Hello and welcome to LXP Industrial Trust Second Quarter 2023 Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the conference over to Heather Gentry, IR. Please go ahead.

Thank you, operator. Welcome to LXP Industrial Trust second quarter 2023 earnings conference call and webcast. The earnings release was distributed this morning and both the release and quarterly supplemental are available on our website in the Investors Section and will be furnished to the SEC on a Form 8-K. Certain statements made during this conference call regarding future events and expected results may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. LXP believes that these statements are based on reasonable assumptions. However, certain factors and risks including those included in today's earnings press release and those described in reports that LXP files with the SEC from time-to-time could cause LXP's actual results to differ materially from those expressed or implied by such statements. Except as required by law, LXP does not undertake a duty to update any forward-looking statements. In the earnings press release and quarterly supplemental disclosure package, LXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure. Any references in these documents to adjusted company FFO refer to adjusted company funds from operations available to all equity holders and unitholders on a fully diluted basis. Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of LXP's historical or future financial performance, financial position, or cash flows. On today's call, Will Eglin, Chairman and CEO; Beth Boulerice, CFO; Brendan Mullinix, CIO; and Executive Vice President, James Dudley will provide a recent business update and commentary on second quarter results. I will now turn the call over to Will.

Thanks Heather. Good morning everyone. We continue to make progress in all areas of our business during the second quarter with excellent leasing results in our development portfolio and strong same-store industrial NOI growth of 5.8%. The leasing volume of 1.6 million square feet in our development portfolio included our 488,000 square foot facility in Phoenix and 1.1 million square foot facility in Columbus. These leasing outcomes produced an estimated average cash yield of 7.5%, excluding partner promotes, resulting in yields well in excess of our original guidance. We have strong tenant interest at our remaining 3.8 million square feet of projects available for lease and expect to make more progress during the balance of the year. Total cost for these remaining projects is approximately $293 million or 6% of our gross asset value, of which we have $45 million left to fund. Our development pipeline has been a valuable vehicle for adding single-tenant warehouse facilities to our portfolio. And since initiating our warehouse development program, we have leased seven industrial facilities. These positive results highlight our continued success in development leasing and our ability to deliver superior outcomes relative to the purchase market. Moving on to sales. We continue to anticipate that our Philadelphia and New Jersey office assets will be sold by year-end. Buyer due diligence is well underway at our 1701 Market Street property in Philadelphia and our Whippany New Jersey asset is under contract subject to standard closing conditions. The two remaining facilities leased to Wells Fargo and South Carolina are to be marketed for sale later this year. Our Palo Alto office facility, which generates $0.02 of FFO per share, is subject to a ground lease that expires in December 2023 and as a result, this asset will no longer produce FFO after this year. Currently, we aren't expecting any additional sales activity this year, but continue to view certain industrial assets in non-target markets as potential sources of incremental liquidity. Turning to our balance sheet, net debt to adjusted EBITDA at quarter end was 6.3 times and our $600 million revolving credit facility was fully available. Our net debt to adjusted EBITDA would be six times, including pro forma stabilization of our leased development projects. Additional EBITDA will be realized, as we continue to stabilize our development pipeline and overall leverage is expected to decline as NOI comes online. We are targeting a leverage range of five times to six times net debt to adjusted EBITDA. With that, I'll turn the call over to Brendan to discuss our investments in more detail.

Thanks Will. Reviewing the second quarter leasing outcomes in our development program, at our 488,000 square foot Phoenix facility, we executed a seven-year lease with a starting rent of $9.60 per square foot and attractive annual rental bumps averaging approximately 4%. We also secured a 10-year lease with a starting rent of $4.85 per square foot and 3.5% annual escalations at our 1.1 million square foot project in Columbus. Both facilities require some additional build-out requested by the tenants. The tenants are expected to take occupancy when the build-outs are complete, which should be early November for the Columbus asset and early January for the Phoenix facility. During the quarter we completed the core and shell of the remaining buildings in our Greenville-Spartanburg project which included a $1.1 million and a 305,000 square foot facility. We also completed the core and shell of one facility in our two-property South Shore Florida project at the end of June, and subsequent to quarter end we completed the second facility. Finally, in July, we completed the forward purchase of our 124,000 square foot South Dallas project for approximately $15 million. With the leasing progress we've made to date, we commenced construction of a 250,000 square foot project in the ETNA Park 70 joint venture, which is in the Columbus market on land we already own. Market demand for this size facility remains strong. The building will feature modern specs including a 36-foot clear height, with a rear load design. We expect the core and shell building to be completed in the first quarter of 2024, for an estimated cost of $29 million and a projected stabilized cash yield of approximately 7%, excluding partner promotes. We intend to continue utilizing our development pipeline as a way of adding single-tenant warehouses to our portfolio, at yields in excess of the purchase market. Our development strategy will continue to be responsive to tenant demand which will include smaller facilities with staggered deliveries to help mitigate potential leasing risk. Additionally, our goal is to target our speculative non-stabilized development pipeline to be around 5% of gross asset value or less. With that, I'll turn the call over to James to discuss leasing.

Thanks Brendan. Overall tenant leasing and demand continues to be solid across the United States, despite some submarket softness in certain markets with excess supply. In the second quarter, rents grew approximately 18% in our target markets compared to the same period in 2022. As we approach a more robust period of lease rollover in the coming years, our view of our mark-to-market opportunity has not changed. And we still expect ample rent growth compared to current rents. At quarter end, we estimate that our industrial portfolios in-place rents, releases expiring through 2028 are approximately 23% below market. We expect in-place rents to grow approximately 39% on average or 31% net of contractual rent escalations based on independent broker estimates. Our industrial portfolio was 99.5% leased at quarter end with vacancy remaining very low. Subsequent to quarter end, we signed a five-year lease renewal with a tenant in our 408000 square foot facility in Duncan South Carolina, a cash rental increase of approximately 16% with 3.5% annual bumps up from 2%. While the tenant exercised its three-year renewal option during the second quarter, the desire to increase the length of the lease pushed final negotiations into the third quarter while also allowing us to secure better terms than we had originally anticipated. Year-to-date, we've completed 2.7 million square feet of lease extensions at attractive base and cash-based rental increases of approximately 41% and 26% respectively. When excluding one fixed renewal based and cash-based rent spreads were approximately 49% and 35%, respectively. We expect to see a pickup in leasing activity in the third and fourth quarters, as renewal windows for 2024 lease expirations approach and we complete negotiations. Currently we're in negotiations on approximately 70% of our 2024 expirations and have meaningful activity on our small amount of remaining vacancy. Our estimates on 2024 expired rents are still expected to be 20% to 30% higher than in-place rents based on current negotiations and brokers' estimates. We also have promising activity on a significant portion of the remaining spec development pipeline and hope to report additional leasing progress later this year. With that, I'll turn the call over to Beth to discuss financial results.

Thanks, James. Revenue in the second quarter was approximately $87 million with property operating expenses of $16 million, of which approximately 95% was attributable to tenant reimbursement. Second quarter adjusted company FFO was $0.18 per diluted common share or approximately $53 million. We are maintaining our current adjusted company FFO guidance within a range of $0.66 to $0.70 per diluted common share. This guidance range considers the timing of development lease-up and sales volume amongst other items discussed on today's call. Second quarter G&A was approximately $9 million, and we still expect 2023 G&A to be within a range of $35 million to $37 million. At quarter end, our same-store industrial portfolio was 99.8% leased and same-store industrial NOI increased 5.8% in the second quarter compared to the same period in 2022. We continue to anticipate our 2023 industrial same-store NOI growth to be within a range of 4% to 5%. At quarter end approximately 98% of our industrial portfolio leases had escalations with an average annual rate of 2.6%. As Will mentioned, our $600 million unsecured revolving credit facility was fully available as of June 30, 2023. Our consolidated debt outstanding was approximately $1.5 billion at quarter end, with a weighted average interest rate of 3.3% and a weighted average term to maturity of six years. Our fixed rate debt percentage remains at approximately 91.4%, which continued to mitigate our exposure to higher interest rates. Finally, our unencumbered NOI remains exceptionally strong at over 93% of our total NOI. With that I'll turn the call back over to the operator, who will conduct the question-and-answer portion of this call.

Thank you. Your first question comes from the line of Anthony Paolone of JPMorgan. Please go ahead.

Thanks, good morning. I was wondering if you could talk about just your appetite to refill the development pipeline as you start to look to 2024? And what yields might look like on sort of the next round as you start things?

Yes. I mean I think Tony, overall, we've been working on shrinking that exposure. So in this quarter, we did 1.6 million feet of leasing and committed to the 250,000 square foot project in Columbus that we think makes a lot of sense given the land that we own and the size facility that is relative to where we see tenant demand. So I think overall, it's a net shrink to that position and then over time sort of target that 5% of gross asset value I think that sort of makes sense to us. And Brendan, do you want to comment on where you see deals penciling these days?

Well relative to the announced project in Columbus that we just added to the program, we've modeled a number of single and multi-tenant scenarios. But there we anticipate that the stabilized yield to LXP will be in the 6.5% plus range, if that gives you an idea of where we would be.

Okay. And then just second question on the projects that are available to lease. You talked about just your activity there. Can you give us a little bit more color and depth as to just how that's coming along? Anything that's changed in terms of tenant demand?

Hey, Tony, it's James. So yes, I would say we're in varying stages. We have activity on all the different properties. Some are further along than others. So I would say that the demand has continued to be strong. But I mean, I think it's pretty well known in the commentary across industrial companies is that they're just taking longer to make decisions and I think we would echo that. So the process is just a little bit slower than it was 12 to 18 months ago, but we do have activity.

Your next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Hi, thanks. Good morning. Just first question. I guess last quarter, you discussed the value of the foreign core of assets in the $5 million range. Appreciate the commentary around the update on some of those assets. Has anything changed around the expected proceeds that you expect to generate? And then at 1701 Market Street in Philadelphia, can you just clarify, whether that's under contract or maybe provide a little bit more detail around some of the contingencies or key items awaiting approval before executing an agreement?

Sure. I think there's been some erosion in the value of the office portfolio overall. So while we have 1701 and Whippany under contract with deposits, I think we want to be a little cautious about pegging the value of the Wells Fargo assets until we have them under contract as well. So I think, there has been some diminishment of value from the $75 million, but I think we just have to wait to quantify that to see how we do with the Fort Mill assets. Do you want to comment on 1701 market?

Yes, sure. In both circumstances, we've moved the process along. We have hard earnest money deposits and anticipate hopefully a smooth closing from here, but they're not done until they're done in the current office sale environment.

Okay. On the Wells assets, has there been any notification or decision around what they're looking to do with the two office assets, whether they're going to renew or vacate one or both of those assets?

No. They let the renewal period expire in terms of exercising any renewal options with respect to either facility. So we'll move ahead and market them for sale and it's possible during that process Wells could change their mind or get back involved. But we're moving to turn those assets into cash and finish the office sale process.

Okay, got it. And then on the $15 million acquisition in the quarter, can you provide a cap rate and initial yield on that transaction? And then, are you seeing more deals begin to surface? And what's the company's appetite like for additional investment opportunities?

Hi. It's Brendan. That acquisition was actually a forward purchase agreement that we acquired a shell. We negotiated that deal in early last year and early in the spring. The anticipated stabilized yield there we're looking at around 5% to low 5% range. In terms of additional acquisitions, again, that one was put under contract last year. While we're monitoring the purchase market, we remain as I've said very focused on stabilizing more of the development pipeline. And as that happens, we may look to expand the pipeline in our land bank as we announced this quarter with the Columbus transaction and alternatively we may revisit the purchase market.

Okay. And just last question, I guess maybe Beth, can you just remind us of sort of the policy in place to transition development into service. Just wondering if there's a timeline either once completed, whether leased or not for some of the projects that are available for lease today, that are complete or just about complete, where they might be placed into service. And then in terms of the leasing, the additional spec leasing I guess, along with that, do you expect to have leases executed before the projects are placed into service?

Yes. So our policy is, if the asset is 90% occupied or one year from substantial completion of the base building. So, when these assets many of them are core and shell complete as of today, but they are not placed into service until that occupancy mark is met. So that will be later at the time. We've put in our supplemental some estimates on when some of the leased properties are going to achieve that occupancy and placed in service date.

Okay, got it. So if I'm looking at like Mt. Comfort and Ocala in Central Florida those would be transitioned whether they're leased or not, they would be transitioned into service during the first quarter of 2024. Is that…?

Exactly. Right, one year.

And then so when we think about the progress on leasing for those projects, is there any anticipation of continuing into service without executed leases in place or based on negotiations and the current leasing pipeline and demand do you expect to have leases executed before they would be transitioned otherwise?

We'll see. We're working on that now and time will tell on that.

Your next question comes from Camille Bonnel with Bank of America. Please go ahead.

Good morning. If I caught correctly in your opening remarks, the mark-to-market opportunity within the portfolio is around 30%. I guess, my first question is was this comment on a GAAP or cash basis?

It's on a cash basis. Today, it's 23%. If you compare that to the ending rent, it's 39%. We also track the numbers, and the 31% is essentially the ending rent compared to the in-place rent that has escalators applied in the lease. So we have three different numbers, but as of today, we believe we are 23% below market.

Okay. And is it possible to expand on what this opportunity is within the portfolio specifically for 2024? Because just thinking about the lease expectations that Duncan, your South Carolina asset, which it seems to be tracking ahead of your expectations that outcome. But the 60% cash leasing spreads came well below the 35% you've been achieving year-to-date. So just trying to connect the dots there?

Sure. We have 18 leases remaining. Some have very high double-digit rates, while others have fixed-rate renewal options at 1% and 4%. The average across these 18 outcomes gives us a blended rate of 20% to 30%.

Okay. So the ones excluding fixed increases you're still seeing double-digit like spreads?

Yeah. So the 20% to 30% includes those for the average. So, yeah, our expectation is over those 18 outcomes that we're going to see 20% to 30% increase in rent.

Okay. And final one for me. I see your secured office loan on your Palo Alto asset is coming due at the end of the year. Just wanted to get your thoughts on your plans here?

Yeah, it fully amortizes, so it will be a zero balance. And 10 years ago Xerox exercised a 10-year renewal option and we essentially used all the rent payments to support the credit tenant lease financing. So that was how we cashed out of the asset 10 years ago and we have a ground lease that expired, so don't have any continued economic interest after the maturity. We won't do anything either.

Your next question comes from the line of Mitch Germain with JMP Securities. Please go ahead.

Good morning. Regarding the 70% of the 2024 expirations we are discussing, I'm curious about the other 30%. Are those just weighted to the back, meaning those tenants haven't started yet, or do we have some known move-outs included in that 30%?

Mitch, this is James. You're right on the first part. They're just back-end weighted. There's only one known move-out in 2024, which is an 18,000 square foot facility in Olive Branch, Mississippi.

Okay, great. Will, could you clarify regarding the other office assets that are currently under discussion or in negotiation or have a letter of intent? It seems there haven't been any additional sales. I know you sold one industrial property in Detroit last quarter, and based on your earlier comments, it appeared you would explore the sales market further. Has anything changed from your perspective?

Just observing that it's not a great time to be a seller given how hard it is acquisition financing is not favorable. So I think we'll just monitor the market. We have an interest in keeping our revolver balance low. But I think we'll just be opportunistic about sales opportunities versus committing. It wouldn't surprise me if we test the market in the next few months on a handful of assets and see what we find. But I think that will be our approach on that front.

Your next question comes from the line of James Kammert of Evercore ISI. Please go ahead.

Hi. Good morning. Thank you. Just a clarification. On the two newly leased development projects it looked like the costs went up. But those rents you quoted and the costs that are now presented in the second quarter supplemental those are the full-in and reflect the additional tenant build-out requirements I think you mentioned.

Exactly. That's exactly what it is, Jim. We've added in the TI amounts now.

Okay. Okay. I just want to make sure why the cost went up particularly on cotton, but it's sounding because the yield there is pretty attractive. And then actually it was just building off Mitch's question similar slot. What is the typical, sort of, renewal notice requirement on the part of representative a seven-year lease how quickly or when do the tenants have to say prior to expiration to tell LXP what their intentions are?

It's typically 9 months to 12 months. Thanks, Jim.

Your next question comes from the line of Jon Petersen with Jefferies LLC. Please go ahead.

Hi, good morning. I'm curious about the lease renewals for next year. Are you noticing any changes in tenant behavior regarding these renewals? Are they approaching you as early as they have in the past couple of years, or are they taking a wait-and-see approach? Additionally, have there been any changes in the escalators you can negotiate on renewals? What is the current status of that?

Sure. It's James again. It varies. We have some that are proactive and some that wait until the last minute. And in most circumstances, we still have the upper hand. So we're fine to wait. But the ones who are savvy, we want to make sure that they have the ability to renew and they'll potentially give up the space by missing their window. So it's typically as we kind of discussed so far conversations around that renewal window. And then from an escalator perspective, we continue to see escalators push towards 4% I would say on average across our markets and portfolio when we're doing a mark-to-market, we're also improving on the escalators on probably on average to 3.5% though in some cases we've gotten to 4%.

And there are no further questions at this time. I will turn the call to Will Eglin.

We appreciate everyone joining our call this morning. And in summary, we continue to produce strong financial and operational performance and are successfully executing on our strategy with progress in all areas of our business. We believe we are poised for strong performance going forward and are excited to continue to produce great outcomes for our shareholders. Please visit our website or contact Heather Gentry if you would like to receive our quarterly materials. And in addition as always, you may contact me or the other members of senior management with any questions. Thanks again for joining us.

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.