Rexford Industrial Realty, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Rexford is a REIT focused on owning, operating, acquiring and redeveloping industrial properties in Southern California infill markets. At quarter-end, its consolidated portfolio comprised 136 properties and approximately 15.1 million rentable square feet; it also managed 19 properties.
Financial and operating highlights
- Revenue: Total revenue was $35.4 million, up 28.5% from $27.5 million. Rental revenue was $35.0 million, up 27.9%.
- Profit: Net income was $5.7 million versus $1.5 million. Net income attributable to common stockholders was $4.2 million, or $0.06 per diluted share, versus $1.3 million, or $0.02. Q1 2017 included a $2.7 million gain on a property sale.
- NOI and FFO: Net operating income (NOI, a non-GAAP measure) was $25.8 million versus $19.8 million; cash NOI was $24.7 million versus $18.7 million. FFO attributable to common stockholders was $14.7 million versus $12.1 million. The company cautions that these non-GAAP measures are not substitutes for GAAP results or cash flow.
- Cash flow: Operating activities provided $19.1 million, compared with $14.1 million. Investing activities used $17.1 million; financing activities provided $0.8 million. Cash, cash equivalents and restricted cash totaled $18.2 million at quarter-end, including $6.5 million of restricted property-sale proceeds.
- Debt and liquidity: Debt principal was $512.5 million, with a 3.188% weighted-average effective rate and 5.6-year average remaining term. Approximately 52% was effectively fixed-rate at quarter-end. Net debt to total combined market capitalization was approximately 23.5%. The $350 million revolver had $20 million drawn and $330 million available at March 31; the company reported compliance with debt covenants.
- Dividends: Common dividends declared were $0.145 per share, versus $0.135 in Q1 2016. The Series A preferred stock carries a 5.875% rate.
- Occupancy and leasing: Same-property weighted-average occupancy was 91.0%, versus 88.4%; quarter-end same-property occupancy was 90.1%, versus 87.8%. Total portfolio occupancy was 88.9%, or 96.4% excluding space undergoing repositioning or lease-up. New-lease spreads were 32.2% GAAP and 20.4% cash; renewal spreads were 17.9% and 9.6%, respectively.
Material changes versus Q1 2016
- Total revenue rose 28.5%, reflecting acquisitions and same-property growth. Same-property rental revenue increased 5.2%, primarily from higher occupancy and rental rates; same-property NOI increased from $8.5 million to $10.6 million.
- Net income increased partly because of the $2.7 million property-sale gain. Interest expense rose 22.9%, mainly due to higher average debt following the 2016 term loan. General and administrative expense increased 41.2%, including higher equity compensation and payroll and a prior-year legal-fee insurance reimbursement that did not recur.
- Operating cash flow increased $4.9 million. Investing cash use declined, in part due to lower acquisition spending and $6.5 million net proceeds from the property sale. Financing cash flow fell from $18.0 million to $0.8 million, with lower net borrowing proceeds and higher dividends among the factors.
- In February 2017, Rexford amended its credit facility to a $350 million revolver and a $100 million term loan. It also issued common stock through its ATM program and repaid a $9.7 million mortgage early, recording a small net debt-extinguishment loss.
Outlook, risks and unusual items
- Management described Southern California infill industrial fundamentals as strong and expected positive renewal rates and leasing spreads for the remainder of 2017. It did not provide formal earnings or FFO guidance in the supplied filing text.
- Management estimated approximately $98.9 million of capital would be needed over the next eight quarters to complete redevelopment and repositioning projects. Timing and costs may change; delays or overruns could defer leasing and revenue. Q1 included $5.8 million of capital expenditures.
- At quarter-end, 1.2 million square feet across properties in repositioning or lease-up was vacant. Lease expirations represent 13.5% of portfolio area during the remainder of 2017 and 12.7% in 2018, creating leasing and renewal risk.
- Subsequent to quarter-end, the company acquired a 138,700-square-foot property for $16.5 million and reported a tenant’s $18.7 million purchase option, with closing expected in June. It also signed agreements to acquire a 1.1-million-square-foot business park for $141.2 million, subject to due diligence and closing conditions; the $4.0 million deposit may become non-refundable if it proceeds beyond due diligence.
- Key risks include tenant defaults or non-renewals, local market and property-value changes, interest-rate and refinancing exposure, acquisition and redevelopment execution, environmental liabilities, and maintaining REIT status and credit ratings. All properties are in Southern California. The filing reported no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors.
- An existing environmental matter at West 228th Street included a $1.1 million estimated remediation liability and a corresponding indemnification asset; management did not expect a material impact but noted indemnification and remediation outcomes are not assured.
Important facts for investors to verify
- Confirm whether the proposed $141.2 million business-park acquisition closed, its final funding mix, and the effect on leverage and liquidity.
- Track progress, remaining costs and lease-up for redevelopment projects, especially against the $98.9 million estimated capital requirement.
- Assess same-property occupancy, leasing spreads, tenant retention and the outcome of 2017–2018 lease expirations.
- Monitor variable-rate debt, swap coverage, future maturities and covenant headroom; quarter-end revolver availability differs from the filing-date borrowing position.
- Verify the address of the post-quarter-end property purchase: the notes identify 2390 Ward Avenue, while MD&A refers to 2930 Ward Avenue.