Rexford Industrial Realty, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The company is a self-managed REIT focused on industrial properties in Southern California infill markets. At quarter-end, its consolidated portfolio included 82 properties and approximately 7.9 million rentable square feet; it also managed 20 additional properties and held a 15% interest in a joint venture.
Comparability: 2014 results are the company’s consolidated results, while 2013 results are those of its accounting predecessor. The company completed its IPO and formation transactions in July 2013, and acquisitions, dispositions, and changes in debt structure make year-over-year comparisons less direct.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $15.0 million | $10.7 million | $28.7 million | $20.0 million |
| Net income (loss) | $81,000 | ($468,000) | $1.51 million | $1.59 million |
| Net income (loss) attributable to Rexford stockholders | $73,000 | ($2.29 million) | $1.35 million | ($1.96 million) |
| Net cash from operating activities | Not presented by quarter | Not presented by quarter | $9.38 million | $2.40 million |
| FFO, before noncontrolling interests | $6.19 million | $1.59 million | $11.71 million | $5.23 million |
| NOI | $10.58 million | $7.39 million | $19.62 million | $13.71 million |
- Total portfolio rental revenue increased 41.0% in Q2 and 45.1% for the six-month period. Same-property rental revenue grew 5.5% and 4.7%, respectively, primarily reflecting higher average occupancy.
- Property expenses were 26.4% of total rental revenues in Q2, compared with 27.3% in the prior-year quarter; for the six-month period, the ratio increased to 28.5% from 27.0%. General and administrative expense rose 99% in Q2 and 112% in the first half, reflecting bonuses, legal and public-company costs, equity compensation, and added staff.
- Six-month net income included $2.15 million of discontinued-operations income, primarily gains on property sales; continuing operations recorded a $636,000 loss. Q2 2014 continuing operations recorded $81,000 of income, with no discontinued-operations income.
- Investing activities used $164.7 million in the first half, primarily for real estate acquisitions and capital expenditures. Financing activities provided $155.6 million, chiefly from borrowings. Cash and cash equivalents were $9.27 million at June 30.
- Total debt was $369.9 million, up from $192.5 million at December 31, 2013. The filing reports debt equal to approximately 47.6% of total market capitalization. The weighted-average interest rate on consolidated debt was approximately 2.0%; about 95% of long-term debt was exposed to short-term interest-rate movements.
- The amended credit facility comprised a $200 million revolver and a new $100 million term loan. The revolver had $99.9 million drawn and $100.1 million available at quarter-end. The company reported compliance with its debt covenants.
Material changes, outlook, and risks
- The company acquired 19 properties during the first half, including a nine-property portfolio purchased for $88.5 million, and sold two properties. Real estate acquisition cash outflows were $174.3 million. Three properties, totaling approximately 211,516 square feet, were undergoing redevelopment or repositioning.
- Occupancy was 90.5% and leased occupancy 91.1%. San Diego County occupancy was 83.6%, below Los Angeles County at 92.5% and Orange County at 91.9%. Management described market recovery as gradual and uneven, with San Diego slower to recover.
- For first-half leasing, the average cash rent increase on renewals was 5.0%; new leases were 3.1% above prior ending cash rents for the same space. Management said market rents were beginning to recover and expected potential rent increases on 2014 and 2015 expirations, while noting execution and market risks.
- Leases covering 11.3% and 17.0% of portfolio rentable area were scheduled to expire in 2014 and 2015, respectively. Tenant defaults accounted for 69,943 square feet of first-half vacated space; natural expirations accounted for 414,911 square feet.
- No formal earnings or FFO guidance was provided. Management expected staffing to grow from approximately 45 employees to 50–60 over the next 12–24 months, with associated G&A increases.
- Two forward interest-rate swaps are intended to fix rates on $60 million of debt beginning in 2015. Management estimated that a 50-basis-point LIBOR increase would raise annual interest expense by approximately $1.8 million; a 50-basis-point decrease would reduce it by approximately $0.5 million.
- Pre-IPO investors sued the company and related parties over the fairness and disclosures of formation transactions. The company denied the allegations and intends to defend the case; it said the outcome and any potential loss could not be estimated. The filing reported no material change to the risk factors in the 2013 Form 10-K.
- Other principal risks include tenant defaults or non-renewals, vacancies and rent declines, acquisition performance, refinancing and capital-market access, interest-rate exposure, natural disasters, REIT qualification, and environmental or litigation liabilities.
Important facts for investors to verify
- Whether acquisition-driven revenue growth translates into sustained same-property NOI and cash flow, given the difference between total-portfolio and same-property growth.
- Occupancy and leasing progress, especially in San Diego, and the company’s ability to re-lease upcoming expirations and defaulted space.
- Debt maturities, covenant headroom, availability under the revolver, and the effect of variable rates despite the planned swaps.
- Cash available for dividends after debt service, capital expenditures, tenant improvements, and leasing commissions; FFO and NOI are non-GAAP measures and are not liquidity measures.
- Developments in the formation-transaction litigation, including any change in the company’s ability to estimate potential loss.
- Final purchase-price allocations and operating performance of recently acquired properties, as acquisition valuations and assumptions remained preliminary.