Generally, when a company performs well, its stock price will respond with a similar increase of relative magnitude. This has not been the case with Lexington Realty Trust (LXP) and presents, in my opinion, an opportunity. Over the past few months, Lexington has made numerous beneficial financial maneuvers, yet its stock price has remained strangely low.
Exploiting the low interest rates of the moment, Lexington underwent a Credit Facility Upgrade in which it replaced its old facility with one of lower rates. In the same press release (linked above), Lexington announced procurement of a $215mm term loan at a rate of LIBOR +2%-2.8% continuously adjusted based on leverage ratios. To further capitalize on low interest rates, Lexington secured a $55mm Long term Mortgage on the Transamerica tower in Baltimore at a fixed rate of 4.32%.
Access to cheap debt allowed Lexington to clean up some of its more expensive debt. This was done through redemption of its 8.05% Series B Preferred announced 4/30/12. During 1Q12, Lexington repurchased and retired 34,800 shares of its 6.50% Series C Cumulative Convertible Preferred Stock for $1.5 million, which was a $0.3 million discount to the liquidation preference. Although small, the $0.3mm savings directly and immediately contributed to common equity, while the reduction in dividend expenditures will make for longer-term gains.
The aforementioned financial improvements increase cashflows, facilitating dividend increases. On 11/03/11, Lexington declared an Increased dividend on its common stock to $0.50 annually. Further increases in dividend are planned in the near future as announced at the 2012 REITWEEK conference.
Common Stock Offering
Like so many other REITs in this acquisition-heavy time, Lexington held a Common Stock Offering which closed on 5/18/11 at an average price of $9.45 per share. Normally, stock offerings can be quite costly and require excellent use of the capital to be beneficial to stockholders on a per-share basis, but since it was done when the stock price was much higher, the initial price per share obtained is greater than the current market value. Investors who participated in this offering may be left with a bad taste in their mouths due to the subsequent price decline, but for those of us looking to enter now at a discount, can reap the benefits of the strong per-share capital Lexington was able to raise.
Reflective of Lexington's financial maneuvers, which in all save approximately $4.0mm per year in debt service payments, management was able to increase its FFO/share guidance by about $0.02 to $0.92-$0.95 for 2012.
Recent Market Price $
Annual Dividend $
Yield at Recent price %
Lexington Realty Trust
$45.49 ($50 par)
Together, these actions add up to a superior bottom line, yet over the time period during which these events occurred (5/18/11-present), the market price fell from $9.42 to $8.69. A price to FFO multiple of only 9 (among the lowest in the sector) further indicates how undervalued Lexington is in the current market. By investing now, we can catch some capital gains as the situation returns to normalcy - all the while collecting a competitive dividend.
Additional disclosure: 2nd Market Capital and its affiliated accounts are long LXP and LXP-D.