Securing Leases In Ocala And Other Big Box Developments Will Unlock Future Revenue Potential

Key Takeaways

• Strategic reinvestment into high-demand Sunbelt markets and build-to-suit opportunities could enhance portfolio quality and drive revenue and FFO growth.
  
• Leasing success and interest rate management are expected to improve revenue, earnings stability, and predictability through stronger financial positioning.
  
• Unsuccessful lease negotiations and slow leasing in 2024, combined with rising interest rates and competitive pressures, may lead to underutilized assets and decreased earnings.

Catalysts

LXP Industrial Trust (NYSE: LXP) is a publicly traded real estate investment trust (REIT) focused on single-tenant industrial real estate investments across the United States.

• The favorable leasing outcomes and substantial same-store NOI growth demonstrate success in increasing rental income, signaling potential future revenue increases and improved net margins through strong mark-to-market rental adjustments.
  
• The completed disposition of non-core assets and strategic reinvestment into high-quality properties in Sunbelt markets are expected to enhance portfolio quality and growth prospects, impacting future earnings positively by focusing on high-demand areas.
  
• The execution of forward interest rate swaps and the repayment of debt will stabilize interest expenses, reducing financial vulnerabilities and supporting earnings stability through 2026, positively impacting earnings predictability.
  
• The potential lease-up of large vacant spaces, particularly the big box developments, could significantly contribute to funds from operations (FFO) and revenue growth, as these leases are anticipated to be a major driver if successfully completed within the guidance range.
  
• Investment in land suitable for build-to-suit opportunities in high-demand markets such as Phoenix represents potential for future growth and value creation, likely to positively impact revenue and FFO through high-yield leasing opportunities.

LXP Industrial Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LXP Industrial Trust's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.6% today to 3.1% in 3 years time.
• Analysts expect earnings to reach $12.2 million (and earnings per share of $-0.02) by about April 2028, down from $37.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $29 million in earnings, and the most bearish expecting $-4.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 324.6x on those 2028 earnings, up from 61.5x today. This future PE is greater than the current PE for the US Industrial REITs industry at 27.3x.
• Analysts expect the number of shares outstanding to grow by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.21%, as per the Simply Wall St company report.

LXP Industrial Trust Future Earnings Per Share Growth

Risks

• The unsuccessful negotiation for a lease at the 1.1 million square foot Ocala, Florida facility and slow big box development leasing in 2024 could result in underutilized assets, potentially impacting revenue and funds from operations (FFO).
  
• Expected interest rate increases, with an approximate rise from 2.7% to 4.3% for term loans, could lead to higher interest expenses, reducing net margins and overall earnings.
  
• Lower tenant retention and delayed decision-making might lead to increased vacancies or reduced leasing rates, which would negatively affect occupancy rates and revenue.
  
• Competitive landscape for large industrial spaces, with several competitors existing in key markets, may hinder LXP's ability to secure tenants, potentially impacting lease-up rates and future revenue growth.
  
• Financial guidance reflects uncertainty, with the low end suggesting no big box leases in 2025, indicating potential downside in FFO which could lead to lower earnings if key vacancies remain unresolved.

Valuation

• The analysts have a consensus price target of $10.4 for LXP Industrial Trust based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $391.6 million, earnings will come to $12.2 million, and it would be trading on a PE ratio of 324.6x, assuming you use a discount rate of 8.2%.
• Given the current share price of $7.89, the analyst price target of $10.4 is 24.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.