Rexford Industrial Realty, Inc. — Q3 2017 Form 10-Q
Business and period: Self-managed REIT focused on industrial properties in Southern California infill markets. This unaudited filing covers the three and nine months ended September 30, 2017. At quarter-end, the company owned 146 properties totaling approximately 18.0 million rentable square feet and managed 19 additional properties totaling approximately 1.2 million square feet.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $43.3 million | $33.3 million | $115.5 million | $91.4 million |
| Net income | $2.0 million | $3.1 million | $27.6 million | $17.3 million |
| Net income attributable to common stockholders | $0.6 million; $0.01/share | $2.3 million; $0.03/share | $22.6 million; $0.33/share | $15.9 million; $0.26/share |
| FFO attributable to common stockholders | $18.0 million | $13.9 million | $48.6 million | $39.3 million |
| Cash NOI | $29.8 million | $22.5 million | $80.2 million | $62.9 million |
Q3 rental revenue rose 31.2% year over year, principally reflecting acquisitions and portfolio growth. Same-property rental revenue increased 7.7% in Q3 and 7.5% for the nine-month period. Same-property occupancy at September 30 was 95.2%, versus 93.0% a year earlier; stabilized portfolio occupancy was 97.2%, while total portfolio occupancy, including repositioning space, was 92.9%.
Q3 GAAP net income declined despite higher revenue, in part because the prior-year quarter included income from an unconsolidated joint venture. For the nine months, reported net income also included $19.2 million of gains on property sales, compared with $11.6 million a year earlier. Interest expense increased 64.9% in Q3 and 35.2% year to date, primarily due to higher average debt and LIBOR.
Cash flow and liquidity: Nine-month operating cash flow was $58.1 million, compared with $44.0 million. Investing cash outflow was $491.9 million, including $532.1 million of real estate acquisitions and $29.2 million of capital expenditures, partly offset by $64.4 million of property-sale proceeds. Financing cash inflow was $431.2 million. Cash and cash equivalents were $12.9 million at quarter-end.
Debt: Principal debt was $667.0 million ($664.2 million carrying value), up from $502.5 million principal at year-end 2016. The company reported a 3.346% weighted-average interest rate, 5.9-year average maturity, and net debt to total combined market capitalization of approximately 21.7%. 59% of debt was effectively fixed-rate and 41% variable-rate at quarter-end; a 50-basis-point LIBOR increase was estimated to raise annual interest expense by approximately $1.4 million. The $350 million revolver had $50 million drawn and $300 million available. The company reported compliance with debt covenants and a Fitch BBB- investment-grade rating with stable outlook.
Material changes and operating developments
- Acquired 15 properties during the first nine months for approximately $541 million gross purchase price, adding about 3.6 million square feet. Q3 acquisitions totaled seven properties and approximately $293 million.
- Sold three properties for $65.6 million gross proceeds and recorded $19.2 million in gains. Two subsequent sales, after quarter-end, generated $30.6 million gross proceeds in total.
- Issued 11.0 million common shares through at-the-market programs during the nine months, generating $309.1 million gross proceeds and $304.5 million net proceeds. A new $300 million ATM program replaced the prior program; $256.6 million of capacity remained at quarter-end.
- Issued $125 million of 10-year senior notes at a fixed 3.93% rate. The amended credit facility provides a $350 million revolver and a $100 million term loan.
- Declared common dividends of $0.145 per share quarterly. The same quarterly common dividend was declared after quarter-end for payment in January 2018.
Outlook, risks and unusual items
Management described Southern California infill industrial-market fundamentals as favorable, citing limited supply, strong tenant demand and low vacancy. It expected market conditions to remain positive through year-end 2017 and anticipated positive renewal growth, while noting that 2018 conditions are less predictable. No formal earnings or FFO guidance was provided.
Leasing spreads for the nine months were 32.6% on new leases and 18.6% on renewals on a GAAP basis; cash spreads were 21.7% and 9.6%, respectively. Retention was 63.9%. Leases representing 14.0% of portfolio square footage and 15.2% of annualized base rent were scheduled to expire in 2018.
Eight properties were in repositioning, redevelopment or lease-up stages. Management estimated approximately $45.6 million of capital would be required over the next seven quarters to complete identified projects; budgets and schedules may change. Tenant-improvement and construction commitments were approximately $20.4 million. The company also disclosed a $1.1 million environmental remediation liability for one property, offset by a corresponding indemnification asset, and said it did not expect resolution to materially affect results.
Principal risks include leasing and tenant-credit conditions, acquisition and redevelopment execution, construction costs and delays, interest rates and refinancing, concentration in Southern California, natural disasters, environmental liabilities, and maintaining REIT status and investment-grade credit. Management reported no material change to previously disclosed risk factors, no material legal proceeding, and effective disclosure controls.
Important facts for investors to verify
- Whether acquisition-driven growth and same-property leasing gains translate into durable operating cash flow and per-share performance, considering share issuance and higher interest expense.
- Progress on repositioning projects, planned $45.6 million capital spending, and the timing and economics of pre-leased space becoming rent-producing.
- Upcoming lease expirations, renewal spreads, retention, and occupancy trends, especially the 2018 expirations.
- Debt covenant headroom, variable-rate exposure, refinancing requirements, and availability under the revolver.
- Use of the remaining ATM capacity and disposition proceeds, and the effect of future equity issuance on existing shareholders.