Best Thing About This REIT is Close to Completion

  1. The share price of Lexington Realty Trust, a net lease REIT that is primarily concentrated in office/ industrial, has surged in the wave of other net lease REITs, such as Realty Income and National Properties Retail.
  1. The multiple at 10 times AFFO remains below that of office, industrial, and net lease sectors.
  1. Despite cutting dividends in 2008 in order to accelerate deleveraging, Lexington is known for being a good dividend payer, accumulating 23 years of consecutive dividends.
  1. Massive asset sales helped the company become investment grade in June.
  1. The dispositions, the best thing happening to the stock, is almost complete, possibly slowing their stock performance.

chart01Lexington Realty Trust, a net lease REIT that is primarily concentrated in office/ industrial, has surfed the hype of net lease REITs this year. The share price has surged by 31% this year, which is in line with its other net lease peers, such as Realty Income’s 33% and National Properties Retail’s 27%.

Lexington stocks are currently trading at around 10 times 2016 projected AFFO, which is certainly lower than the average multiple for office and industrial, which has been in the mid-twenties. Also, it has been lower than Realty Income (24x) and National Properties Retail (21x).

When we last featured the stock in March (click here), we highlighted its great dividend record. Lexington has been paying dividends for 23 consecutive years. Also, the stock is yielding a great 6.5%, well above the REIT average. Since the payout ratio is around 58% and their AFFO per share continues to grow, chances are low they will cut the dividend.

Last June, Standard & Poor’s rewarded their deleveraging efforts with an investment grade corporate rating. The management has carried out an aggressive disposition plan, which helped to lower their debt to EBITDA to below 7x and fixed charge coverage to 2.7x. Most recently, the company sold parcels of land in New York City.

Unfortunately, their disposition plan of about $600 million, which might be the best thing to happen to the company, is close to completion. We wonder whether they will continue creating internal catalysts to keep investors excited.

In summary, the completion of their disposition program might slow Lexington’s stock performance. Of course, if nothing at all, it will remain a good dividend payer.

Source: Lexington Realty Trust(NYSE:LXP), Standard&Poor’s, Fast Graphs

Written on 11 Aug 2016

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT, and PEB.

U.S. REITs: Longest Dividend-Paying Stocks — Lexington Realty Trust

chart01

Several reasons have led us to believe that Lexington Realty Trust, a net lease REIT mostly in Office/Industrial, has become a good, reliable purchase for dividend lovers. First, it is part of the group of most consistent dividend-paying REIT stocks (not many REITs have distributed dividends for 22 years in a row). Second, it has a dividend yield above the equity REIT average of 8.1%. Finally, it looks undervalued if compared to its closest peers, including office, industrial and net lease REITs.

From its first dividend in January 1994, Lexington never interrupted the distribution of quarterly dividends. Such consistency can be one of the most obvious signs that management has been committed to its shareholders. Since it went public in 1993, the company is the result of several mergers. Regardless, 22 years of consecutive dividends is a very good track record, even though they slashed dividends in 2008 to accelerate the deleveraging of the company and paid dividends mostly in shares in 2009.

chart02A potential risk to its dividend record is an ambitious plan to make over its portfolio. With between $600 – $700 million of dispositions planned for 2016, including a sale of New York City land, the FFO per share in 2016 will reduce to $1.05, as opposed to $1.10 in 2015. However, if everything works as planned, we doubt the company will have any issues in maintaining the current level of dividends. Its current payout ratio is conservative, just around 60%.

chart03The good thing about this plan is that management will mitigate another potential threat to dividends by reducing the leverage level. In Q4, they posted a higher than average debt level of 57% of the capital structure. Although some would argue that an environment of low interest rates is a good time to maximize debt levels, still you don’t want to threaten the company’s liquidity level. Since the dispositions’ proceeds will serve various purposes — to pay down debt, acquire properties that fit their objectives, and repurchase stocks — we believe that the new debt level will not go down beyond 50%.

chart04Lexington management has been skillful in maintaining a resilient portfolio. The company has been moving away from Office and has increased its exposure to Industrial properties. Also, a significant part of the revenues is now sourced from long-term leases, a likely consequence of investing in build-to-suit and sale-leaseback, single-tenant properties. In the end, they enjoy a portfolio that is diversified and well balanced in terms of expirations.

chart05The company valuation metrics indicate they are undervalued. In terms of dividend yield, the company tops any industrial REITs with its 8.1%. Compared with Office REITs, the company would have the third highest yield, after Government Properties and Select Income. Its AFFO multiple is lower than most peers.

It is natural that a non-pure play REIT such as Lexington usually looks undervalued because it is harder to compare. The dual nature of the company, especially during a transitional period, makes some investors step back; but during periods like this is when savvy investors make good purchases.

In summary, I’d buy Lexington for its dividend consistency and few threats to this record. The portfolio transition is long term and represents a potential upside to the stock.

Source: Lexington Realty Trust(NYSE:LXP)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.