Is Lexington Realty's 7.5% Yield Too Good To Be True?
Last week, Lexington Realty (NYSE:LXP) released the company's first quarter earnings results and Mr. Market seemed to yawn - shares down .6%.
As a follow up to an article that I wrote a few weeks ago, I am providing a recap of LXP's latest earnings results in hopes of determining whether or not Mr. Market is ignoring this REIT or if he sees something that I don't.
As I explained in the recent LXP article, "I can say with a fair degree of confidence that Lexington Realty is a mis-priced REIT that deserves a better score." Even after the first quarter earnings were released (last week), LXP is still behaving as if there is invisible risk - that oftentimes is the primary reason for investor losses.
Like many dividend investors, I jumped on LXP's gravy train to take advantage of the outsized dividend yield - now an eye-popping 7.5% yield (the second highest in the peer group).
Sometimes though, a robust yield like this can be too good to be true. That's what I refer to as a "sucker yield" and as I wrote in Investopedia:
A "sucker-yield" is based on quantifiable high yields, seemingly ridiculous, when the underlying security has a flawed or vulnerable business model. Companies that fall under the "sucker-yield" definition typically have unpredictable and unreliable earnings histories with unsafe dividend payouts.
Many - including me - can get distracted by the glare of gold "seemingly hypnotized by the allure of owning securities with substantial income." As a true measure of safety, it's critical that investors analyze the underlying safety of the dividend, the ability for the dividend to grow, and the overall merit of the stock. Let's begin…
The Latest Results
In the first quarter, LXP's Funds From Operations (or FFO) was $0.26 per share. As I referenced (in my last article), I was "expecting to see mediocre results with accelerated progress" in Q2, Q3, and Q4.
It's evident that the $.26 per share (FFO) performance was relatively flat (FFO per share in Q4-14 was $.27); however, the company did raise its annual guidance by $.01 per share to a range of $1.01 to $1.05. During the first quarter, LXP made steady progress in the key areas of its business that affect performance.
On the investment front, LXP invested approximately $21.5 million in ongoing build-to-suit projects, made 5 acquisitions for approximately $197.3 million, placed a forward purchase under contract for $29.7 million and disposed of 3 office properties for approximately $35.2 million.
Looking at the acquisitions, we can see that LXP acquired $197.3 million at an average going-in cap rate of 6.9% (8.1% yield based on GAAP). The minimum lease term for the purchased assets is 12 years and the maximum is 40 years.
Looking at the build-to-suit pipeline, LXP has around 1.64 million square feet under construction (in various phases) and the leases range from 15 to 20 years. These projects will cost (in total) around $395 million and they will be turned over (paying rent) in 2015 and 2016.
LXP also has $184 million in forward commitments and the average going-in cap rate is 7.2% (8.4% yield on GAAP). These projects will commence rent in Q4-15 and Q1-16.
LXP also disposed of 3 office buildings, 2 of which were deed-in-lieu (handed back to the bank).
As part of the company's recycling strategies, LXP has been reducing its exposure to suburban office properties and monetizing multi-tenant properties upon stabilization of occupancy and transitioning the portfolio so that more revenue is derived from long-term leases.
In Q1-15, LXP's weighted average lease term was 12.4 years (up from 11.1 years a year ago) and approximately 72% of revenue was derived from leases expiring after 2019.
LXP had a strong quarter of leasing, executing leases totaling approximately 900,000 square feet and ending the quarter with 96.7% of square footage leased, a 30-basis-point improvement from last quarter.
Renewal rents increased modestly on a GAAP basis, and declined modestly on a cash basis. LXP had 2 office leases expire, which were not renewed, but announced recently that the Lakewood, Colorado property has been leased with rent expected to commence in September.
The Balance Sheet Looks Better
LXP has made consistent progress with respect to its refinancing strategy by continuing to execute on its plans to unencumber net operating income (or NOI) and extend its weighted average debt maturity while lowering overall borrowing costs.
During the quarter, LXP retired $113.6 million of mortgage debt and unencumbered 6 properties with annual NOI of $13.9 million. Unencumbered assets now represent around 68.4% of NOI.
Continue reading this article here.
Brad Thomas is the Editor of the Forbes Real Estate Investor.
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