Lexington Realty Trust (NYSE:LXP)

Another relatively cheap triple-net REIT. On my watch list.

http://caps.fool.com/Blogs/lexington-reit-buy-signal/535886?source=itxsitmot0000001&lidx=1

I added LXP a while ago, for obvious reasons. Also Jakila

Deteriorating Professional Opinion

low relative PE, good star & 2010 earnings. Bottom fishing week of 5/3

LXP has long term debt at about 6X of current revenues. Its annual interest payments have exceeded operating income for each of the past three years.

What does over-leveraged mean to you?

For me it means thumbs down.

I am LOVING REIT's right now!

Red Raider is Lord

looks like a great portfolio in well positioned markets- great diversification- may be a real time buy

12% Yield

Presently, stock price does not reflect strong management and strong balance sheet. It is treated as any other REIT.

bull

This stock has been hammered...Once the economy turns around then the REIT industry will recovery... Great play for the long-term at a bargain-basement prices

REIT with hefty yield, potentially undervalued

On May 17, 2009 at 6:32 PM, JakilaTheHun (99.89) wrote:
Going with Lexington Realty Trust (LXP).

I have already written a pitch for them. You could copy that or you could just link to my detailed article on Lexington:

http://seekingalpha.com/article/137818-lexington-realty-trust-a-solid-reit-with-huge-potential

Very beaten down REIT that looks significantly undervalued to me. Probably should be selling closer to the $15 - $20 range given their balance sheet, FFOs, and portfolio of properties.

Lexington has relatively low leverage for a REIT (63% debt-to-value), is not overly exposed to many of the RE problem areas (such as NYC, LA, South Florida, etc), and has strong FFOs and cash flows. They are also selling off some of their properties and buying back their own debt at huge discounts. This is a very smart move.

Even if revenues were to drop 10% - 20% and the book value of their RE properties is 20% overstated, this stock still be worth around $8 - $10. They are paying out a 72 cent annualized dividend right now, despite the fact that they have cut back to increase cash (and buy back more debt at a gain).

If you want to read my full analysis of Lexington, you can check out my write-up at Seeking Alpha:

http://seekingalpha.com/article/137818-lexington-realty-trust-a-solid-reit-with-huge-potential

yer

I don't think this company is as bad off as the market believes. The dividend should hold up as I note on my blog: http://www.poeticportfolios.com/?p=79#more-79

Cash Flow

Lexington reported Funds from Operations of $43.3 million or $0.40 per share in the third quarter. The previous year, they reported $50.4 million in Funds from Operations or $0.46 per share. Across their portfolio, Lexington reports $442 million in annualized cash rent from their 48.8 million square feet of space, approximately $9.06 per square foot. Total vacant square feet of 3 million increases operating costs (as they do not receive reimbursements) and drives down the rental rate per square foot.

Annualizing property operating costs totals about $81 million in expenses. General and administrative expenses basically cover management of the properties and corporate overhead. These costs are approximately $34 million on an annualized basis, or 7.7% of annualized lease income. This would be considered high on a property by property basis as a stabilized, triple-net leased property would general have a management fee of 2-3%. The additional expense is likely the result of running a publicly-traded REIT plus value creation strategies such as property development activities.

I’ll assume (very conservatively) that rent on vacant space can be leased for $10.00 per square foot, triple-net for the remaining space. I back this out again, but I’d like to keep it as a separate item for now. A simple cash flow statement looks like this:

Gross Potential Rent: $472 million
Less Vacancy: ($30 million) - 6.4%
Effective Gross Income: $442 mllion

Operating Costs: ($81 million)
Management and Admin: ($34 million)

Net Operating Income: $327 million
Debt Service: ($149 million)
Net Cash Flow After DS: $178 million

DSCR: 2.20x

At $178 million, FFO per share would be $1.62. Lexington has guided between $1.56 and $1.64 per share for 2009.

Leverage

I believe that the value of Lexington’s real estate holdings is worth a bit more than cost. Total real estate holdings are listed at $3.8 billion on their balance sheet. Assuming an 8.00% capitalization rate, which is still conservative despite the general economic conditions, their real estate portfolio is worth $4.1 billion. This value, too, may be understated as administrative and corporate overhead is included in this number. Also keep in mind that Lexington successfully sold 15 properties last quarter at an average capitalization rate of 6.6%. The value per square foot based on the $4.1 billion value is $84. Again, a very conservative estimate of value considering Lexington’s portfolio is 74% office.

Lexington has debt outstanding of just under $2.5 billion, indicating a loan to value ratio of 61% based on fairly conservative assumptions. All of this excludes the $135.5 million in cash that the company held at quarter-end.

Portfolio Risks

According to presentation material on Lexington’s web site, 53% of their tenants are investment grade, 32% are unrated, and 15% are non-investment grade. They have exposure to Daimler-Chrysler, Tower Automotive, Dana, Tenneco, Circuit City, and Bally’s. Dana Corp., for example, represents 2.2% of their tenant base. Potential lease defaults from these and other non-investment grade tenants could certainly result in additional vacancy at a time when leasing is more difficult.

More than anything else, the significant decline in Lexington shares is likely due to $267 million in debt maturities due in 2009. Financing has rapidly become scarce over the last year, and financing that seemed like a sure bet 18 months ago is now in question. However, in their third quarter press release, Lexington noted that the gross book value of properties securing these loans is $1.4 billion, and the annual cash revenue produced by these properties is $121 million. An 8.0% cap rate suggest a portfolio value of $1,512 million based on this rental income. Based on the $1.4 billion gross book value, the loan to value ratio for this portion of their portfolio is 19%. Even in these times of scarce financing, it seems likely that Lexington could find financing for this portion of their portfolio.

Stressed Cash Flow

Lexington has done a good job in maintaining occupancy rates through 2008. Many markets have seen vacancy rates rise over 2% since the middle of 2008, yet Lexington noted that they leased 770,000 square feet in the third quarter and by the time of their earnings report had leased 1.3 million more square feet. This is impressive in this market.

In their supplemental information, Lexington notes that 25 leases representing 9.0% of their portfolio cash flow expires in 2009. In my stressed cash flow below, I will assume that none of this is re-tenanted in 2009 plus I will assume that an additional 5.0% of space is lost to tenant defaults.

Gross Potential Rent: $472 million
Vacancy: ($95 million)
Effective Gross Income: $377 million

Operating Costs: ($81 million)
Management and Admin: ($34 million)

Net Operating Income: $262 million
Debt Service: ($149 million)
Net Cash Flow After DS: $113 million
DSCR: 1.76x

FFO/shr: $1.03

Dividend Outlook

As noted above, Lexington announced that they are cutting their dividend back to $0.72 per share in 2009. Based on my stressed cash flow scenario above, it looks like this dividend level is very safe. Excess cash flow will be used to support de-leveraging of the company.

In the long term, Lexington looks to have plenty of room for increasing dividends beyond 2009. At their recent share price of $5.00 per share, the current yield is 14.4%.

Company Strategy Amid Crisis

2008 has been a year where every financial company has been in a race to reduce leverage, and Lexington has been no exception. However, I am impressed by how opportunistic the company has been in achieving these ends. Asset sales at a 6.6% cap rate certainly does not look like a fire sale. It looks like the company achieved some good prices. They plan to market $400 million in properties for sale in 2009 not because they have to, but because they see an opportunity to repurchase debt at a discount.

During the third quarter, Lexington repurchased $25.5 million in exchangeable notes at a 10.7% discount. Subsequent to quarter-end, an additional $32 million in exchangeable notes were repurchased by the company resulting in a yield to maturity of 16.3%. The debt markets are certainly not nearly as efficient as the real estate market. Returns in commercial real estate are no where near 16.3%. Lexington has taken advantage of this opportunity.

Conclusion

In a recent post, I noted that REITs could be a high-yield opportunity in this market. Lexington certainly appears to have conservative leverage levels and a smart strategy for dealing with this crisis. Debt maturities in 2009 appear to be mitigated by extremely low leverage levels. Portfolio occupancy is also mitigated by relatively low debt levels. Even if portfolio occupancy falls from 93.8% to 80%, Lexington can still meet their dividend level in 2009 and beyond.

passed my new screent test

dividend rich, backed by real estate rental income,