Rexford Industrial Realty, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Dollar amounts are in millions unless otherwise stated; financial statement figures are unaudited. Rexford is a REIT focused on industrial properties in Southern California infill markets.
Business context and portfolio
At quarter-end, the consolidated portfolio comprised 130 properties and approximately 13.6 million rentable square feet. The company also held a 15% interest in a joint venture property and managed 19 additional properties. During the first half, it acquired five properties totaling approximately 1.87 million square feet for a combined contractual price of $230.7 million, including a nine-property portfolio acquired for $191 million. It sold three properties for $21.7 million gross proceeds.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $30.6 | $22.7 | $58.1 | $44.1 |
| Net income | $12.8 | $0.2 | $14.3 | $0.3 |
| Net income attributable to common stockholders | $12.3 | $0.1 | $13.6 | $0.2 |
| Diluted EPS | $0.19 | Reported as — | $0.23 | Reported as — |
| FFO | $13.8 | $10.7 | $26.5 | $20.7 |
| Net operating income (NOI) | $22.5 | $16.4 | $42.4 | $31.6 |
| Cash NOI | $21.7 | $15.8 | $40.4 | $30.7 |
| Operating cash flow | Not separately stated | Not separately stated | $24.4 | $17.8 |
Rental revenue increased 35.5% in Q2 and 31.2% for the first half, reflecting acquisitions as well as improved same-property occupancy and rents. Same-property rental revenue rose 7.5% in Q2 and 6.9% for the first half. Same-property occupancy at June 30 was 92.5%, versus 89.0% a year earlier. Consolidated portfolio occupancy was 90.1%; excluding space undergoing repositioning or lease-up, it was 96.5%.
Reported net income included an $11.6 million gain on property sales. Q2 interest expense rose 124% year over year to $3.7 million, and first-half interest expense doubled to $7.0 million, primarily due to higher average debt and financing costs. Dividends declared were $0.135 per common share for Q2 and $0.27 for the first half, up from $0.12 and $0.24, respectively.
Cash, debt and liquidity
- Cash and cash equivalents were $29.2 million at June 30; restricted cash of $18.0 million represented sale proceeds held for like-kind exchanges.
- Debt principal was $503.0 million, compared with $418.7 million at year-end 2015. The weighted-average interest rate was 3.059%, with a 5.8-year average term to maturity. Approximately 55% of debt was effectively fixed-rate; 84% was unsecured.
- No amounts were drawn on the $200 million revolving credit facility, leaving $200 million available. The filing reports net debt to total market capitalization of approximately 24.9% and covenant compliance at quarter-end.
- Debt maturities include $169.5 million in 2019; $327.3 million is due thereafter. The $225 million unsecured term loan matures in 2023.
- First-half investing cash outflow was $241.4 million, principally for acquisitions and capital expenditures; financing cash inflow was $241.0 million, including equity proceeds and new term borrowing.
Changes, outlook and risks
Growth in the total portfolio reflects substantial acquisitions, funded in part through a $174.4 million net follow-on equity offering and additional term debt. Same-property operating trends also improved: Q2 same-property NOI increased to $7.7 million from $5.6 million, and the company reported positive leasing spreads. For the first half, new-lease GAAP and cash spreads were 29.0% and 14.9%; renewal spreads were 15.8% and 6.5%. Retention was 65.3% of expiring square footage.
Management described Southern California industrial markets as generally strong, citing tight supply, improving rents and positive absorption, and expected favorable renewal rates and leasing spreads for the rest of 2016. It did not provide quantified full-year earnings or FFO guidance. The company had approximately $83 million of acquisitions under contract or letter of intent. It estimated approximately $46 million of capital would be needed over the next eight quarters to complete repositioning of 10 properties; timing and budgets may change. The company expected completed projects to support leasing and revenue growth.
Principal risks include local market and tenant conditions, vacancies and lease renewals, acquisition execution and integration, construction cost or schedule overruns, access to financing and interest-rate exposure, REIT qualification and rating changes, and environmental liabilities. A 50-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $1.1 million on then-outstanding variable-rate debt. Environmental remediation at one property had an estimated $1.2 million liability and a matching indemnification asset; management did not expect a material impact, but recovery and future environmental costs are not assured. The company disclosed no other legal proceedings it believed would likely have a material adverse effect and no material changes to previously reported risk factors.
Subsequent events: on July 1, the company made a $6 million, 10% secured loan due June 2017; on July 6, it acquired the remaining 85% interest in its JV property for $21.8 million, partly using exchange proceeds.
Key facts for investors to verify
- How much of the reported earnings increase is recurring operating performance versus the $11.6 million property-sale gain; compare GAAP income with FFO, NOI and cash NOI.
- Whether acquisition returns and integration support growth after considering the higher debt balance, interest expense and enlarged share count.
- Progress on occupancy and leasing at repositioning properties, including the estimated $46 million remaining capital program and expected completion schedule.
- Upcoming lease expirations—17.1% of portfolio square footage expires in 2017—and whether management achieves the anticipated positive renewal spreads.
- Debt covenant headroom, refinancing requirements, swap exposure and liquidity available after planned acquisitions, capital spending and dividends.
- Execution of the pending acquisition pipeline, 1031 exchanges and environmental remediation, including whether the expected indemnification is collected.