Rexford Industrial Realty, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context
Rexford is a self-managed REIT focused on owning, operating, acquiring and redeveloping industrial properties in Southern California infill markets. At year-end, it owned 213 properties totaling approximately 26.6 million rentable square feet and managed another 19 properties totaling approximately 1.0 million square feet. Its strategy combines acquisitions with leasing, repositioning and redevelopment. The portfolio was 96.1% occupied, and no single tenant represented more than 2.9% of annualized base rent.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $267.2 million | $212.5 million |
| Net income | $64.0 million | $47.1 million |
| Net income attributable to common stockholders | $50.5 million | $36.1 million |
| Basic/diluted EPS | $0.47 / $0.47 | $0.42 / $0.41 |
| FFO attributable to common stockholders | $130.9 million | $97.3 million |
| Net operating income (NOI) | $201.0 million | $159.0 million |
| Cash NOI | $185.5 million | $146.5 million |
| Cash from operating activities | $139.5 million | $102.8 million |
| Cash used in investing activities | $(972.7) million | $(507.2) million |
| Cash from financing activities | $731.5 million | $578.2 million |
Revenue increased 25.8%, while net income rose 36.0% and common-stockholder FFO rose 34.6%. Reported net income included a $16.3 million gain on property sales. Same-property revenue increased 5.7%, supported by higher occupancy and rents. Total NOI grew 26.4%; Cash NOI grew 26.6%. FFO and NOI are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Fourth quarter: Revenue was $74.4 million, net income was $24.4 million, common-stockholder net income was $19.9 million, and basic and diluted EPS were each $0.18. For the fourth quarter of 2018, the corresponding figures were $57.0 million, $15.2 million, $12.4 million and $0.13/$0.13.
Portfolio and leasing: Year-end annualized base rent was $245.1 million, or $9.61 per occupied square foot. Weighted-average occupancy in the same-property portfolio improved to 97.4% from 96.0% at year-end; same-property weighted-average occupancy for the year was 96.8%, versus 95.6%. 2019 new-lease cash spreads were 30.8% and renewal-lease cash spreads were 19.5%; renewal retention was 72.8%. Management said expiring rents were, on a weighted-average basis, below current asking rents.
Balance sheet and liquidity: Cash and cash equivalents were $78.9 million. Notes payable were $857.8 million carrying value ($861.0 million principal); total liabilities were $1.02 billion. Net debt to total combined market capitalization was 12.3%. Debt had a 3.54% weighted-average effective interest rate and 5.5-year average term to maturity; 93% was effectively fixed-rate, including swaps. The company had no revolver borrowings and $350 million available under its year-end facility. It reported compliance with all debt covenants.
Operating cash flow increased by $36.7 million year over year. Investing cash use rose primarily because acquisitions and acquisition deposits increased. The company spent $47.2 million on capital expenditures in cash-flow reporting and declared $0.74 per common share in 2019 dividends. Its 2019 common-stock issuance raised $639.6 million net; a Series C preferred offering raised approximately $83.2 million net.
Material changes versus the prior comparable period
- Acquisitions accelerated: Rexford acquired 40 properties with 5.4 million square feet for an aggregate contractual purchase price of $970.7 million, compared with 35 properties and $492.9 million in 2018.
- Year-end portfolio size increased from 176 properties in 2018 to 213 in 2019. Total real estate held for investment, before accumulated depreciation, rose to $3.70 billion from $2.72 billion.
- Common shares outstanding increased from 96.8 million to 113.8 million during 2019, principally reflecting equity issuance. The company also issued $100 million of long-term senior notes and $83.2 million net of Series C preferred stock proceeds.
- Net income increased despite lower property-sale gains: $16.3 million in 2019 versus $17.2 million in 2018. Growth in revenue and FFO also reflects the expanded portfolio and same-property operating improvement.
- Cash used in investing increased to $972.7 million from $507.2 million, largely due to higher acquisition spending. Cash and cash equivalents declined to $78.9 million from $180.6 million.
- The company adopted ASC 842 lease accounting in 2019, changing presentation of rental income and certain tenant reimbursements; comparative presentation was reclassified where applicable.
Outlook, risks and unusual items
- Management outlook: Management described Southern California infill industrial fundamentals as favorable, citing constrained supply, strong tenant demand and low vacancy. It expected positive market conditions and rent growth to continue into 2020, and anticipated positive 2020 renewal rates and leasing spreads. These are expectations, not formal earnings guidance.
- Lease rollover: Leases covering 14.7% of portfolio square footage expire in 2020 and 19.8% in 2021. Management’s below-market rent assessment and forecast of positive renewals are subject to market conditions, tenant retention and leasing costs.
- Development and repositioning: The company estimated approximately $110.6 million of capital would be required over the next eight quarters to complete identified projects. Construction timing, costs, permits and lease-up could differ from estimates.
- Concentration and tenant credit: All properties are in Southern California and the business is concentrated in industrial real estate. Wholesale trade, warehousing and manufacturing accounted for 22.9%, 17.0% and 16.8% of annualized base rent, respectively. The filing says a substantial majority of leases are with tenants without investment-grade credit ratings.
- Other material risks: Risks include earthquakes and other natural disasters, insurance deductibles and exclusions, environmental liabilities, competition, interest rates and refinancing, capital-market access, California property taxes and regulation, and maintaining REIT status. Earthquake insurance is subject to material deductibles; certain extraordinary losses, including wildfire, are not insured.
- Contingencies and unusual items: No pending legal proceedings were identified as reasonably expected to have a material adverse effect. A $0.6 million estimated remediation liability and corresponding indemnification asset remained for a previously acquired property; management expected no material impact. No real estate impairment charges were recorded in 2019.
- Post-year-end financing: On February 13, 2020, Rexford amended its credit facility to $600 million, including a $500 million revolver and $100 million term loan. At the filing date, the revolver had no borrowings. The filing also notes approximately $268.4 million of acquisitions under contract or letter of intent, with no assurance they would close.
- Audit and controls: Ernst & Young issued unqualified opinions on the financial statements and internal controls. The critical audit matter was valuation and purchase-price allocation for 2019 property acquisitions, involving significant estimates and assumptions.
Important facts for investors to verify
- Reconcile acquisition spending and expected returns, including the $970.7 million of 2019 acquisitions and the $110.6 million estimated project capital requirement.
- Track execution on 2020–2021 lease expirations, actual renewal spreads, tenant retention and the lease-up of repositioning space.
- Assess dilution from common and preferred equity issuance against growth in FFO per share and dividends; compare FFO with operating cash flow and recurring capital needs.
- Review debt maturities, covenant headroom, interest-rate hedges and liquidity after the February 2020 credit-facility amendment.
- Evaluate exposure to Southern California, major tenant industries, non-investment-grade tenants, earthquake and environmental risks, and the assumptions behind acquisition valuations.