Rexford Industrial Realty, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, compared with Q1 2014. Rexford is a REIT focused on owning and operating industrial properties in Southern California infill markets. At quarter-end, its consolidated portfolio comprised 102 properties and approximately 10.3 million rentable square feet; it also held a 15% interest in a joint venture property.
Financial and operating performance
- Total revenue was $21.34 million, up 55.9% year over year. Rental revenue rose 59.6% to $18.56 million, largely reflecting acquisitions; same-property rental revenue increased 5.4%.
- Net income was $81,000, versus $1.43 million in Q1 2014. Continuing-operations income was $81,000, versus a $717,000 loss. The prior-year result included $2.13 million of gains on property sales. Net income attributable to common stockholders was $27,000; reported basic and diluted EPS rounded to $0.00. Common dividends declared were $0.12 per share.
- Operating expenses were $19.20 million, including $9.88 million of depreciation and amortization. Interest expense was $1.83 million. The filing reports NOI of $15.16 million versus $9.05 million and cash NOI of $14.83 million versus $8.94 million. These are non-GAAP measures, not substitutes for GAAP earnings or cash flow.
- Operating cash flow was $9.78 million, compared with $3.16 million. Investing used $49.26 million, including $46.71 million for real estate acquisitions and $4.49 million in capital expenditures. Financing provided $78.42 million, principally reflecting the equity offering and debt repayments. Cash and equivalents ended the quarter at $47.54 million.
- Total assets were $1.02 billion and total equity was $713.86 million. Debt principal was $269.88 million ($269.54 million carrying value), down from $357.08 million principal at year-end 2014. The company reported a 2.24% weighted-average debt rate and 3.4-year average term to maturity. About 82% of debt was variable-rate; $200 million remained available under the revolver.
- Portfolio occupancy was 89.5% and leased occupancy 90.8%. For Q1 renewals, cash and GAAP rent spreads were 3.9% and 10.2%; for new leases, they were 5.7% and 15.1%. Excluding five properties under redevelopment or repositioning, occupancy was 94.3%.
Material changes versus Q1 2014
- Total revenue increased 55.9%, while total expenses increased 47.1%, reflecting portfolio growth and acquisitions. Same-property total revenue increased 4.1%; same-property property expenses fell 3.4%.
- Net income declined despite higher operating revenue, primarily because Q1 2014 included $2.13 million in property-sale gains. Q1 2015 had no dispositions.
- Q1 2015 acquisitions comprised four properties totaling approximately 428,000 square feet, with a reported purchase price of $52.36 million. The company issued 11.5 million shares at $16 per share in February, generating approximately $176.3 million net proceeds, and repaid $116.0 million of revolver borrowings.
Outlook, commentary, risks and unusual items
- Management expected to complete at least $250 million of acquisitions during 2015. By May 8, it reported approximately $68 million closed, $29 million in escrow and letters of intent for approximately $40 million. The company also established a $125 million at-the-market equity program; no shares had been sold under it as of May 8.
- Management cited improving leasing fundamentals but described the recovery as uneven, with San Diego slower to recover. Approximately 13.5% of portfolio space was scheduled to expire in 2015 and 25.8% in 2016; management expected potential rent increases as markets improved.
- Key risks include tenant defaults or nonrenewals, vacancy and rent changes, acquisition and redevelopment execution, concentration in Southern California, interest-rate exposure, refinancing, environmental liabilities, and maintaining REIT qualification. A 50-basis-point LIBOR increase was estimated to raise annual interest expense by approximately $1.1 million, excluding $30 million already effectively fixed through swaps. The company said it was in compliance with debt covenants.
- A $1.2 million estimated environmental remediation liability for a property acquired in 2014 was matched by a $1.2 million indemnification asset; management expected no material impact but noted uncertainty about environmental obligations and recovery from the former owner. A remaining investor lawsuit was settled in Q2 2015 for a nonmaterial amount.
- The company repaid a $10.1 million loan on April 1, 2015, and acquired two additional properties on April 30 and May 1 for a combined $15.4 million. Management stated that interim results are not necessarily indicative of full-year results. No material changes to the risk factors in the 2014 Form 10-K were reported.
Important facts for investors to verify
- Whether acquisition growth and the stated 2015 acquisition pipeline translate into occupancy, NOI and cash flow growth.
- Lease expirations, renewal retention, rent spreads and occupancy trends, particularly in San Diego and properties undergoing redevelopment.
- Variable-rate debt exposure, swap coverage, debt maturities and continued compliance with loan covenants.
- Cash available after acquisitions, capital spending and dividends, and any future use or dilution from the $125 million ATM program.
- Environmental remediation costs and indemnification recovery; review the full filing for detailed debt terms, contingencies and non-GAAP reconciliations.