Rexford Industrial Realty, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Rexford is a REIT focused on owning, operating, acquiring and repositioning industrial properties in Southern California infill markets. At quarter-end, its portfolio included 153 properties totaling approximately 18.7 million rentable square feet; it also managed 19 additional properties.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $48.5 million | $35.4 million | +37.3% |
| Net income | $15.1 million | $5.7 million | +163.7% |
| Net income attributable to common stockholders | $12.2 million; $0.16 basic and $0.15 diluted per share | $4.2 million; $0.06 per share | |
| FFO attributable to common stockholders | $21.4 million | $14.7 million | +45.4% |
| Net operating income (NOI) | $36.5 million | $25.8 million | +41.5% |
| Cash NOI | $33.4 million | $24.7 million | +35.1% |
| Cash provided by operating activities | $25.2 million | $19.1 million | +$6.1 million |
NOI was approximately 75.1% of total revenue, compared with 72.9% a year earlier. These are calculated ratios; NOI and FFO are non-GAAP measures and should be considered with the company’s stated limitations. GAAP net income included $10.0 million of gains on property sales, versus $2.7 million in Q1 2017.
Balance sheet and liquidity at March 31: Total assets were $2.166 billion, total liabilities $737.5 million and total equity $1.428 billion. Cash and cash equivalents were $15.6 million, with a further $4.2 million in restricted cash. Debt principal was $662.4 million; the reported carrying value was $659.4 million. The company reported a 3.392% weighted average debt interest rate, 5.5-year average debt maturity, and net debt equal to approximately 20.3% of total combined market capitalization. About 77% of debt was effectively fixed-rate; the remaining $151 million was variable-rate. A 50-basis-point LIBOR increase was estimated to raise annual interest expense by approximately $0.8 million.
At quarter-end, $51 million was outstanding on the revolving credit facility, leaving $299 million available. Subsequent to quarter-end, a $112 million draw brought revolver borrowings to $225 million and availability to $125 million as of the filing date. Dividends declared for common shares were $0.16 per share for the quarter, up from $0.145 in Q1 2017.
Material changes versus Q1 2017
- Total rental revenue rose 38.4%; rental income increased 38.1%. Acquisitions made since January 2017 contributed to the increase. Same-property rental revenue increased 7.8%, with same-property rental income up 9.0%.
- Same-property occupancy at quarter-end improved to 94.9% from 92.7%; weighted average same-property occupancy was 95.0% versus 93.9%.
- Interest expense increased 46.4% to $5.9 million, primarily reflecting the $125 million senior notes issued in 2017 and higher revolving borrowings. General and administrative expense rose 21.2%, including higher bonus, equity compensation and consulting costs.
- Operating cash flow increased, while investing cash outflows rose to $44.8 million, largely reflecting property acquisitions and capital spending. Financing cash flow was $32.5 million, supported by $57.4 million of net stock issuance proceeds.
- During Q1, the company acquired five properties totaling 432,411 square feet for $52.7 million and sold three properties totaling 140,384 square feet for $26.9 million gross proceeds. ATM sales of 2.09 million shares generated $57.6 million net proceeds.
Outlook, risks and unusual items
- Management described Southern California infill industrial market conditions as strong, citing tight supply, tenant demand and rising asking rents. It expected generally positive market conditions and positive renewal spreads through the remainder of 2018; these are expectations, not guaranteed results.
- New and renewal leases signed in Q1 had GAAP leasing spreads of 32.0% and 23.1%, respectively; cash spreads were 18.1% and 13.8%. Retention was 68.4%. Leases representing 9.4% of portfolio square footage expire during the remainder of 2018 and 15.0% during 2019.
- Six properties were in repositioning or lease-up at quarter-end. Management estimated $38.6 million of capital would be needed over the next six quarters to complete identified projects and anticipated starting work on two more properties in 2018. Timing, costs and lease-up remain uncertain.
- Management reported approximately $250 million of acquisitions under contract as of the filing date. Separately, a May 1 agreement covered a 0.7-million-square-foot Central Los Angeles property for $121 million, subject to customary closing conditions. The filing also reports five post-quarter acquisitions totaling $55.3 million.
- Key risks include the company’s concentration in Southern California, tenant defaults or nonrenewals, vacancy and rental-rate changes, acquisition and redevelopment execution, construction costs and delays, rising interest rates and refinancing availability, REIT qualification, natural disasters, and environmental liabilities. The company reported compliance with debt covenants at March 31 and no litigation expected to have a material adverse effect.
- Tenant improvement and construction commitments were approximately $30.8 million. A West 228th Street environmental remediation liability of $1.1 million was matched by a $1.1 million indemnification asset; management expected no material impact but cautioned that undiscovered liabilities or incomplete indemnification remain possible.
- Management said there were no material changes to previously disclosed risk factors. Disclosure controls were considered effective, and no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Reconcile the quarter-end revolver balance of $51 million with the post-quarter $112 million draw and the $225 million balance reported as of the filing date; assess funding for the pending $121 million acquisition and other acquisition commitments.
- Separate recurring operating performance from property-sale gains when evaluating earnings; review the definitions and limitations of FFO, NOI and Cash NOI.
- Track occupancy and lease-up progress, particularly the repositioning portfolio, upcoming lease expirations and whether reported leasing spreads translate into cash rent growth.
- Monitor redevelopment spending against the $38.6 million estimate, the $30.8 million contractual commitments and project completion schedules.
- Review debt maturities, variable-rate exposure, covenant headroom and the effect of further equity issuance on per-share results; common shares outstanding increased during the quarter.