Rexford Industrial Realty, Inc. quarterly report, Q2 FY2019

Rexford Industrial Realty, Inc. — Q2 2019 Form 10-Q

Business context and reporting period. This unaudited filing covers the three and six months ended June 30, 2019. Rexford is a REIT focused on industrial properties in Southern California infill markets. At quarter-end, its consolidated portfolio comprised 196 properties and approximately 23.9 million rentable square feet; it also managed 19 properties totaling approximately 1.0 million square feet.

Key financial results

Metric	Q2 2019	Q2 2018	H1 2019	H1 2018
Total revenue	$64.4 million	$51.8 million	$124.8 million	$100.3 million
Net income	$16.0 million	$7.8 million	$26.7 million	$22.9 million
Net income attributable to common stockholders	$12.8 million	$5.2 million	$20.8 million	$17.4 million
Diluted earnings per share	$0.12	$0.06	$0.20	$0.21
Operating cash flow	—	$61.5 million	$45.1 million
FFO attributable to common stockholders (non-GAAP)	$32.0 million	$22.8 million	$61.4 million	$44.3 million

Q2 rental income rose 23.2% year over year to $63.6 million; same-property rental income increased 5.2%. H1 rental income rose 23.2% to $123.2 million; same-property rental income increased 5.6%. The company reported total portfolio NOI of $48.5 million in Q2 and $94.3 million in H1, with corresponding NOI margins of approximately 76% of rental income. These are non-GAAP measures.

Net income growth included a $4.8 million real-estate sale gain in Q2 2019, compared with $1.6 million in Q2 2018. H1 gains were $4.8 million versus $11.6 million. H1 diluted EPS declined despite higher total earnings, alongside a substantial increase in weighted-average common shares following equity issuance.

Financial position, liquidity and capital allocation

At June 30, cash and cash equivalents were $172.2 million; restricted cash was $11.1 million, bringing cash, cash equivalents and restricted cash to $183.3 million.
Debt principal was $761.0 million, with a 3.46% weighted-average interest rate and 5.0-year average term to maturity. The company reported net debt to total combined market capitalization of approximately 11.1%.
Approximately 73% of debt was effectively fixed-rate; the remaining 27% was variable-rate. Management estimated a 50-basis-point LIBOR increase would add approximately $1.0 million to annual interest expense.
No borrowings were outstanding on the $350 million revolving facility, leaving $350 million available. The company reported compliance with debt covenants at quarter-end.
H1 operating cash flow was $61.5 million; investing cash outflow was $474.4 million, primarily reflecting $459.0 million of real-estate acquisitions and $22.2 million of capital expenditures. Financing cash inflow was $415.5 million, including $457.2 million of net stock issuance proceeds.
Rexford acquired 22 properties totaling approximately 2.6 million square feet for a reported gross purchase price of $497.2 million year to date. It sold one property for $11.6 million and recorded a $4.8 million gain.
In H1, it issued 12.8 million common shares at a weighted-average $36.27 per share, generating $457.7 million net proceeds. A $550 million ATM program remained available, with stated capacity of $535.3 million at June 30.

Material changes and operating trends

Total portfolio revenue growth reflected acquisitions as well as operating improvement. Same-property weighted-average occupancy was 96.8% in Q2 2019 versus 95.4% in Q2 2018.
At quarter-end, the consolidated portfolio was 94.2% occupied, or 97.8% excluding space in repositioning. New-lease GAAP and cash leasing spreads for H1 were 40.2% and 27.2%; renewal spreads were 31.4% and 17.9%. Retention was 78.9%.
Q2 operating expenses increased with portfolio expansion. Same-property property expenses were nearly flat year over year in Q2, while total portfolio property expenses rose 18.5%; total depreciation and amortization rose 24.0%.
Common shares outstanding increased from 96.8 million at December 31, 2018 to 109.7 million at June 30, 2019. Common dividends were $0.185 per share per quarter during Q2, compared with $0.16 per share in Q2 2018.
Rexford adopted ASC 842 lease accounting on January 1, 2019. Among other presentation changes, tenant reimbursements were combined with rental income; certain real-estate taxes paid directly by tenants are now reported net.

Outlook, risks and unusual items

Management described Southern California infill industrial fundamentals as favorable and expected positive market trends to continue through the remainder of 2019, citing low vacancy, constrained new supply, rental growth and tenant demand. It anticipated positive renewal spreads for the rest of 2019; it said 2020 conditions were less predictable.
No specific earnings or financial guidance was provided. Management estimated approximately $88.9 million of capital would be required through year-end 2020 to complete repositioning and development projects; cost and timing estimates are subject to change.
As of the filing date, approximately $316.1 million of acquisitions were under contract or letter of intent. Execution, funding and integration remain dependent on market conditions and transaction outcomes.
On July 16, 2019, the company completed a $100 million private placement of senior notes: $25 million at 3.88% due 2029 and $75 million at 4.03% due 2034. This occurred after quarter-end.
Other post-quarter events included a July 3 purchase of land previously subject to a ground lease for $3.0 million, a July 31 property acquisition for $8.2 million, and declaration of quarterly common and preferred dividends.
Principal risks include tenant defaults or non-renewals, local economic and property-market changes, acquisition and redevelopment execution, interest rates and refinancing, access to capital, maintaining investment-grade ratings and REIT status, natural disasters, and environmental liabilities. Management reported no legal proceedings expected to have a material adverse effect and no material changes to the 2018 Form 10-K risk factors.
An existing environmental remediation matter had a $0.7 million estimated liability and a corresponding $0.7 million indemnification asset at June 30; management did not expect a material financial impact but noted the limits of the indemnity and uncertainty around environmental exposures.

Important facts for investors to verify

How much of revenue and NOI growth is attributable to acquired properties versus same-property rent, occupancy and leasing spreads.
Whether redevelopment and lease-up projects meet the disclosed completion, cost and leasing assumptions, including the $88.9 million projected capital requirement.
The effect of continued ATM share issuance and dilution on per-share earnings, FFO and dividend coverage.
Debt maturity and interest-rate exposure, including the terms and use of the post-quarter $100 million note issuance and compliance with covenants.
Whether strong market conditions and leasing spreads persist, particularly as significant lease expirations approach: 18.2% of portfolio square footage was scheduled to expire in 2020.
Environmental remediation and tenant credit exposures, and the recoverability of the related indemnification asset.