Rexford Industrial Realty, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. The quarter ended September 30, 2013. Rexford is a self-managed REIT focused on industrial properties in Southern California infill markets. It completed its IPO and formation transactions on July 24, 2013, so post-IPO results cover July 24–September 30 and earlier 2013 results are those of its accounting predecessor. Comparisons below that combine these periods are not fully like-for-like.
Financial and operating performance
| Metric | Reported information |
|---|---|
| Revenue | For the nine months, combined total revenue was $32.1 million, up 31.4% from $24.4 million. In management’s combined three-month comparison, total portfolio revenue was $12.0 million, up 45.5% from $8.2 million. |
| Profit / loss | Post-IPO net income was $295,000, or $0.01 per share, for July 24–September 30. Combined nine-month net loss was $4.0 million, versus $7.3 million a year earlier. The combined three-month comparison showed a $5.6 million net loss versus $2.7 million; it included a $3.9 million debt-extinguishment loss. |
| Cash flow | Combined nine-month operating cash flow was $8.1 million; investing cash use was $62.4 million; financing cash flow was $15.2 million. Cash and cash equivalents at September 30 were $4.4 million. |
| Property operations | At September 30, the portfolio was 88.0% occupied and 89.8% leased. Same-property average occupancy increased 5.6% in the three-month comparison and 7.6% in the nine-month comparison. Same-property rental revenue rose 17.5% and 10.9%, respectively. Property expenses were 23.6% of same-property rental revenue for the quarter, compared with 26.4% a year earlier. |
| Debt and liquidity | Debt was $122.9 million, down from $302.8 million at December 31, 2012; the company reported a 25.1% debt-to-total-market-capitalization ratio. The $200 million revolver had $14.9 million drawn and $115.3 million available. Weighted-average debt interest was approximately 2.2%; about 95.8% of long-term debt was exposed to short-term rate changes. |
| Assets and equity | Total assets were $489.1 million and total equity was $355.6 million at September 30. Net real estate investments were $438.8 million. |
Material changes versus prior comparable periods
- IPO and formation transactions substantially changed the capital structure: the company raised approximately $208.5 million net in the IPO, $47.0 million in a concurrent private placement, and a further $5.9 million net from partial exercise of the over-allotment option. It repaid $303.3 million of predecessor debt at IPO closing.
- Same-property revenue growth reflected higher occupancy; total portfolio growth also reflected acquisitions. The company acquired two properties after the IPO for a combined contract price of approximately $14.0 million. Predecessor acquisitions earlier in 2013 were approximately $73.8 million.
- Interest expense fell in the three- and nine-month comparisons following debt paydown and the expiration of interest-rate swaps. General and administrative expense rose with public-company costs, headcount, bonuses, legal fees, and equity compensation.
- Renewal rents were approximately 1.0% below expiring rents on a weighted-average basis for leases renewed in the first nine months of 2013. Management reported gradual but uneven market improvement, with San Diego lagging.
Outlook, risks, contingencies, and unusual items
- No numerical earnings, revenue, or occupancy guidance was provided. Management’s strategy is to acquire leased, partially leased, distressed, and under-marketed industrial properties, then improve occupancy through leasing, redevelopment, or repositioning. Two properties totaling 139,516 square feet were in redevelopment or repositioning.
- Management cited available space of approximately 656,466 square feet and leases covering 27.6% of portfolio rentable area scheduled to expire in 2014. It expects possible rent increases as markets recover, but noted that expiring rents were at or slightly above estimated current market rents.
- Interest-rate sensitivity: management estimated a 50-basis-point LIBOR increase would raise annual interest expense by approximately $0.6 million. None of the variable-rate debt was hedged at September 30.
- A putative class action filed October 3 alleges unfairness and disclosure deficiencies in the formation transactions and asserts fiduciary-duty, securities-law, negligent-misrepresentation, and fraud claims. The company disputes the claims, intends to defend them, and said the outcome and any potential loss could not then be estimated.
- An accommodation concerning formation-transaction consideration became effective October 28, with up to $32.1 million of value to be reallocated to participating pre-IPO investors through units, shares, and cash. Participation remained open through November 30; the ultimate amounts were therefore not final as of the filing.
- Subsequent to quarter-end, the company acquired two additional properties for contract prices of $10.6 million and $12.7 million, funded partly with assumed debt and revolver borrowings. It also disclosed the resignation of a director effective November 7.
- Other key risks include leasing and tenant-credit risk, market and acquisition execution, refinancing and interest-rate exposure, REIT qualification, natural disasters, environmental liabilities, and litigation. The company reported compliance with its debt covenants and effective disclosure controls.
Important facts for investors to verify
- Reconcile the post-IPO and predecessor reporting split when assessing year-over-year performance; the filing’s combined comparisons are not equivalent to a full quarter of the public company.
- Track occupancy, leasing commencements, renewals, rent spreads, and the relatively large 2014 lease-expiration concentration.
- Confirm revolver availability, debt maturities and extension conditions, covenant compliance, and the effect of LIBOR changes on interest costs.
- Monitor developments, costs, and potential financial effects of the investor litigation and the final scope of the accommodation.
- Assess acquisition funding and integration, redevelopment progress, and whether operating cash flow supports planned acquisitions, capital expenditures, and future distributions.