Rexford Industrial Realty, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The company is a REIT focused on industrial properties in Southern California infill markets. At quarter-end, its consolidated portfolio comprised 68 properties and approximately 6.5 million rentable square feet; it also held a 15% interest in a three-property joint venture and managed 20 additional properties. The 2013 comparison is the accounting predecessor’s results, not a like-for-like comparison with the post-IPO company.
Financial and operating metrics
- Revenue: Total revenue was $13.7 million, up 47.3% year over year; rental revenue was $13.4 million, up 49.3%. Same-property total revenue increased 3.6%, with rental revenue up 3.8%.
- Profit: GAAP net income was $1.4 million versus $2.1 million; net income attributable to Rexford stockholders was $1.277 million versus $327,000. The company reported a $717,000 loss from continuing operations and $2.146 million income from discontinued operations, including property-sale gains. Basic and diluted EPS were $0.05 overall and a $0.03 loss from continuing operations. Dividends declared were $0.12 per common share.
- FFO: Funds from operations before noncontrolling interests, a non-GAAP measure, was $5.526 million versus $3.646 million. The company cautions that FFO is not a liquidity measure and is not a substitute for GAAP results.
- Cash flow: Operating cash flow was $3.156 million versus $1.372 million. Investing activities used $20.233 million, primarily for acquisitions; financing activities provided $14.424 million, primarily from net revolving-credit borrowings. Cash and cash equivalents ended at $6.344 million.
- Property performance: Same-property rental revenue growth was partly offset by property expense growth; same-property property expenses rose 15.0% to $2.785 million. Property expenses were 30.9% of same-property rental revenue versus 27.8% a year earlier. Companywide occupancy was 90.2% and leased occupancy 91.1%; San Diego occupancy was lower at 79.3%.
- Debt and liquidity: Notes payable were $212.918 million; reported total principal debt was approximately $213.0 million. Debt to total market capitalization was approximately 34.5%, and weighted-average interest rate was 2.1%. Of $200 million in revolving commitments, $101.9 million was drawn; $85.2 million was available under the borrowing-base limit. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $571.6 million and total equity $340.0 million. Accumulated real-estate impairment was $18.6 million.
Changes versus the prior comparable period
- Total revenue increased substantially, primarily reflecting portfolio growth, including acquisitions and properties brought into consolidation. The filing states results are not comparable period to period because of acquisitions, dispositions, and the difference between the post-IPO company and its predecessor.
- Continuing operations moved from $434,000 income to a $717,000 loss. The prior period included a $1.365 million gain from early repayment of a note receivable; current-period depreciation and amortization, property expenses, and corporate costs were also higher. Interest expense fell 66.9%, primarily due to mortgage debt reduction at the IPO.
- Two properties were sold in Q1: 1335 Park Center Drive for $10.103 million and 2900 N. Madera Road for $4.350 million. Net gains on sale recorded in discontinued operations were $2.125 million. Five properties were acquired for an aggregate purchase price of approximately $32.966 million.
- Same-property occupancy and leasing contributed to revenue growth, while property expenses increased partly because of higher allocated overhead and the absence of prior-year property-tax refunds.
Outlook, commentary, risks, and unusual items
- Outlook: No specific earnings or FFO guidance was provided. Management expected opportunities for occupancy and rental-rate growth as Southern California leasing conditions improved, but characterized market recovery as uneven, particularly in San Diego. It noted that upcoming 2014 and 2015 lease expirations represented 23.8% and 20.3% of portfolio annualized rent, respectively.
- Leasing: The company executed 41 new leases covering 307,102 square feet and renewed 53 leases covering 351,995 square feet; 43 leases covering 266,308 square feet vacated, including eight tenant defaults. Reported renewal retention was approximately 55% by lease count and 57% by area. Cash renewal spreads were 3.9%; new leases were reported at 3.2% above ending cash rents on the same space.
- Interest-rate risk: Approximately $204.6 million, or 96.1% of consolidated debt, was exposed to short-term rate fluctuations. Two forward swaps cover $60 million of the term loan beginning in 2015. Management estimated 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.
- Liquidity and growth: Management expected to meet short-term needs through operating cash flow and the revolver, and long-term needs through operating cash flow, borrowing, equity issuance, or revolver availability. It warned that unavailable or unattractive capital could constrain acquisitions, operations, debt service, and REIT distributions. The largest stated debt maturity was approximately $144.8 million in 2016, before considering extension options.
- Legal contingency: A putative class action by pre-IPO investors alleges unfair formation-transaction terms and fiduciary-duty, securities-law, misrepresentation, and fraud claims. The company considers the action without merit and intends to defend it, but says outcome and any potential loss cannot be estimated. Plaintiffs also challenge communications concerning a proposed accommodation under which certain former owners agreed to return up to $32.1 million received in connection with the IPO and formation transactions.
- Other items: On April 17, 2014, after quarter-end, the company acquired a Seal Beach property for $21.1 million using the revolver. It reported no material change to previously disclosed risk factors, no known material environmental liability, and effective disclosure controls.
Important facts for investors to verify
- Review same-property operating trends separately from acquisition-driven growth, and confirm how the predecessor comparison affects year-over-year conclusions.
- Track occupancy, lease commencements, tenant defaults, renewal retention, and the 2014–2015 lease-expiration exposure, especially in San Diego.
- Confirm revolver availability under borrowing-base and covenant tests, the 2016 maturity concentration, and the effect of LIBOR changes despite the forward swaps.
- Assess recurring cash generation and capital needs against dividends; do not treat FFO as cash available for dividends or debt service.
- Monitor the investor litigation, potential costs or outcomes, and any developments regarding the proposed accommodation.