Rexford Industrial Realty, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Rexford is a REIT focused on owning and operating industrial properties in Southern California infill markets. At quarter-end, its consolidated portfolio comprised 164 properties and approximately 20.2 million rentable square feet; it also managed 20 properties totaling approximately 1.2 million square feet.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $51.8 million | $36.8 million | $100.3 million | $72.1 million |
| Net income | $7.8 million | $19.9 million | $22.9 million | $25.6 million |
| Net income attributable to common stockholders | $5.2 million | $17.8 million | $17.4 million | $22.0 million |
| Diluted EPS | $0.06 | $0.26 | $0.21 | $0.33 |
| Operating cash flow | — | $45.1 million | $31.3 million | |
| Net operating income (NOI; non-GAAP) | $38.8 million | $26.9 million | $75.3 million | $52.7 million |
| Cash NOI (non-GAAP) | $35.6 million | $25.7 million | $68.9 million | $50.4 million |
| FFO attributable to common stockholders (non-GAAP) | $22.8 million | $15.9 million | $44.3 million | $30.6 million |
- For the six-month period, rental revenue was $100.0 million, up 40.1%; same-property rental revenue increased 8.6%. Same-property occupancy at June 30 was 96.0%, compared with 92.2% a year earlier. Q2 same-property weighted average occupancy was 95.5%, versus 92.5%.
- Q2 net income declined despite higher operating revenue, chiefly because the quarter included only $1.6 million of property-sale gains versus $16.6 million a year earlier. Six-month net income also fell, reflecting lower disposition gains ($11.6 million versus $19.2 million).
- Six-month NOI margin was approximately 75% of rental revenue; Cash NOI was approximately 69%. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Cash and cash equivalents were $162.7 million at June 30, compared with $6.6 million at year-end 2017. The $350 million unsecured revolver was undrawn and available. Investing used $320.2 million of cash, principally for acquisitions and capital expenditures; financing provided $430.9 million.
- Debt principal was $761.2 million ($757.1 million carrying value), versus $671.7 million principal at year-end. Weighted average interest rate was 3.47%, average remaining maturity six years; 67% of debt was effectively fixed-rate. Net debt to total combined market capitalization was approximately 16.3%. The company reported compliance with all quarterly debt covenants.
- Total assets were $2.61 billion and total equity $1.74 billion at quarter-end. Common dividends declared were $0.16 per share for Q2, versus $0.145 a year earlier.
Material changes and operating developments
- Completed 17 acquisitions in the first half for gross contractual purchase prices totaling approximately $327.5 million, adding about 2.0 million square feet. With two subsequent acquisitions, management reported 19 year-to-date acquisitions totaling $347.8 million.
- Sold five properties in the first half for a gross contractual price of $37.6 million and recorded $11.6 million in gains. Some sale proceeds were reinvested through tax-deferred like-kind exchanges.
- Raised $380.3 million gross ($374.6 million net) through ATM share sales in the first half, issuing 12.4 million common shares at a weighted average $30.56. A new $400 million ATM program replaced the prior $300 million program; $248.7 million of capacity remained at quarter-end.
- Entered a $150 million unsecured term loan due 2025. Amended the $60 million term loan to extend its maturity from 2019 to 2023 and reduce its LIBOR spread from 1.90% to 1.70%. Pricing on the $225 million term loan was also reduced.
- Same-property rental growth reflected higher occupancy and leasing rates. First-half new and renewal leases produced reported GAAP leasing spreads of 30.5% and 29.5%, respectively; cash spreads were 18.6% and 18.9%. Retention was 69.5%.
Outlook, commentary and risks
- Management described Southern California infill industrial fundamentals as favorable, citing constrained supply, high tenant demand and low vacancy. It expected positive market conditions through the remainder of 2018 and anticipated positive renewal rates and leasing spreads for the rest of 2018; it said 2019 conditions were harder to predict.
- Management expected to fund acquisitions with cash, operating cash flow, revolver capacity, dispositions and, over time, equity or long-term debt. Approximately $85 million of acquisitions were under contract or letter of intent at the filing date.
- Approximately $50.8 million of capital was estimated to complete redevelopment and repositioning projects over the next eight quarters. Actual cost and timing may vary. The portfolio was 95.2% occupied including repositioning space and 98.1% occupied excluding it.
- Interest-rate exposure remains: $250 million, or 33% of debt, was variable-rate at quarter-end. Management estimated a 50-basis-point LIBOR increase would raise annual interest expense by approximately $1.3 million. Swaps mitigate, but do not eliminate, rate risk.
- Risks include leasing and tenant credit, local economic and property-market conditions, acquisition execution, construction costs and delays, interest rates and refinancing, REIT qualification, credit ratings, natural disasters and environmental liabilities. The company disclosed no off-balance-sheet arrangements and no litigation expected to have a material adverse effect.
- A West 228th Street environmental remediation liability and matching indemnification asset were each recorded at $1.1 million; management did not expect a material impact, but noted that environmental exposures and recovery from the former owner are not assured. Tenant and construction commitments totaled approximately $33.1 million.
- No quantitative full-year earnings or FFO guidance was provided in the supplied filing text. Subsequent events included two July property acquisitions totaling $20.3 million and a declared $0.16 common dividend for the next quarter.
Investor verification priorities
- Assess how much reported growth reflects acquisitions versus same-property performance, and track occupancy, leasing spreads, retention and upcoming lease expirations.
- Reconcile GAAP earnings with FFO, NOI and Cash NOI, including the impact of property-sale gains, depreciation, and capital and leasing requirements.
- Review the economics and dilution from ATM issuance, and whether acquisition returns justify the additional shares and debt.
- Monitor debt maturities, variable-rate exposure, hedge effectiveness, covenant headroom and access to capital markets.
- Verify the budget, schedule, lease-up assumptions and funding plan for the $50.8 million repositioning program, and monitor environmental remediation and the related indemnification.