Rexford Industrial Realty, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Rexford is a REIT focused on owning, operating, acquiring and redeveloping industrial properties in Southern California infill markets. At quarter-end, its consolidated portfolio comprised 139 properties and approximately 16.2 million rentable square feet; it also managed 19 properties totaling approximately 1.2 million square feet.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $36.8 million | $30.6 million | $72.1 million | $58.1 million |
| Net income | $19.9 million | $12.8 million | $25.6 million | $14.3 million |
| Net income attributable to common stockholders | $17.8 million | $12.3 million | $22.0 million | $13.6 million |
| Basic and diluted EPS | $0.26 | $0.19 | $0.33 | $0.23 |
| FFO attributable to common stockholders | $15.9 million | $13.3 million | $30.6 million | $25.4 million |
| Net operating income (NOI) | $26.9 million | $22.5 million | $52.7 million | $42.4 million |
| Cash NOI | $25.7 million | $21.7 million | $50.4 million | $40.4 million |
- Q2 total revenue rose 20.2%; rental revenue increased 19.4%. Six-month total revenue rose 24.1%; rental revenue increased 23.4%. Acquisitions contributed materially to total-portfolio growth.
- Same-property rental revenue increased 8.2% in Q2 and 7.7% for the six months. Same-property occupancy was 93.5% at June 30, 2017, versus 91.5% a year earlier.
- Reported net income included real estate sale gains of $16.6 million in Q2 and $19.2 million for the first half. FFO excludes property-sale gains and is a non-GAAP measure; it is not a measure of liquidity or cash available for dividends.
- Operating cash flow for the first half was $31.3 million, versus $24.4 million. Investing used $189.2 million; financing provided $155.5 million. Cash and cash equivalents ended at $13.1 million, down from $15.5 million at year-end 2016.
- At June 30, total debt principal was $564.2 million, compared with $502.5 million at December 31, 2016. Weighted-average interest rate was 3.173%, average maturity 5.2 years, and net debt to total combined market capitalization approximately 20.9%. About 47% of debt was effectively fixed-rate; the remaining 53% was variable-rate.
- The $350 million revolving facility had $72 million drawn and $278 million available at quarter-end. The company reported compliance with debt covenants. Total assets were $1.705 billion and total equity $1.085 billion.
- Common dividends declared were $0.145 per share for Q2, compared with $0.135 in Q2 2016. Series A preferred stock dividends were $1.322 million for Q2; the filing reports a 5.875% preferred dividend rate.
Material changes and operating activity
- During the first half, Rexford acquired six properties totaling approximately 1.76 million square feet for a gross contractual price of $241.3 million, including a 16-building business park acquired for $141.2 million. It sold three properties for $65.6 million gross proceeds and recorded $19.2 million of gains.
- Same-property Q2 rental revenue grew with higher occupancy following repositioning and lease-up, as well as increased rental rates. Q2 same-property property expenses increased 12.7%, faster than same-property rental revenue growth of 8.2%.
- For the first half, new leases had 31.8% GAAP and 21.9% cash leasing spreads; renewals had 17.2% GAAP and 7.7% cash spreads. Retention was 62.6%. Results reflect management’s strategy to replace certain below-market tenants with higher-rent tenants.
- Consolidated occupancy was 91.4%, including space undergoing repositioning; stabilized portfolio occupancy excluding such space was 96.5%. Nine properties with approximately 0.9 million square feet were in redevelopment, repositioning or lease-up stages.
- Common-stock issuance under ATM programs generated $118.8 million net proceeds in the first half. The former $125 million program was fully used; the replacement $150 million program had $145.2 million of capacity remaining at June 30.
- Debt financing was expanded in February through a $450 million unsecured facility, including a $350 million revolver and a $100 million term loan. Rexford repaid a $9.7 million mortgage early in March.
Outlook, risks and unusual items
- Management described Southern California infill industrial conditions as strong, citing high occupancy, limited new supply, tenant demand and rising rents in several markets. It expected positive renewal rates and leasing spreads for the remainder of 2017; it noted that 2018 conditions are harder to predict. The filing provides no formal earnings or FFO guidance.
- Management estimated approximately $50.7 million of capital spending over the next seven quarters to complete identified redevelopment and repositioning projects. Budgets and schedules may change; delays or cost overruns could defer leasing and revenue.
- Subsequent to quarter-end, Rexford acquired five properties totaling approximately 1.8 million square feet for $285.7 million. The largest was a six-building, 1.2-million-square-foot portfolio acquired for $210.5 million. It issued $125 million of 10-year senior notes at a fixed 3.93% rate in July; these proceeds partially funded that acquisition.
- Interest-rate sensitivity: management estimated a 50-basis-point LIBOR increase would raise annual interest expense and reduce future earnings and cash flows by approximately $1.5 million, based on quarter-end variable-rate debt.
- Key risks include tenant defaults or nonrenewals, vacancies and rent declines, acquisition and redevelopment execution, refinancing and interest-rate exposure, market and economic shifts, REIT qualification, natural disasters, and environmental liabilities. The company reported no litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors.
- An estimated $1.1 million environmental remediation liability and corresponding indemnification asset remained for the West 228th Street property; management did not expect resolution to have a material financial impact but cautioned that environmental liabilities may not be fully identified or indemnified. The company also had approximately $11.9 million of tenant-improvement and construction commitments.
- Accounting change: Rexford early adopted ASU 2017-01 and accounted for 2017 property acquisitions as asset acquisitions, capitalizing related acquisition costs rather than expensing them. This affects comparability of acquisition expenses. Disclosure controls were reported effective; no material internal-control changes were identified.
Important facts for investors to verify
- How much of reported earnings growth and the Q2 EPS increase reflects property-sale gains versus recurring property operations; compare GAAP results with FFO, NOI and cash NOI.
- Whether occupancy, leasing spreads and lease-up progress support continued same-property growth, and how planned redevelopment spending affects returns and liquidity.
- Funding and leverage after the substantial post-quarter acquisitions and note issuance, including revolver usage, debt maturities, covenant headroom and exposure to variable interest rates.
- Whether the $50.7 million redevelopment estimate and $11.9 million construction commitments remain current, and whether any environmental or other contingencies change.
- How equity issuance, preferred dividends and common dividends affect per-share results and future capital requirements.