Business Context and Reporting Period
This Form 8-K, filed on April 11, 2016, by Rexford Industrial Realty, Inc. (a Maryland corporation), reports the entry into a material definitive agreement to acquire a portfolio of nine industrial properties (the "REIT Portfolio") from a third-party seller. The filing also discloses two smaller property acquisitions completed in March 2016 and the planned exercise of an accordion feature on the company's term loan facility.
Key Financial Metrics and Transaction Details
- REIT Portfolio Acquisition: Purchase price of approximately $191.0 million in cash (exclusive of closing costs) for 1.53 million rentable square feet across nine properties in Southern California.
- Portfolio Metrics: As of March 31, 2016, the portfolio was 100% leased and 86% occupied. The weighted average remaining lease term is approximately 4.5 years. Annualized base rent totals $10,798,839, with an average rent of $7.05 per square foot.
- Anticipated Yield: Management estimates an approximate initial full-year unlevered cash net operating income yield of 5.3%.
- Recent Acquisitions:
- 8525 Camino Santa Fe (San Diego): Acquired March 15, 2016, for $8.5 million (59,399 sq. ft.).
- 28454 Livingston Avenue (Valencia): Acquired March 29, 2016, for $16.0 million (134,287 sq. ft.).
- Debt and Liquidity: The company intends to exercise the accordion feature on its $125.0 million senior unsecured term loan to establish a new $100.0 million incremental term loan to partially fund the REIT Portfolio Acquisition. Recent smaller acquisitions were funded with cash on hand and borrowings under the unsecured revolving credit facility.
Material Changes and Portfolio Composition
The REIT Portfolio represents a significant expansion of the company's footprint, with an average tenant size of 127,500 square feet, compared to 8,300 square feet for the company's existing in-place portfolio as of December 31, 2015. The portfolio includes a mix of warehouse, distribution, and manufacturing assets, with an average property age of 12.5 years. Notably, 23% of the annualized base rent is scheduled to expire in the second, third, or fourth quarter of 2016.
Outlook, Risks, and Contingencies
- Closing Conditions: The REIT Portfolio Acquisition is expected to close in the second quarter of 2016 but is subject to customary closing conditions. There is no assurance the transaction will close or close on schedule.
- Deposit Risk: The company has incurred significant expenses and faces the potential forfeiture of a $5,750,000 deposit if the transaction fails to close under certain circumstances.
- Indemnification Limits: Seller indemnification for breaches of representations and warranties is capped at $7,640,000 with a one-to-two-year cut-off date, which may not cover all contingent liabilities.
- Tax Risks: There is a risk that the REIT Portfolio may fail to qualify as a REIT for U.S. federal income tax purposes, which could result in significant tax liabilities for the company and potentially jeopardize the company's own REIT status.
- Lease Expiration Risk: A significant portion of the portfolio's rent (23%) expires in late 2016, creating near-term leasing risk.
Investor Verification Checklist
- Verify the final closing date and any adjustments to the $191.0 million purchase price.
- Confirm the successful execution of the $100.0 million incremental term loan.
- Monitor the re-leasing success rate for the 300,548 square feet of space expiring in the remainder of 2016.
- Review the final purchase price allocation and actual initial year net operating income to validate the 5.3% yield estimate.
- Assess the status of the tenant option to purchase the 2811 S Harbor Blvd property for $18.7 million in 2017.