Rexford Industrial Realty, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Amounts below are in millions of dollars unless stated otherwise. The company is a REIT focused on owning and operating industrial properties in Southern California infill markets.
Business context and portfolio
- At September 30, 2015, the consolidated portfolio comprised 113 properties and approximately 11.1 million rentable square feet; portfolio occupancy was 88.8% and leased occupancy was 90.5%.
- The company also held a 15% interest in a joint venture owning one property and managed 19 additional properties.
- During the first nine months, Rexford acquired 15 properties totaling approximately 1.25 million square feet for $169.1 million. Seven properties totaling 719,493 square feet were in redevelopment or repositioning, with combined occupancy of 7.7%.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $23.7 | $18.0 | $67.7 | $46.7 |
| Rental revenue | $23.3 | $17.6 | $66.5 | $45.2 |
| Net income (loss) | $0.6 | $(0.7) | $0.9 | $0.8 |
| Net income attributable to common stockholders | $0.5 | $(0.6) | $0.7 | $0.7 |
| Basic and diluted EPS | $0.01 | $(0.02) | $0.01 | $0.02 |
| FFO | $11.3 | $7.6 | $32.0 | $19.3 |
| NOI | $17.1 | $12.7 | $48.7 | $32.3 |
| Cash NOI | $16.1 | $12.6 | $46.8 | $31.8 |
| EBITDA | $13.5 | $9.5 | $37.7 | $26.2 |
Q3 total-portfolio NOI was approximately 73% of rental revenue, versus approximately 72% a year earlier. These are derived ratios; NOI and FFO are company-defined non-GAAP measures and should not be treated as cash available for dividends or as substitutes for GAAP results.
- Same-property performance: Q3 same-property rental revenue increased 5.0% year over year; same-property NOI was $5.5 million versus $3.8 million. Average same-property occupancy for the quarter rose to 93.2% from 90.8%.
- Leasing: For the first nine months, new leases achieved cash and GAAP rent increases of 6.0% and 15.5%, respectively; renewals achieved 5.7% and 14.1%. Retention by rentable square feet was 56.0%.
- Cash flow: Nine-month operating cash flow was $31.6 million, investing cash flow was $(164.1) million, and financing cash flow was $129.1 million. Cash ended at $5.1 million, down from $8.6 million at year-end 2014.
- Balance sheet: Total assets were $1.075 billion and total equity was $698.9 million. Notes payable had a $335.9 million principal balance ($335.1 million carrying value), down from $357.1 million principal at December 31, 2014.
- Debt and liquidity: The weighted-average debt interest rate was 3.07% and average remaining term was 5.4 years. About 65% of debt was fixed or effectively fixed; net debt to total market capitalization was approximately 29.5%. The $200 million revolver had $67.5 million drawn and $132.5 million available.
- Dividends: Dividends declared were $0.135 per common share for Q3 and $0.375 for the first nine months, compared with $0.12 and $0.36, respectively, in 2014.
Material changes versus prior periods
- Total revenue rose 31.3% in Q3 and 45.0% for the first nine months, largely reflecting acquisitions; same-property rental revenue growth was more modest at 5.0% and 4.9%, respectively.
- Q3 returned to GAAP profitability from a loss in the comparable 2014 quarter. The nine-month net income comparison was broadly flat, while 2014 included $2.1 million of income from discontinued operations and a property-sale gain.
- Acquisition-related growth also increased expenses: Q3 total expenses rose 26.2%, including higher property costs, depreciation, and G&A. Nine-month total expenses rose 40.5%.
- In August, Rexford issued $100 million of 4.29% guaranteed senior notes due 2025 and used part of the proceeds to repay two secured loans totaling $91.25 million. The refinancing reduced secured debt exposure and extended maturities; a $0.3 million Q3 loss on debt extinguishment was recorded.
- A February follow-on equity offering of 11.5 million shares at $16.00 per share generated $176.3 million net proceeds. Shares outstanding increased substantially; Q3 weighted-average shares were 55.1 million versus 33.5 million a year earlier.
Outlook, commentary, risks, and unusual items
- Outlook: Management expected 2015 acquisitions of $250 million or more. As of November 6, it reported approximately $197 million closed and $22 million in escrow, with other opportunities under consideration. This is management’s stated expectation, not a guarantee.
- Management estimated approximately $22.3 million of capital would be needed over the next seven quarters to complete repositioning work on the seven identified properties. It cited improving leasing fundamentals and expected strong renewals for 2015–2016 expirations; 2016 leases represented 27.4% of annualized base rent.
- Management anticipated higher G&A as staffing grew from 65 employees toward 70–80 over the next 12–24 months. No specific earnings or FFO guidance was provided in the supplied filing text.
- Interest-rate exposure remains: 35% of debt was variable-rate at quarter-end. The filing estimates a 50-basis-point LIBOR increase would raise annual interest expense by about $0.6 million; a 50-basis-point decrease would reduce it by about $0.2 million. Swaps had a $4.7 million recorded liability, and the company estimated $2.1 million would be reclassified from accumulated other comprehensive loss to interest expense over the next 12 months.
- Key risks cited include local-market and tenant demand, vacancy and rent changes, tenant defaults or non-renewals, acquisition and redevelopment execution, financing/refinancing and interest rates, REIT qualification, environmental liabilities, and natural disasters. The company reported compliance with debt covenants and an investment-grade BBB- Fitch rating; it cautioned that the rating could change.
- Environmental matter: a $1.2 million remediation liability for the West 228th Street property was matched by a $1.2 million indemnification asset tied to an escrow arrangement. The company cautioned that not all environmental liabilities may be identified or fully indemnified. It also had $4.1 million of tenant-improvement and construction commitments.
- Previously disclosed litigation involving pre-IPO investors was settled for a non-material amount and dismissed with prejudice in June 2015. No other legal proceedings were identified as reasonably expected to have a material adverse effect.
- After quarter-end, the company acquired two properties for approximately $27.4 million in total, funded with revolver borrowings.
Most important facts for investors to verify
- Whether acquisitions and redevelopment spending meet expected returns, and whether the very low occupancy of repositioning assets improves on schedule.
- Actual same-property rent, occupancy, retention, and cash NOI trends relative to acquisition-driven reported growth.
- Upcoming lease expirations—especially the 2016 exposure—and realized renewal rents and tenant retention.
- Liquidity after acquisitions, redevelopment costs, dividends, and further revolver borrowing; also monitor debt maturities, covenant headroom, and credit rating.
- Whether environmental remediation costs remain within escrow and indemnification coverage, and whether any additional liabilities arise.