Lexington Realty Trust (LXP) has grown to be the largest position in the Against the Sky Portfolio. Given its recent rise, now is a good time to take a look at its most recent quarter, determine if the company is executing its strategy, and double-check its valuation.
For its fiscal third quarter, Lexington reported $36.8 million in funds from operations (FFO), or $0.30 per share. That’s $1.20 on an annualized basis. Lexington provided guidance of $1.26-$1.28 per share for the full year. This guidance has been reduced due to increased shares outstanding from Lexington's stock dividends. It looks like $1.15-$1.20 per share will be a stable baseline going forward, assuming additional property sales. At $1.15 per share, the company is selling at 5.4x FFO based on its recent share price of $6.25. I would consider the company to be fully valued in this economic climate at about 8x FFO, or $9.20 per share.
During the quarter, the company signed only 23 leases totaling only 400,000 square feet. Occupancy fell from 92% the previous quarter to 91.3% in the third quarter. Most of Lexington’s portfolio is single-tenant properties with long-term leases in place. In 2010, only 11 leases expire totaling 3% of Lexington's GAAP base rent.
Liquidity at the company continues to improve. It has $56 million in unrestricted cash and $305 million available under its credit facility. During the remainder of 2009, Lexington has $24 million in balloon payments due. In 2010 it has $84 million maturing, and $86 million maturing in 2011. The Company provides a good amount of detail in its supplemental release regarding these maturities, and based on the gross book value of these properties, the loan to value ratios look fairly conservative. Given its maturity schedule and liquidity position, Lexington has subsequently announced it will pay a cash dividend of $0.10 per quarter.
In its third quarter, the Company reduced debt by $68.9 million, including repurchasing $29.2 million in face value on its exchangeable notes at a 15% discount. The discounts on this debt declines each quarter as the market and Lexington stabilize. However, a 15% return is still unlikely to be available in commercial real estate any time soon. Subsequent to quarter end, the Company had repurchased $17.6 million in face value on these notes, reducing the amount outstanding to $87.7 million.
Since the end of the quarter, the company sold a building leased to Blue Cross/Blue Shield in Columbia, South Carolina where the lease was due to expire in 2010. The sale of the facility resulted in $12.3 million in net proceeds for the Company.
As noted above, Lexington also announced that it will pay a cash dividend of $0.40 per year. Looking at FFO, the company will be retaining approximately $0.75 per share in cash flow annually, or $84 million. This should allow the company to continue its deleveraging strategy and also pursue some acquisition opportunities in a depressed commercial real estate market.
Also as noted above, the company produced funds from operations of $36.8 million. Property operating EBITDA was $71 million. Interest and amortization costs were $33 million, resulting in a debt service coverage ratio of 2.15x. Annualized operating EBITDA would then be $284 million. Applying an 8.5% capitalization rate results in an overall property value of about $3.3 billion.
The company had total cash of $80 million at the end of the quarter. Assuming no value for other assets, the Company has $3.4 billion in cash and property and $2.2 billion in debt outstanding, implying equity of $1.2 billion or $10.71 per share.
Valuation and Conclusion
At 8x funds from operations, I valued the company at $9.20 per share, and assuming no value for other assets and an 8.5% capitalization rate, I calculate an equity value of $10.71 per share. As of this writing, Lexington’s share price is $6.25 per share. As I noted in my recent portfolio review, I will likely start looking to reduce my holdings to avoid concentration risk, but I believe that $9 per share represents the intrinsic value of this company given the outlook for commercial real estate.
Disclosure: I currently hold shares of Lexington Realty Trust