LXP INDUSTRIAL TRUST
Fitch Ratings has affirmed
The Rating Outlook is Stable.
LXP's rating is supported by its portfolio of predominantly triple-net leased industrial assets and the company's solid credit metrics, including leverage and fixed charge coverage. Fitch expects the company to redeploy proceeds from non-core asset dispositions toward industrial distribution properties in top 50 U.S. MSAs to enhance its portfolio returns.
The rating also reflects LXP's exposure to an almost entirely single-tenant asset portfolio, which creates a binary risk in occupancy and could lead to greater operating volatility. The company mitigates this risk by targeting strong tenant credit. LXP also has less established unsecured debt capital access, particularly in the public bond market, notwithstanding three public bond issuances since
Key Rating Drivers
Portfolio Repositioning About Complete: LXP has transitioned to a predominantly single-tenant net lease industrial portfolio since 2015. The company has steadily increased its exposure to general purpose, bulk distribution assets and has reduced exposure to multi-tenant office and retail assets. As such, industrial properties comprised approximately 98% of portfolio ABR as of
Fitch generally views this strategy favorably as bulk distribution assets are more versatile, supporting a broader customer base and backfilling demand. They are also less onerous for the owner from a capital and operational perspective, which is a better fit within the net lease REIT model compared with multi-tenant office and retail assets. Prospectively, Fitch expects the company's disposition strategy will include exiting its remaining office assets as well as sales of perceived non-core industrial assets.
Solid Financial Metrics: Fitch expects REIT leverage (net debt before preferred stock to recurring operating EBITDA after distributions to/from associates and minorities) to sustain in the low to mid 5x range through the forecast period as LXP funds net acquisition activity and development activity largely with available cash, operating cash flow and unsecured debt capital. Fitch believes the company will be able to achieve this through sound operating cash flows as rent growth persists.
LXP expects leverage to remain between its target of 5x-6x. Fitch also assesses leverage by treating preferred stock as debt. On this basis, Fitch projects that leverage will be modestly above sensitivities in 2024 and then drop to the middle range of sensitivities by 2026 as the remaining dispositions are executed and incremental income from the company's development portfolio ramps up.
Sound Operating Performance: LXP reported +4.1% SSNOI growth in 2023 as industrial portfolio straight-line and cash rents increased by 52% and 37%, respectively. Fitch anticipates similar results into the forecast period as the company expects comparable organic growth in 2024 and estimates that its industrial leases expiring through 2029 are 23% below market.
Single Tenant Strategy: LXP's focus on assets that should support stronger backfilling demand and transferability mitigates some of the risk inherent in the single-tenant asset strategy. LXP's strategy creates incremental risk due to the binary outcome attached to occupancy; each building is either 100% leased or 0% leased.
However, this risk also generally results in less institutional competition for the asset type with other players in the space often less sophisticated or less well-capitalized than typical institutional buyers, creating enhanced pricing and return potential. Moreover, the scale and operating platform of a public REIT can have a partial mitigating effect, as it can achieve an average 95%+ overall target occupancy through increased portfolio granularity that smaller competitors in the space are more challenged in replicating.
Geographically Diverse Portfolio: LXP's industrial portfolio operates largely in the Sunbelt and Midwest
Tenant Exposures: LXP's largest tenant,
LXP generates approximately 49% of industrial ABR from investment-grade tenants, which compares favorably with 'BBB' category net lease and industrial REIT peers. The company has a few notable industry exposures within its industrial portfolio as of
Less-Established Capital Access: LXP is a less established unsecured bond issuer but has executed three bond issuances since
The company has historically taken advantage of when its common equity is trading at a premium to NAV to fund investment activity, and Fitch anticipates the company may utilize its ATM program prospectively, although none is assumed in our forecast model. Fitch expects that the company will be a moderate net acquirer going forward, particularly continuing to grow its development portfolio. Fitch assumes these costs are funded through a combination of retained cash, disposition proceeds and unsecured debt capital.
Derivation Summary
LXP's portfolio is generally in line with or stronger than 'BBB' category net lease peers in measures of occupancy (100.0% of stabilized portfolio at 4Q23) and investment-grade tenancy (49% of total industrial ABR). The company's WALT of 6.0 years is lower than the Fitch-rated net lease average of approximately 10 years, largely attributable to its transition to shorter term industrial assets and leases, and the company's portfolio is more exposed to secondary and tertiary markets relative to some of its industrial REIT peers.
LXP's credit metrics, including leverage, are expected to sustain in the low to mid 5x range and net UA/UD in the low-2x range, which is relatively comparable with peer,
Key Assumptions
Fitch's Key Assumptions Within the Rating Case include:
SSNOI growth of approximately 3%-4% per annum through the forecast period;
Acquisition activity of approximately
Development expenditures of approximately
Maintenance capex of approximately
No common equity issuance during the forecast period,
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade
Fitch's expectation of REIT leverage (net debt to recurring operating EBITDA) sustaining below 5.0x;
Demonstration of improved capital access, including consistent access to public unsecured bond capital through higher frequency of issuances on par with 'BBB+' rated REIT issuers;
Fitch's expectation of fixed-charge coverage sustaining above 4.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade
Fitch's expectation of REIT leverage sustaining above 6.0x;
Fitch's expectation of unencumbered assets to net unsecured debt sustaining below 2.0x;
Fitch's expectation of fixed-charge coverage sustaining below 3.0x.
Liquidity and Debt Structure
Fitch estimates LXP's base case liquidity coverage at 3.3x from 1Q24 through YE 2025. The company should be able to fund all its debt maturities through 2024 as well as recurring and development capex with cash flow after dividends.
LXP's maturity schedule is well-laddered with no material maturities until 2027 after the expected repayment of
LXP has contingent liquidity, as measured by unencumbered asset coverage of net unsecured debt (UA/UD), at 1.9x when applying a stressed 9.25% capitalization to 2023 unencumbered NOI. This is a moderate increase from 1.6x UA/UD at Fitch's prior review given incremental development income stabilization in 2023 and beyond.
Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources include unrestricted cash, availability under unsecured revolving credit facilities and retained cash flow from operating activities after dividends. Uses include pro rata debt maturities, expected recurring capex and forecast (re)development costs.
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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