Rexford Industrial Realty, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed October 31, 2019. Rexford is a REIT focused on industrial properties in Southern California infill markets. At quarter-end, its consolidated portfolio comprised 205 properties and approximately 24.8 million rentable square feet; it also managed 19 properties totaling approximately 1.0 million square feet.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $68.1 million | $55.2 million | $192.8 million | $155.5 million |
| Net income | $12.9 million | $9.0 million | $39.6 million | $31.9 million |
| Net income attributable to common stockholders | $9.7 million | $6.3 million | $30.6 million | $23.7 million |
| Diluted EPS | $0.09 | $0.07 | $0.29 | $0.28 |
| FFO attributable to common stockholders | $33.7 million | $25.9 million | $95.2 million | $70.2 million |
| Net operating income (NOI) | $50.9 million | $41.2 million | $145.1 million | $116.5 million |
| Cash NOI | $46.7 million | $38.2 million | $134.0 million | $107.2 million |
Q3 NOI was approximately 74.7% of revenue, versus 74.6% a year earlier; net income was approximately 19.0% of revenue versus 16.2%. FFO, NOI and Cash NOI are non-GAAP measures and should be considered alongside GAAP results.
- Cash flow: Nine-month operating cash flow was $107.6 million, compared with $80.9 million. Investing used $715.6 million, principally reflecting property acquisitions; financing provided $624.9 million. Cash and cash equivalents ended at $197.5 million, up from $180.6 million at year-end 2018.
- Balance sheet and debt: Total assets were $3.50 billion and total equity was $2.49 billion. Debt principal was $861.0 million ($857.7 million carrying value), up from $761.1 million principal at year-end. The weighted-average effective debt rate was 3.56%, and average maturity was 5.8 years. 93% of debt was effectively fixed-rate; net debt to total combined market capitalization was approximately 11.2%.
- Liquidity: The $350 million revolving credit facility was undrawn, leaving $350 million available. Management expects to fund liquidity needs through operating cash flow, cash, the revolver, equity and debt issuance, and selective property sales.
Material changes versus comparable periods
- Q3 total revenue increased 23.3% and nine-month revenue increased 24.0%; same-property rental income rose 4.8% and 5.4%, respectively. Total portfolio growth primarily reflects acquisitions, alongside improved same-property occupancy and rental rates.
- Same-property occupancy was 97.0% at September 30, versus 95.6% a year earlier. The consolidated portfolio was 94.9% occupied, or 97.5% excluding properties undergoing repositioning.
- For the nine months, new leases had 39.7% GAAP and 27.0% cash leasing spreads; renewal leases had 30.8% GAAP and 17.8% cash spreads. Retention was 73.5%.
- Q3 operating expenses rose 23.8%, including 26.6% higher depreciation and amortization, largely reflecting acquisitions. Nine-month interest expense increased 4.0%. Nine-month gains on property sales fell to $5.7 million from $11.6 million.
- Cash-flow hedge adjustments reduced other comprehensive income by $16.8 million in the first nine months, compared with $6.9 million of positive adjustments in 2018. This affected equity, not reported net income.
Outlook, financing, and risks
- Management outlook: Management described Southern California infill industrial fundamentals as favorable, citing limited supply, low vacancy, tenant demand and rising asking rents. It expected positive market trends through the remainder of 2019 and positive renewal growth, while noting that 2020 conditions are harder to predict. No specific earnings or FFO guidance was provided.
- Investment and capital: The company acquired properties during 2019 and reported approximately $197.8 million of acquisitions under contract or letter of intent as of the filing date. It estimated approximately $90.1 million of capital would be needed through 2021 to complete repositioning and development projects; cost, timing and lease-up remain uncertain.
- Equity and debt issuance: Common-stock ATM sales generated $507.7 million in net proceeds during the first nine months. A September preferred-stock offering generated approximately $83.3 million net. The company also issued $100 million of senior notes: $25 million at 3.88% due 2029 and $75 million at 4.03% due 2034.
- Debt and interest-rate exposure: Debt maturities include $101.0 million in 2022 and $282.5 million in 2023; extension options may apply to certain facilities. Covenants include leverage and coverage tests, and the company reported compliance at quarter-end. A 50-basis-point LIBOR increase or decrease was estimated to change annual interest expense and cash flow by approximately $0.3 million.
- Other items and contingencies: The company adopted ASC 842 lease accounting in January 2019. It classified Golden Valley as held for sale at quarter-end and completed its sale on October 11 for $11.2 million gross and $10.6 million net proceeds. It reported $10.6 million of tenant-improvement and construction commitments. An environmental remediation liability of $0.7 million was matched by a $0.7 million indemnification asset; management did not expect a material impact. No current legal proceeding was identified as likely to have a material adverse effect.
- Principal risks: Tenant defaults or non-renewals, vacancies and rents, acquisition and development execution, construction cost or schedule overruns, interest rates and refinancing, market and economic conditions, natural disasters, environmental liabilities, REIT qualification and maintaining investment-grade credit ratings. All properties were located in Southern California, creating geographic concentration.
Important facts for investors to verify
- Whether reported acquisition, occupancy and leasing-spread growth translates into sustained same-property cash NOI and FFO growth.
- The leasing progress, completion dates, remaining costs and returns for repositioning and development projects, including the estimated $90.1 million capital requirement.
- Future use of the ATM program and further equity issuance, including the effect of share-count growth on per-share results.
- Debt maturity, covenant and refinancing exposure, swap valuations, and the sensitivity of interest expense to rates.
- Lease rollover and retention, particularly the 17.2% of portfolio square footage scheduled to expire in 2020, and whether below-market leases can be renewed at higher rents.
- Completion of the Golden Valley sale, environmental remediation and indemnification, and other disclosed contractual commitments.