Rexford Industrial Realty, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Rexford is a self-managed REIT focused on industrial properties in Southern California infill markets. The filing was signed February 24, 2016. Unless otherwise noted, financial amounts below are in U.S. dollars.
Business context
At year-end, the consolidated portfolio comprised 119 properties and approximately 12.0 million rentable square feet, with 89.2% occupancy and 1,285 leases. Rexford also held a 15% interest in a joint venture owning one property and managed 19 additional properties. Its strategy combines acquisitions with leasing, repositioning and redevelopment.
Financial and operating performance
| Metric | 2015 | 2014 | Change or context |
|---|---|---|---|
| Total revenue | $93.9 million | $66.6 million | Up 41.0%, primarily reflecting portfolio growth |
| Net income | $2.0 million | $1.0 million | Continuing-operations income was $2.0 million versus a $1.2 million loss |
| Net income attributable to common stockholders | $1.7 million | $0.8 million | Basic and diluted EPS: $0.03 versus $0.02 |
| Funds from operations (FFO) | $43.8 million | $28.0 million | Non-GAAP supplemental measure |
| Cash from operating activities | $40.5 million | $24.5 million | Up $16.0 million |
| Cash used in investing activities | $236.8 million | $380.6 million | Primarily acquisitions and capital expenditures |
| Cash from financing activities | $192.9 million | $355.7 million | Included equity issuance, new notes and debt repayments |
| Year-end cash and cash equivalents | $5.2 million | $8.6 million | Year-end revolving-credit availability was $59.5 million |
| Notes payable, carrying value | $418.2 million | $356.4 million | Principal debt was $418.7 million at year-end |
Full-year net operating income (NOI), a non-GAAP measure, was $67.6 million, compared with $46.2 million in 2014. Same-property total revenue increased 4.4%; year-end same-property occupancy rose to 94.4% from 92.8%, and weighted-average occupancy increased to 93.2% from 91.0%. Total portfolio annualized base rent at year-end was $93.7 million; this is a point-in-time operating measure, not reported annual revenue.
Property expenses were $25.0 million, up 36.0% mainly because of acquisitions; same-property property expenses declined 1.4%. General and administrative expense rose 23.6% to $15.0 million. Interest expense increased 32.1% to $8.5 million as debt balances and financing costs increased. Dividends declared were $0.51 per common share, up from $0.48.
Material changes versus prior year
- Acquired 21 properties totaling approximately 2.1 million square feet for an aggregate purchase price of $247.6 million; 10 were identified as value-add acquisitions.
- Portfolio growth materially increased total revenue, NOI, property expenses and depreciation. Same-property revenue growth was more modest at 4.4%.
- Raised $176.2 million net from a February follow-on offering of 11.5 million shares and issued $100 million of 10-year senior notes at a fixed 4.29% rate. Proceeds helped fund acquisitions and repay secured loans.
- Debt increased to $418.7 million principal from $357.1 million. At year-end, 55% was effectively fixed-rate and 45% variable-rate; net debt to total market capitalization was 30.6%. Fitch assigned an investment-grade BBB- rating.
- Operating cash flow rose to $40.5 million, while investing outflows remained substantial at $236.8 million.
Outlook, risks and unusual items
- Management outlook: Management described Southern California industrial conditions as favorable, citing tight supply, positive absorption and rising rents in several markets. It expected positive renewal spreads and continued leasing-rate opportunities in 2016. This is management commentary, not quantified earnings guidance.
- Leasing and occupancy: Leases covering 24.7% of portfolio rentable area were scheduled to expire in 2016 and 18.3% in 2017; 10.8% of rentable area was available at year-end. Average remaining lease term was about 2.9 years including month-to-month leases.
- Repositioning commitments: Eight properties were in redevelopment, repositioning or lease-up at year-end, with one additional project anticipated in 2016. Management estimated $52.2 million of capital would be needed over the next nine quarters to complete planned work; costs and timing could change.
- Liquidity after year-end: In January 2016, Rexford borrowed $125 million under a new unsecured term loan due in 2023 and used $116 million to repay revolving-credit borrowings. The filing reported $175.5 million of revolver availability after that repayment. The loan has prepayment premiums for certain early repayments. In February 2016, the company entered a swap intended to fix the rate on the $125 million notional amount from 2018 through 2022, at 1.349% plus the applicable margin.
- Debt and rates: Scheduled principal maturities were concentrated in 2018 ($145.9 million) and 2019 ($169.5 million). A 50-basis-point increase in LIBOR was estimated to increase annual interest expense by about $1.0 million on year-end variable-rate debt, before considering possible management actions.
- Geographic and catastrophe exposure: All consolidated properties are in Southern California, an earthquake-prone region. The company did not carry earthquake insurance, citing cost, and warned that a major event could cause substantial uninsured losses. Wildfire losses also may be uninsured.
- Other risks: Tenant credit quality is predominantly non-investment grade; acquisition execution, re-leasing, tenant defaults, construction costs, environmental liabilities, property taxes, financing access, REIT qualification and competition could affect cash flow and distributions.
- Unusual items: Early repayment of the Calle Perfecto note generated a $0.6 million gain. Debt extinguishment resulted in a $0.2 million loss. No property dispositions occurred in 2015. A previously disclosed pre-IPO investor lawsuit was settled for an amount described as not material and dismissed with prejudice.
- Reporting and controls: The independent auditor issued an unqualified opinion on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported GAAP earnings with FFO and NOI, and assess capital expenditures, leasing commissions and other recurring cash needs excluded from those supplemental measures.
- Track execution, budget and lease-up progress for the repositioning program, including the estimated $52.2 million remaining capital requirement.
- Review 2016–2017 lease expirations, available space, renewal rates and tenant credit exposure against management’s positive rental-market outlook.
- Confirm current debt balances, maturities, covenant headroom, variable-rate exposure and the terms and effectiveness of the 2016 loan and interest-rate swap.
- Assess the potential financial impact of uninsured earthquake exposure and disclosed environmental matters, including the West 228th Street remediation estimate.
- Confirm future dividend capacity against operating cash flow, debt restrictions and REIT distribution requirements; the filing provides no assurance of future dividend amounts or timing.