Rexford Industrial Realty, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Financial statements are unaudited. Unless otherwise stated, amounts are in U.S. dollars.
Business context
Rexford is a REIT focused on owning, operating, acquiring and redeveloping industrial properties in Southern California infill markets. At quarter-end, its portfolio comprised 371 properties and approximately 45.0 million rentable square feet. The company reported one operating segment.
Financial and operating performance
| Metric | Q3 2023 | Nine months 2023 | Comparison with prior year |
|---|---|---|---|
| Total revenue | $205.4 million | $587.4 million | Up 26.2% and 29.8%, respectively |
| Net income | $61.8 million | $182.3 million | Up 48.4% and 38.7%, respectively |
| Net income attributable to common stockholders | $56.3 million; $0.27 per diluted share | $165.8 million; $0.83 per diluted share | Common-stockholder income up 53.2% and 42.0%, respectively |
| Core FFO attributable to common stockholders | $115.0 million | $326.0 million | Nine-month amount up 33.4% |
| NOI | $156.1 million | $448.3 million | Nine-month amount up 30.4% |
| Cash NOI | $137.1 million | $398.4 million | Nine-month amount up from $301.7 million |
| Same-property rental income | $140.1 million | $410.3 million | Up 8.6% and 7.1%, respectively |
| Same-property occupancy | 97.8% quarterly average; 97.9% at quarter-end | 97.9% average | Quarterly average was 98.4% in Q3 2022; nine-month average was 98.8% |
NOI is a non-GAAP measure; it equaled approximately 76.8% of rental income for the first nine months of 2023, compared with approximately 76.0% in the prior-year period. Total portfolio occupancy was 94.1%, including space undergoing repositioning or redevelopment; stabilized portfolio occupancy excluding such space was 97.9%.
Nine-month operating cash flow was $311.6 million, versus $260.9 million. Investing activities used $1.273 billion, primarily for acquisitions and capital spending; financing activities provided $1.008 billion, including equity proceeds and borrowings. Cash and cash equivalents were $83.3 million at September 30, 2023.
Debt, liquidity and capital
- Debt principal was $2.246 billion ($2.228 billion carrying value); reported net debt to total combined market capitalization was approximately 16.7%. All debt was fixed-rate, either contractually or through swaps, at a weighted effective rate of 3.615%.
- The $1.0 billion unsecured revolving facility was undrawn, leaving $1.0 billion available. The company reported investment-grade ratings of BBB+ from S&P and Fitch and Baa2 from Moody’s, each with a stable outlook, and compliance with required debt covenants.
- Management identified $409 million of principal due within 12 months, including a $400 million term loan due July 2024 with two one-year extension options. Total contractual debt maturities for 2024 were $473.4 million, before extension options.
- During the nine months, Rexford issued $300 million of 5.00% senior notes due 2028 and raised common equity through offerings and forward-sale settlements. Common shares outstanding increased to 206.5 million at quarter-end from 189.1 million at December 31, 2022.
- Common dividends declared for Q4 2023 were $0.38 per share. The filing states REIT qualification generally requires distributing at least 90% of REIT taxable income.
Material changes and management commentary
- Revenue and earnings growth reflected contributions from acquisitions as well as higher rental rates. Total-portfolio nine-month rental income rose 29.0%, partly reflecting 77 properties acquired between January 2022 and September 2023; same-property rental income rose 7.1%.
- Rexford acquired 14 properties during the first nine months for an aggregate purchase price of approximately $1.16 billion and sold one property for $17.0 million, recording a $12.1 million gain.
- For the first nine months, the company executed 355 new and renewal leases covering 5.4 million square feet. Reported leasing spreads were 81.6% on a GAAP basis and 62.5% on a cash basis; retention was 73.0%. Q3 renewal spreads were lower than the first-half results.
- Interest expense increased 34.5% for the nine-month period, principally reflecting debt issued or borrowed in 2022 and 2023, partly offset by greater capitalized interest and lower revolving borrowings. The company used swaps to fix rates on variable-rate borrowings.
- Management described tenant demand and long-term infill-market fundamentals as healthy, while noting that vacancy and asking rents varied by submarket. It cited inflation, higher interest rates, port activity and normalization of vacancy and rent growth as potential pressures. No formal earnings or FFO guidance is provided in the supplied filing text.
Outlook, risks and unusual items
- At September 30, 26 properties were under repositioning or redevelopment and three were in lease-up. Management estimated approximately $427.8 million of capital would be required over the next three years to complete identified projects. It warned that construction inflation, approval delays and supply-chain issues could increase costs, delay leasing and reduce project yields.
- The company reported approximately $223.4 million of tenant-improvement and construction commitments. It also had approximately $400 million of investments under contract or accepted offer as of the filing date; completion was not assured.
- All properties are concentrated in Southern California, exposing results to local economic, regulatory, weather and natural-disaster risks. No single tenant represented more than 5% of nine-month rental income.
- Other disclosed risks include tenant defaults or bankruptcies, higher operating costs and interest rates, refinancing conditions, environmental liabilities, REIT qualification and the ability to maintain credit ratings. Rexford added risk-factor disclosure concerning potential financial-services-sector disruptions and uninsured deposits.
- No legal proceeding was identified as reasonably expected to have a material adverse effect. There were no property impairment charges, but the company recorded a $0.2 million impairment of an office lease right-of-use asset after a sublease terminated early. It also reported construction demolition costs and a $12.1 million property-sale gain.
- Subsequent to quarter-end, Rexford settled an additional 4.6 million shares under its May 2023 forward equity sale agreements for $256.1 million net proceeds. The filing reported 3.5 million shares, or approximately $193.8 million of proceeds, remaining for settlement as of the filing date.
Important facts for investors to verify
- Debt maturity and refinancing plans, especially the $400 million July 2024 term loan, extension conditions and the broader 2024 maturity schedule.
- Actual cost, timing, lease-up and returns for redevelopment projects, including the $427.8 million estimated capital requirement and construction commitments.
- Whether leasing spreads, retention and occupancy remain strong as market vacancy and rents vary across Southern California submarkets.
- Potential dilution and proceeds from remaining forward equity settlements and the company’s future use of its ATM equity program.
- Tenant credit quality, rent collection and exposure to local-market, interest-rate, inflation, environmental and financial-services-sector risks.