. Please go ahead.
Great. Thanks. Good morning. Curious. Just looking at the renewals for next year, are you seeing any change in tenant behavior on these lease renewals? Like, are they coming to you, you know, as early as they have over the last couple of years for renewal, or are they kind of wait and see? Is there any change in the escalators that you guys are able to negotiate on renewals, and where does that stand right now?
Sure. It's James again. It, it varies. We have some that are proactive and some that wait until the last minute. In most circumstances, we still have the upper hand, so we're, we're fine to wait. The ones who are set out, we wanna make sure that they have the ability to renew, and don't potentially give up the space by missing their window. It's typically, as we kind of discussed so far, conversations around that renewal window. From an escalator perspective, you know, we continue to see escalators push towards 4%. I would say on average, across our markets and, and portfolio, when we're doing a mark-to-market, we're also improving on the escalators and on probably on average to 3.5%, though in some cases we've gotten to 4%.
Okay. That's helpful. That's all for me. Thanks.
There are no further questions at this time. I will turn the call to Will Eglin.
We appreciate everyone joining our call this morning. In summary, we continue to produce strong financial and operational performance and are successfully executing on our strategy with progress in all areas of our business. We believe we are poised for strong performance going forward and are excited to continue to producing great outcomes for our shareholders. Please 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 for joining us.
This concludes today's conference call. We thank you for joining. You may now disconnect your line.