NEW YORK CITY—Lexington Realty Trust’s solid fourth-quarter performance, which the company reported last week, bears out the bullish projections that executives at net lease REITs have made recently. Company funds from operations rose 12% to $65.7 million year over year, and LXP ended the year with its portfolio 97.6% leased.
“The successful execution of our business plan in 2013 has positioned us for strong growth” in FFO for 2014, T. Wilson Eglin, LXP’s president and CEO, said when Q4 numbers were announced this past Thursday. FFO growth, he added, will be driven by the $717.6 million of investments LXP made last year, more than half in Q4, “and our ongoing commitment to lowering our cost of capital, which resulted in the company reducing its financing costs to 4.7% while extending its weighted-average debt maturity to 7.0 years.”
Given “a deep pipeline” of additional investment opportunities, a flexible balance sheet with substantial credit line capacity and numerous capital recycling opportunities, “we believe Lexington is well positioned to create additional shareholder value,” said Eglin. The company is projecting company FFO in the range of $1.11 to $1.15 per diluted share for this year.
Another net lease trust reporting its Q4 results this past Thursday, Newton, MA-based Select Income REIT, similarly reported a strong finish to the year. SIR noted, however, that ’13 full-year results are not comparable to those for the year prior, since the company went public as recently as March 2012. Q4 normalized FFO for the three months that ended Dec. 31 were $33.2 million, or $0.67 per share, compared to normalized FFO for the same quarter in ’12 of $23.6 million, or $0.71 per share.
Earlier this month, Realty Income Corp. reported that Q4 revenue increased 62.4% to $215.7 million as compared to $132.8 million the year prior, while normalized FFO available to common stockholders rose 68.4% to $124.6 million. The Escondido, CA-based REIT, with a market cap of $8.6 billion, accordingly received an upgrade by TheStreetRatings.com from hold to buy.
O’s strengths are evident in “multiple areas, such as its robust revenue growth, compelling growth in net income and expanding profit margins,” according to TheStreetRatings.com. “We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity.”
In January, W. P. Carey Inc. received an investment grade issuer rating of Baa2 with a stable outlook from Moody’s Investors Service. Moody’s based its rating on WPC’s rating stable cash flows, high occupancy and strong operating performance throughout credit and real estate cycles. The ratings agency also noted WPC’s rigorous underwriting criteria and focus on acquiring mission critical assets.
Trevor Bond, WPC’s president and CEO, noted that the Moody’s rating, in tandem with a recent BBB grade from Standard & Poor’s, meant his company was “strongly positioned to access the investment grade unsecured market. Access to unsecured borrowing will help us continue to strengthen our balance sheet and maintain an efficient cost of capital, while diversifying our sources of funding for future growth.” In common with what is now the largest REIT in the net lease space, American Realty Capital Properties—which, like WPC, is headquartered in New York City—WPC will report its Q4 earnings this week.
Bond and his fellow panelist at a REITWorld presentation this past November, ARCP CEO Nicholas Schorsch, expressed optimism for the future of the sector. Schorsch predicted that net lease REITs could grow to $100 billion to $120 billion; ARCP by itself now has an enterprise value of $21.5 billion since its mergers with rivals Caplease and Cole Real Estate Invesment Trust. “I don’t think we’ll ever go back to $10 billion,” Schorsch told an audience at REITWorld, sponsored by the National Association of Real Estate Investment Trusts. “Money is moving.”
More recently, Green Street Advisors in a January report chalked up some of the clear strengths of net lease REITs, which now represent 7% of the REIT index. For one thing, net lease REITs have tended to outpace REIT benchmarks; for another, they have been “champions at capturing the public/private arbitrage.” For insights into how active the market for single-tenant net lease has become, read the recent GlobeSt.com commentary from Stan Johnson Co.’s Britton Burdette.