LXP Industrial Trust (LXP) June 3, 2026 Capital Markets Day Transcript

Good morning, everybody. Welcome to day two of May Read. I'm John Peterson. I'm the head of the real estate research team at Jefferies. Very happy to have the management team of LXP Industrial with me on the stage. Immediately to my left is Will Eglin, CEO. Down from him is Brendan Mullenix, Chief Investment Officer. We have Nathan Brunner, Chief Financial Officer, and James Dudley, Director of Asset Management. Thanks, guys, for being with us. because maybe what we can do, maybe, Will, I'll start with you, and if you could just give us maybe a brief overview of LXP, just to kind of set the stage, what the company does, what markets you're focused on, and how you think the business is positioned today.

Sure. Thanks, John, and thanks to all of you for coming to our presentation today. If you think about our company in the context of the other public REITs, our focus is on large format warehouse and distribution facilities, and 93% of the portfolio is Class A. So that's the asset focus. In terms of our market footprint, we're focused on 12 markets in the Sunbelt and Lower Midwest. About 80% of the portfolio is in the Sunbelt at the moment. And the markets that we're focused on have very good demographic characteristics, great logistics infrastructure. They're in business-friendly states. And as a result, they're attracting a lot of the investment and manufacturing facilities. Demand drivers are also benefiting from data center construction and support operations. So that's putting us, I think, in a very good position with respect to our ability to continue to raise rents. We've had a very strong year from a leasing standpoint so far. Our portfolio is about 53 million feet. Coming into the conference, we gave a leasing update we've completed 4.6 million feet year to date and then yesterday we signed 186 000 square foot lease in phoenix and raised the rent 54 so um exactly so so we love that and that's very important from an organic growth standpoint we have 2.9 fixed rental escalations that's contractual growth and our rents continue to be inexpensive relative to market and right now we have about 10 million feet in various stages of negotiation so we think there's a long runway of great leasing outcomes for us what's new in the business this year compared to the last few years is that we have really good opportunity to create value in our land bank via development and we had a great success early this year breaking ground on a 1.2 million square foot facility in Phoenix that leased very quickly on really advantageous terms that will create a lot of shareholder value in our transaction update press release on Monday we said that we would be commencing a couple of development starts in Columbus which is also a market that's set up very well to produce great development outcomes we also announced an acquisition that allowed us to raise our guidance also so anyway all the fundamentals in our business are very strong. We've got good capacity for organic growth, and we now have that external growth component that's been missing. We are self-funding all of our new growth initiatives via asset dispositions, and we haven't sold anything yet this year, but we will be in the market with some disposition candidates where we think we're going to get outstanding value, and that's consistent with our longer-term strategy. Right now, 87% of our assets are in our target markets. That implies that the other 13% are going to be turned into liquidity over time and reinvested in our target markets, mainly in development, where we can earn that premium yield compared to market capitalization rates. But from time to time, we will be acquisitive when we have big tax gains to manage. And that was one of the things that happened with the recent acquisition in Phoenix. That will be completed with a 1031 exchange transaction.

All right, great. That was super helpful. So maybe we stick in the Phoenix market because you guys have been very active this year. I want to start with the development. So you started a project on spec back in February. We haven't seen a lot of spec development being started in the industrial space. So maybe talk about the decision-making around that and just the level of demand that you guys saw that led to the lease early on in the project.

Sure. Sure. Well, that project in Phoenix, that land site, is one that we've been working on for a number of years. And when the market was weak at the sort of, in that market, I'm calling the end of the down cycle, what we did was a lot of pre-development work to position ourselves to respond to where we saw the strongest demand and the best supply dynamics. And so So actually there, we planned a million-two building, a 380, and a 615, and did the design work and the permitting work to be able to launch on any of those three. While we were doing that, we observed that what had been very oversupplied in the larger space, as in many markets, large bulk was sitting there, and tenants were not pulling the triggers on leasing those spaces. We saw that start to switch mid-year last year and really accelerate towards the end of the year, and that had us thinking that the million-footer might be the most compelling opportunity. As we got into the beginning of this year, we saw all of those million-foot existing spaces get taken up or be in very advanced negotiations, so we felt as though the timing was right to launch, because both from a supply standpoint, we would have virtually no competition on the ground, and then the demand looked just very healthy. so we hoped for a pre-leasing it was very exciting that it leased as quickly as it did and those dynamics on the demand side have continued million foot activity has been very active and at this point we're looking at we're still looking at a variety of size ranges we're responding to some bill to student inquiries as well but we're we're also doing pre-development work in consideration of a potential another large bulk start later this year what I guess on those future developments at that site what would it take to get you guys to I mean would you build on spec again are you looking for a pre-lease you know how do you expect to approach future developments at that land site if If the market conditions remain as they are today, which is very similar to what they were when we made the decision at the start of this year to start spec, we would do another spec project there.

Great. So let's stay in Phoenix. I want to talk about this acquisition you guys announced on Monday. It was a little over $100 million, covered land play, looked like the yield was very impressive, 16%. Maybe just talk more through what the strategy is with that land site in Phoenix and what you guys might do with it long term.

Sure. Well, it's a fantastic piece of land for industrial development. It's 37 acres on I-10 right near the airport. It is improved with some office buildings right now that have five years of lease term left. The total rent payments in that five years are $82 million compared to a purchase price of $103 million. And so what that means is by collecting all that rent and waiting for the vacancy at the end of the term, we're going to end up with a very low land basis that we think is going to produce a fantastic development outcome at the end of the lease term. And the plan there is probably to build four or five smaller box formats of 400,000 to 450,000 feet.

Okay. I guess in terms of timing on that development there, do you wait until the office lease is expired? I think you said there's about five years left on it.

In all likelihood, that's our base underwriting. If there is an opportunity after we've done site planning, if we wanted to have a discussion with the tenant about an early buyout of the lease or something like that, if that enhanced our return prospects, we'd do it.

But there's a lot of rent to collect and a lot of accretion to enjoy while we're you know waiting waiting for that development opportunity i guess how unique is this opportunity do you see a lot of um you know office to warehouse type conversions and these more in in your markets that that you guys underwrite or was this a pretty unique opportunity i think that i'd say it's pretty unique but uh in certain respects but in in others not so much in Phoenix specifically there's been a very considerable increase in office to industrial conversions and office to the multi-family as well what I think is particularly unique about this project is the scale of the of the site it's 37 acres in a very infill fully built part of the market it's directly on I-10 it's right across from the airport. So it's a really exceptional location and the size of it is very unusual. So there's been a number of these kind of conversions that have gotten started in the last year or so in the same sub-market, but they're typically smaller projects. And this lease structure that we're stepping into just provides a nice income bridge to that ultimate redevelopment for us. so unusual in that respect all right great maybe we'll move on to Columbus Ohio so you guys announced that you plan to start two new spec projects at the Aetna Industrial Park I guess 750,000 square foot project and 160,000 square feet maybe talk a bit more about the Columbus market and why you guys are confident in that development yeah sure first just to give a little bit of background in that park these these buildings we've already developed three buildings there which I think will sort of speak a little bit to to Columbus and the kind of users that we service there so the first building that we developed there was a build to do build to own for a user which is Cole's department stores that was a 1.2 million square foot building the second building was 1.1 million square foot building that we built on spec and leased to Stanley Black & Decker and our third most recent project was a 250 that we built on spec that leased to a 3PL that services the data center industry. So I mentioned all that to sort of give you an idea of the diversity of tenant demand that's in that Columbus market. It's very centrally located uh we're our park is located directly on i-70 has fantastic access uh because of that and so we appeal to a really broad range of tenants including e-commerce major retailers and consumer product companies uh what one of the more recent uh demand drivers that we're seeing in Columbus, as well as in a number of our other markets, is data center-related logistics requirements, and that has sucked up a lot of existing space in the Columbus market. So at this point, the bulk, and in particular for the east side of Columbus where we're located, which is sort of most proximate to the majority of data center development to uh to the north in new albany uh and some additional projects a little further east of us the bulk existing bulk is is almost entirely gone uh and what's remaining is in very active negotiations so from a supply standpoint it looks very compelling uh and there's a lot of demand behind it and specifically including um from data center requirements so we think there's a real

opportunity there we could pre-lease um but it's pretty exciting could you guys dive in a little more on the data center opportunity you know you talked about in columbus i guess what other markets you know are you seeing that maybe talk a little more about the type of customers we're we're talking about are these you know 3pls working with hyperscalers is this suppliers like what what does it what does it look like so we we've seen it across all markets if you kind of look at the advanced manufacturing and data center demand that we've seen it's been a significant portion of the absorption that we've had across our markets and taking a step back just on the big box side, you know, 10 of our 12 markets are in the top 15 for net absorption.

So we've had a lot of net absorption in our markets. It represents about 72% of the overall net absorption in the last 12 months in the U.S. So there was a big box push between Amazon and Walmart. We've seen a lot of that kind of going back over the last nine months. I think the read through on Amazon is probably they announced they're coming out and doing some third party logistics business so I think there's a read through that there was that piece of it and also just getting closer to consumer and competing with Walmart so you had that push and then kind of on the tail end of that and I think specific to our markets we had data center activity in Phoenix we've had data center activity in Columbus as Brendan mentioned Richmond but really across all of the Sunbelt markets and many of the lower Midwest markets and also advanced manufacturing These companies are going there because there's access to power, you know, strong labor, strong infrastructure as well. So it's been really great for the big box market and the demand coming out. Some of the specifics about the data center users, they could be the hyperscalers through 3PL. They could be the hyperscalers themselves. It could be data center components and just maintenance and testing. We've also seen new demand from contractors for the actual development of the data centers. You know, typical lease duration right now is going to be in that five to seven year range. I think there is a little bit of a question in the market as to what the duration is for some of those contractors that are coming in and developing the data centers. But we think that there's definitely going to be a staying power for the data centers with replacement of equipment and things of that nature. So that's been a really great push to really even tighten the big box market more. You know, they're looking for power. So if your site has power, and I guess, you know, kind of looking back on the last cycle for the big box space, you would typically spec a big box, you know, 4,000 to 6,000 amps. We specced our Phoenix to 9,000 amps. They don't need the power of the actual data center, but they need increased power for automation. They're looking for clear height, so, you know, having a 40-foot clear on a large building is really important. And the other thing that's become even more important, I think this is across the industry in general, as slab thickness because there is more automation and there's more just weight that's going in with equipment. So it's been a great windfall for our opportunities, and I do think it's very specific to the markets that we're in. And I guess I'll just really quickly touch on advanced manufacturing. I mean, we haven't talked about, you know, TSMC, for example, or Hyundai, but in all these markets that we're in, advanced manufacturing is continuing to grow. So I think we're going to see suppliers for those advanced manufacturing plants as they come online also be another demand driver going forward okay so I I guess JD to like to pull it all together I've thought about like big box demand from Walmart Amazon data center demand advanced manufacturing like if you were to rank those three like what are the biggest to smallest drivers of demand well I think it's definitely it was definitely Amazon yeah and I think Amazon and Walmart will continue you know Walmart probably is doing one building for every three that Amazon's doing but they were the ones who really kind of pushed demand on big box and changed the market really overnight you know in the third quarter of last year but this this data center phenomenon is definitely on the come because there is a whole lot of new data center manufacturer creation that's happening so I think we're going to continue to see that push and that demand and the advanced manufacturing I think has longevity so some of the the data center stuff seems to be very immediate and and being pushed forward there's longevity on the advanced manufacturing as that gets developed. So I think it really paints a nice picture for the supply-demand dynamic for big box in particular.

Okay, great. And I wanted to ask about escalators. So you're 2.9% in place today on your portfolio. I think in the leases you guys have signed this year, you've been ahead of that range. Like, you know, where are you able to push escalators today on tenants? Does it continue to move higher?

Well, it's been an interesting cycle. So if you go back pre COVID, it was it was pretty typical to have a 2% escalator on most industrial leases. And then we saw those escalators get pushed up on the big box, you know, in some cases close to 4%. But I would say they kind of averaged at the height of the market around three and a half when you're talking about the very large boxes on some of the smaller boxes for and in some markets, maybe a little higher than four, there was definitely some downward pressure over the last couple years on those escalators as supply got full and demand kind of diminished so we saw pressure on the big box you know pushing back down to around 3% in some cases maybe even high twos Amazon was really pushing an initiative on two and a half in many cases but we've seen with the tightening of that particular market escalators start to increase again so I think you'll start to see particularly on the big box side average escalators push back into that mid threes in our markets there is some softness on the smaller stuff and some and some competition there but in select markets and sizes you may also be able to push some of the smaller back towards forth so I think as the market tightens supply continues to be a little bit constrained at the moment and demand continues we ought to see some upward pressure got it okay Nathan I'll bring you in here so bringing this all together you guys increase guidance with with a lot of these developments we've already talked about can you walk us through the moving pieces there on the guidance and where you guys maybe the building blocks of where you think you're set up moving forward.

Sure. So the guidance range at the midpoint increased five and a half cents, which is about three million dollars. And there are really three components to that. The first was the Phoenix covered land investment that we made that has annual run rate gap in OI of about 15 million dollars in 2026 it will contribute about nine million dollars we also announced as part of guidance that we plan to sell around 200 million dollars of assets in the second half those properties will be properties that we own outside our 12 market target footprint the the earnings impact of those dispositions in 2026 is approximately six million dollars and that's That's based on selling those assets at cash cap rates in the low sixes. And then the third component of the change is the announcement around the Columbus development start. It has a development budget of $90 million. Roughly half that will be spent in 2026. Its earnings impact is largely neutral as we invest cash on balance sheet or revolve a drawer into those projects and ultimately capitalize interest from an accounting perspective. That's also an important change to our business plan.

That's helpful. And then I guess just generally on capital allocation, so it seems like you have a lot of development opportunities. You guys have done share buybacks in the past. I guess how do you weigh where you spend that incremental dollar, I guess, from those dispositions on share buybacks, developments? You did an acquisition recently. How do you think about that?

Yeah, I mean, both buyback and development have been interesting uses of capital to us with, you know, the shares have traded at a discount to net asset value the last couple of years. It's narrowed a lot. But development's a better use of capital right now. I think if you look at, for example, the building that we just pre-leased in Phoenix, roughly $120 million budget, we think our profit will be $40 million. So that just screens as a better use of capital compared to buyback. But, you know, if the shares got softer for any reason, you know, we have liquidity available for buyback as well. And, you know, we'll look at those two areas very closely. When we're acquisitive, it's because we have – we're expected to have such a big gain from selling something that we want to keep our tax basis intact.

And then you've alluded to it a couple times, but on dispositions, I think you said 87% of your properties are in your target market. So when we think about the balance, I guess how should we think about timing, kind of triggers to, you know, what gets you to sell?

Well, what we're trying to do is maximize the value of each of those assets. And often there's an asset management project, typically a lease extension or something that supports, right, more disposition value. and then we're trying to match that outcome with you know a good use of capital where we can put it to work at a return that's you know attractive compared to to acquisition so a lot of those dollars will get allocated to development and we you know we'll make substantial progress this year I would think our gross asset value would be over 90% in our target markets at the end of the year and then we'll just keep we'll just keep going till it's finished So it's a multi-year project to optimize value and find good uses of capital.

Nathan, on the balance sheet, can you just talk about where your leverage is at today? I know it's definitely been trending downward, but just remind us where your targets are versus where you are today and how we should think about that trending.

Sure. We made really good progress on the balance sheet in 2025. we took advantage of some of that demand that James described around Amazon's desire for big boxes and we sold two of our development projects to Amazon and we used those proceeds to reduce our average profile by about a turn and so we ended 2025 at around five times our target is to stay between five and five and a half and so we're going to be very prudent around match funding development and investment with dispositions to maintain that leverage profile of five to five and a half.

And then maybe, James, to come back to you, on the markets, we talked a lot about Phoenix and Columbus being particularly strong markets. I guess what are some other markets in your portfolio you call out with particular strength and which ones are a bit weaker right now?

So across our markets, we've seen a pretty dramatic change in vacancy rate. We saw pretty much every one of our top 12 markets have several hundred basis points of compression. And I know we've talked about Phoenix and Columbus already, but I have to call out Columbus because Columbus really didn't have the overbuilding that some of the other markets that we have in our portfolio have. It's at about a 5% vacancy rate right now. and if you strip out some of the functionally obsolescent buildings that are in the market it probably screens closer to four and as Brendan mentioned before there just really isn't a whole lot of availability you've got Ohio State University you've got proximity to a huge portion of the of the US consumer base in the Northeast you've got advanced manufacturing and drill going in you have all the data center activity that's happening in New Albany into the east as Brendan mentioned so of our 12 markets I think I would call out Columbus is really a great opportunity, which is interesting because the Midwest really struggled through this last cycle with Columbus kind of being the shining star. That being said, you know, you look at places like Indianapolis where we're, you know, vacancy got really, really high. It's gotten really tight as well. So we love the Sun Belt for all the great things about the Sun Belt, the transportation attributes and the population growth. But it's been really interesting to see how a couple of the really strong logistics markets in Columbus and Indianapolis have performed recently.

All right, great. We've got just a few minutes left. Any questions from the audience?

The 3PL data center supplier, is there a certain facility size they're mainly looking at, or is it kind of a problem?

So for the line, the question is for the 3PL guys, is there a certain size they're looking for? I'm sorry, 3PL data center, data center specific.

So the component suppliers, mostly what we've seen, have been very big box. We've seen some varying sizes on the contractors. For example, in Richmond, we have a contractor looking at a 250. We've got a contractor looking at a 400 in Columbus. We would expect to see activity – well, we did see activity in Columbus on the 250 that we already leased, and then we would expect to see it on both sizes of our developments So it does vary, but I think the majority of it has been in that really big box.

Are you talking about rent volatility or just demand volatility? Yeah, so the decision to do spec development right now with all the volatility in the market.

Well, there is volatility in the market, but if you think of a couple of things that are driving demand, a lot of it is around the advanced manufacturing initiatives, and that's like steady multi-year investment. And then the data center investment that's also, you know, that's creating a lot of demand that seems to be pretty, you know, insensitive to the economic cycle. So I think those are really strong attributes. You know, in the case of Phoenix, why we went, some people said, well, you know, why did you go spec there instead of just wait for a build to suit? And the truth was we saw every million square foot building in the market disappear over 18 months. and the company that we leased the building to was already a tenant in our portfolio. We knew they were coming to market for an RFP and we knew if we broke ground, we'd essentially have close to a captive audience. So you're looking for that certainty where you have that visibility and you're really highly, highly confident that the outcome is going to be great. Yeah, I think so. In that case, I mean, I think the rule of thumb probably is 50 basis points of premium yield compared to build the suit in that case it's probably a hundred and and you know if we'd waited for build the suit there's other people with big land sites it would have made it much more competitive so so by as i said by by breaking ground it really put us uh in in the best position to to have a great outcome great i think that that depends on the supply demand dynamic for that size facility in phoenix we're going to work you know a couple years of site planning and then we'll be ready you know if we love the market from a development standpoint to have that negotiation with the tenant some of it depends on how much they're willing to pay us right to to get out of the lease but there is the potential for that to be additive to the sort of expected return profile that we underwrote so we're aware of that and if there's an opportunity we would we would capitalize on that I mean I think it's remote but it's also possible that someone would come along and say gosh we really would love to have the headquarters office facility and you know we could enter into a new 15-year lease with somebody and sell it for twice as much as as we pay I think that's I that's remote but but you know it is you know it's in the realm of possibility I suppose all right we're out of time thanks guys so much thank you