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What Investors Need To Know About KeyBanc's Upgrade On Lexington Realty Trust

What Investors Need To Know About KeyBanc's Upgrade On Lexington Realty Trust

On June 17, KeyBanc Capital Markets analyst Craig Mailman published a research note and upgraded the shares of Lexington Realty Trust (NYSE: LXP) from Underweight to Sector Weight.

Mr. Market's current valuation has resulted in this beaten down office/industrial REIT paying a dividend yield of 7.6 percent.

Lexington Realty owns a diversified portfolio including: single-tenant office, single-tenant industrial, long-term land leases, as well as a small amount of multi-tenant and retail/specialty properties.

Lexington also has a significant pipeline of build-to-suit opportunities, leased to single-tenants with 15 to 20 year leases, with the vast majority containing escalation clauses.

Tale Of The Tape - Past Year


The Vanguard REIT Index ETF (NYSE: VNQ) tracks the MSCI REIT Index (RMZ) and is a good proxy for the equity REIT sector.


During the past 12 months LXP shares have traded in a range of $8.90 - $11.55, and as of this writing, are up ~2.5 percent on the KeyBanc upgrade.

LXP June Presentation - Highlights


Many REIT investors tend to prefer "pure-play" single-tenant net-lease portfolios vs. a diversified portfolio such as Lexington, which accounts for part of the lower valuation.


About 37 percent of LXP's tenants are investment grade, with the largest 10 tenants accounting for just 27.8 percent of base rents as of the quarter ended March 31.


After being forced to cut its dividend after the Great Recession, LXP has subsequently paid out a rising and well covered dividend -- less than 66 percent of FFO -- currently paying $0.68 per share annually.


LXP has been focused on improving the quality of its assets, and bolstering its balance sheet, including significantly reducing the amount of encumbered assets.

KeyBanc - Lexington: Upgrade To Sector Weight, Target Price N/A

The rationale discussed by Mailman for the LXP upgrade included:

  1. Office Drag To Ease: Noting that the suburban office portfolio has been a drag on past performance due to move-outs and negative rent spreads, Mailman believes that "retention should return to a more normalized level (e.g., 75%) in 2016," and rents should remain "closer to flat."
  2. Recycling Capital: During Q1 LXP acquired $200 million of new assets, with $150 million under contract, and another $105 million to be spent on existing redevelopment projects.
  3. Meanwhile, KeyBanc feels that LXP remains on track to dispose of $300 to $350 million of non-core and underperforming assets.

  4. Valuation Call: The downside should be more limited, given the relative underperformance of its common shares YTD, with Mailman noting that LXP had "fallen below [KeyBanc's] prior downside target price of $9.00 per share."

KeyBanc - Bottom Line

KeyBanc noted that LXP is trading at a lower NAV discount than its triple-net peer group and "offers a premium 7.6% dividend yield (vs. 3.7% for the REIT sector), which is covered at an estimated 83% 2015 AFFO payout.

However, the sensitivity of the triple-net REIT sector to rising interest rates could serve to dampen the upside for Lexington Realty moving forward.

Investor Takeaway

REIT expert Brad Thomas wrote a Seeking Alpha article focused on Lexington back in May after LXP had announced its Q1 2015 results. Thomas wrote that the dividend looks to be safely covered, and agrees that Lexington is attractively valued relative to its REIT peers.

Source: Seeking Alpha - May 12, 2015

Notably, Thomas owns shares of LXP for his own account, and his analysis indicated "…that LXP shares could hit $12.05 by the end of 2016 (translating to a forward P/FFO multiple of 11.2x)."

At 11.2x, LXP would still be trading at a relatively low multiple relative to most of the pure-play net-lease REITs in its peer group. In the meantime, investors are being paid a 7.6 percent dividend yield.

Latest Ratings for LXP

Aug 2019DowngradesOutperformMarket Perform
Aug 2019UpgradesHoldBuy
May 2019UpgradesSellHold

View More Analyst Ratings for LXP
View the Latest Analyst Ratings

Posted-In: Analyst Color Long Ideas REIT Dividends Upgrades Analyst Ratings Trading Ideas Real Estate Best of Benzinga


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