Rexford Industrial Realty, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company is a REIT focused on industrial properties in Southern California infill markets. At quarter-end, its consolidated portfolio comprised 86 properties and approximately 8.6 million rentable square feet; it also managed a 15% JV interest in three properties and managed 20 additional properties.
Financial performance and position
| Metric | Q3 / September 30, 2014 | Comparison or context |
|---|---|---|
| Total revenue | $18.0 million for Q3; $46.7 million for nine months | Q3 increased 54.0% and nine-month revenue increased 47.3% versus the company’s combined 2013 comparison periods. Growth primarily reflected acquisitions and consolidation of a property; the periods are not directly comparable. |
| Net income (loss) | Q3: loss of $0.7 million; nine months: income of $0.8 million | Q3 loss improved from a combined $5.6 million loss in 2013. Nine-month income included $2.1 million of discontinued-operations income, mainly a property-sale gain; continuing operations reported a $1.3 million loss. |
| EPS | Q3: $(0.02); nine months: $0.02 | Basic and diluted EPS were the same. |
| FFO | $7.6 million for Q3; $19.3 million for nine months | Non-GAAP measure; not a substitute for GAAP income or liquidity. |
| Operating cash flow | $17.9 million for nine months | Compared with $8.1 million in the combined 2013 period. |
| Cash and liquidity | $60.5 million cash; no revolver borrowings and $200 million available | At September 30, 2014. |
| Debt | $269.7 million consolidated debt; approximately $6.2 million of JV debt allocated to its 15% interest | Weighted average consolidated rate approximately 2.0%; about 93.2% of consolidated long-term debt was exposed to short-term rate changes. |
| Dividends | $0.12 per common share for Q3; $0.36 for nine months | Declared dividends. |
For the nine months, investing cash flow was $(240.2) million, principally reflecting property acquisitions and capital expenditures; financing cash flow was $273.8 million. The company reported $248.5 million of cash outflow for real estate acquisitions and $8.8 million of capital expenditures. Same-property revenue increased 3.9% for both Q3 and the nine-month period; same-property NOI was $12.7 million in Q3 and $32.3 million for nine months.
Material changes and operating trends
- Rental revenue rose 54.8% for Q3 and 48.7% for nine months on a total-portfolio basis, mainly due to acquisitions. Same-property rental revenue rose 2.9% and 3.9%, respectively, supported primarily by higher average occupancy.
- Occupancy was 91.8% and leased occupancy 92.3%. Occupancy varied by county: Los Angeles 95.4%, Orange County 90.3%, and San Diego County 82.4%. Excluding four properties being redeveloped or repositioned, occupancy was 93.3%.
- For the first nine months, the company executed 135 new leases covering 769,343 square feet and renewed 201 leases covering 1.15 million square feet. Weighted average cash renewal spreads were 4.2%; new-lease cash spreads versus expiring rents were 3.7%. Twenty-five tenant defaults accounted for 96,430 square feet of the 671,598 square feet vacated.
- The company acquired multiple industrial properties and a nine-property portfolio during 2014. A follow-on offering of 17.25 million shares at $13.50 per share raised approximately $221.8 million net; proceeds were partly used to repay the revolving facility. It also entered into new term loans, including a $100 million unsecured term facility and a $48.5 million secured loan.
- Property sales during 2014 included two reported dispositions with a net gain overall, while the separate sale of 500–560 Zenith Drive generated a $0.15 million loss.
Outlook, risks, contingencies and unusual items
- No quantified earnings or operating guidance was provided. Management described market recovery as gradual and uneven, with San Diego slower to recover, and cited improving leasing fundamentals. It expects potential rent increases on upcoming renewals as market conditions improve, while noting this is uncertain.
- Management expected general and administrative costs to rise, including from public-company requirements and planned staffing growth from approximately 45 employees to 60–70 over the following 12–24 months.
- Debt agreements include leverage, coverage, net-worth and other covenants. The company stated it was in compliance at quarter-end. Its $48.5 million loan also has an annual minimum in-place debt-yield covenant of 9.25%.
- Interest-rate swaps hedge portions of variable-rate loans beginning in 2015. Management estimated that a 50-basis-point LIBOR increase would raise annual interest expense by approximately $1.0 million; a 50-basis-point decrease would reduce it by approximately $0.3 million.
- A lawsuit by pre-IPO investors alleges, among other matters, unfair formation-transaction terms and disclosure issues. Three additional plaintiffs settled for amounts described as not material; the remaining claims are contested, and the company said it could not estimate any potential loss.
- At the West 228th Street property, estimated remediation costs were approximately $1.3 million. The company recorded a $1.2 million liability and a matching indemnification asset, backed by seller escrow; it expected no material financial impact, but the seller’s responsibility is capped.
- The company early-adopted ASU 2014-08 on discontinued operations, which may result in fewer future property sales qualifying for discontinued-operations presentation. Reported period comparisons are also affected by the IPO and formation transactions in July 2013 and by acquisitions and dispositions.
- Management identified no material changes to the risk factors in its 2013 Form 10-K. Disclosure controls and procedures were assessed as effective; no material change in internal control over financial reporting was reported.
Key facts investors should verify
- Whether occupancy, lease renewals, tenant defaults and rent spreads continue to improve, especially in San Diego and at properties under redevelopment.
- Acquisition performance, including stabilization, leasing costs and returns relative to financing costs; distinguish organic same-property growth from portfolio expansion.
- Debt maturities, refinancing needs, covenant headroom and exposure to variable interest rates, including the effectiveness and terms of the swaps.
- Cash available after dividends, tenant improvements, leasing commissions and planned capital spending; review the sustainability of distributions against operating cash flow and REIT requirements.
- Developments and potential costs in the investor litigation and environmental remediation matters, including escrow sufficiency and any obligations beyond the seller’s cap.
- Reconcile GAAP earnings with FFO and NOI, and account for the non-comparable predecessor periods and discontinued-operations presentation changes.