Rexford Industrial Realty, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Rexford is a REIT focused on industrial properties in Southern California infill markets. At quarter-end, it owned 167 properties totaling approximately 20.5 million rentable square feet and managed 20 additional properties.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $55.2 million | $43.3 million | $155.5 million | $115.5 million |
| Net income | $9.0 million | $2.0 million | $31.9 million | $27.6 million |
| Net income attributable to common stockholders | $6.3 million | $0.6 million | $23.7 million | $22.6 million |
| Diluted EPS | $0.07 | $0.01 | $0.28 | $0.33 |
| Net operating income (NOI) | $41.2 million | $32.0 million | $116.5 million | $84.7 million |
| Cash NOI | $38.2 million | $29.8 million | $107.2 million | $80.2 million |
| FFO attributable to common stockholders | $25.9 million | $18.0 million | $70.2 million | $48.6 million |
| Cash provided by operating activities | Not presented quarterly | Not presented quarterly | $80.9 million | $58.1 million |
Q3 NOI was approximately 74.6% of total revenue, compared with 73.8% in Q3 2017. The filing does not present a conventional net profit margin as a highlighted performance measure. Common dividends declared were $0.16 per share in Q3, up from $0.145 a year earlier; the board subsequently declared another $0.16 quarterly dividend.
Financial position and operating performance
- Cash and cash equivalents were $183.9 million at September 30, 2018, versus $6.6 million at year-end 2017. The company had no revolver borrowings and $350 million of revolving capacity available.
- Debt principal was $761.2 million, compared with $671.7 million at December 31, 2017. Weighted-average interest rate was 3.414%, average maturity was 5.8 years, and approximately 80% of debt was effectively fixed-rate. Management reported net debt to total combined market capitalization of approximately 15.3%.
- Total assets were $2.669 billion; total liabilities were $883.4 million; total equity was $1.785 billion. The company reported compliance with all required quarterly debt covenants.
- Same-property occupancy was 96.8% at September 30, 2018, versus 93.1% a year earlier. Total portfolio occupancy, including repositioning space, was 95.1%; stabilized portfolio occupancy excluding that space was 97.6%.
- Same-property revenue rose 10.3% in Q3 and 9.2% year to date. Total portfolio rental revenue rose 26.0% in Q3 and 34.8% year to date, reflecting acquisitions as well as improved occupancy and rents. New-lease cash spreads were 34.1% in Q3; renewal cash spreads were 14.8%.
Material changes versus prior comparable periods
- Q3 net income increased by $7.0 million year over year. Nine-month net income increased by $4.3 million, while common-stockholder diluted EPS declined from $0.33 to $0.28.
- Year-to-date common-stockholder earnings included $11.6 million of gains on property sales, compared with $19.2 million in the prior-year period. Thus, reported net income includes material disposition gains in both periods.
- Year-to-date operating cash flow increased $22.8 million. Investing outflows were $368.5 million, primarily reflecting $363.5 million of real estate acquisitions and $41.3 million of capital expenditures. Financing inflows included $425.2 million of net stock issuance and $401.0 million of debt proceeds, partly offset by debt repayments and dividends.
- The company acquired 21 properties during the first nine months for a gross contractual purchase price of $361.1 million and sold five properties for $37.6 million gross proceeds. Common shares outstanding increased to 92.7 million from 78.5 million at year-end, primarily reflecting equity issuance.
- Interest expense rose 28.7% year to date to $18.8 million, mainly due to the 2017 senior notes and the $150 million term loan issued in May 2018. A $60 million term loan was also extended to 2023 at a lower LIBOR margin.
Outlook, risks and unusual items
- Management described Southern California infill industrial fundamentals as strong, citing tight supply, high tenant demand, low vacancy and rising rents, and expected positive trends to continue through the remainder of 2018. It anticipated positive renewal spreads for the remainder of 2018 and expressed optimism, with less certainty, about 2019 expirations. No specific earnings or revenue guidance was provided.
- Management estimated approximately $46.2 million of capital would be needed over the next seven quarters to complete current redevelopment and repositioning projects. It reported approximately $193.8 million of acquisitions under contract or letter of intent as of the filing date. Project costs, timing, leasing and funding are subject to change.
- In October 2018, Fitch upgraded the company’s senior credit ratings to BBB from BBB-, with a stable outlook. The company noted that a downgrade could make financing more difficult or expensive.
- Key disclosed risks include tenant defaults or non-renewals, vacancies and rental-rate changes, acquisition and redevelopment execution, interest rates and refinancing, local economic and real-estate conditions, natural disasters, REIT qualification and environmental liabilities. A 50-basis-point LIBOR increase was estimated to raise annual interest expense by approximately $0.8 million, before any mitigating actions.
- The company recorded a $1.1 million environmental remediation liability for a property acquired with pre-existing conditions, matched by a $1.1 million indemnification asset; management did not expect a material impact but noted that recovery and future environmental obligations are not assured. A potential insurance-subrogation claim of approximately $3.7 million had not resulted in a filed lawsuit; the insurer confirmed the policy limit was sufficient and no reservation of rights applied.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing states there were no material changes to the risk factors in the 2017 Form 10-K.
Important facts for investors to verify
- Whether occupancy, leasing spreads and same-property revenue growth persist as repositioning space is completed and leases commence.
- Whether acquisition activity, the approximately $46.2 million redevelopment budget and pending acquisition pipeline can be funded without excessive dilution or leverage.
- Debt maturity, variable-rate exposure, hedge expirations and covenant headroom, particularly as interest rates and refinancing conditions change.
- How much of year-to-date earnings growth reflects recurring property operations versus $11.6 million of disposition gains, and how FFO and cash NOI compare with cash available for dividends and capital needs.
- Progress on environmental remediation and the potential insurance-subrogation matter, including whether actual costs or recoveries differ from current estimates.
Amounts are in U.S. dollars. FFO, NOI and Cash NOI are non-GAAP measures; the company cautions that they should not be treated as substitutes for GAAP earnings or operating cash flow.