Business context and reporting period
Rexford Industrial Realty, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The REIT owns and operates industrial properties in Southern California infill markets. At quarter-end, its consolidated portfolio comprised 133 properties and approximately 14.6 million rentable square feet; it also managed 19 properties totaling approximately 1.2 million square feet.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $33.3 million | $23.7 million | $91.4 million | $67.7 million |
| Net income | $3.1 million | $0.6 million | $17.3 million | $0.9 million |
| Net income attributable to common stockholders | $2.3 million | $0.5 million | $15.9 million | $0.7 million |
| Diluted EPS | $0.03 | $0.01 | $0.26 | $0.01 |
| FFO attributable to common stockholders | $13.9 million | $10.8 million | $39.3 million | $30.5 million |
| Cash NOI | $22.5 million | $16.1 million | $62.9 million | $46.8 million |
- Q3 total revenue rose 40.7% year over year; same-property rental revenue increased 8.4%. Same-property occupancy at September 30 was 93.7%, up from 90.0% a year earlier.
- Nine-month net income included an $11.6 million gain from property sales. Net income comparisons also reflect acquisitions and other non-recurring items; FFO and NOI are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Cash from operating activities was $44.0 million for the nine months, versus $31.6 million in 2015. Investing activities used $312.1 million, primarily for acquisitions and capital expenditures; financing activities provided $318.2 million.
- At September 30, cash and cash equivalents were $55.3 million. Debt principal was $502.8 million, compared with $418.7 million at December 31, 2015. The company had no revolver borrowings and $200 million of revolving capacity available. Net debt to total combined market capitalization was approximately 21.4%.
- Debt had a weighted-average interest rate of 3.087% and average remaining maturity of 5.6 years. 55% was effectively fixed at quarter-end; a 50-basis-point LIBOR increase was estimated to add about $1.1 million to annual interest expense on then-variable debt. The company reported compliance with debt covenants.
- Common dividends declared were $0.135 per share for Q3, unchanged from the prior-year quarter. The company issued $174.4 million net from a common-stock offering and $86.7 million net from a Series A preferred-stock offering during 2016.
Material changes versus the prior comparable period
- Growth in total-portfolio revenue largely reflected 37 properties acquired from January 2015 through September 2016, including a nine-property, approximately 1.53-million-square-foot portfolio acquired for $191.0 million in April 2016. Nine-month total rental revenue increased 36.5%; same-property rental revenue increased 7.2%.
- Q3 interest expense increased 69.4% to $3.8 million, and nine-month interest expense increased 88.1% to $10.8 million, primarily reflecting higher average debt following the 2016 term-loan borrowings.
- The company sold three properties for $21.7 million gross proceeds and recorded $11.6 million in gains. Proceeds were used in tax-deferred exchanges.
- Same-property leasing spreads for the nine months were 24.3% on new leases and 15.5% on renewals on a GAAP basis; cash spreads were 13.1% and 6.2%, respectively. These measures exclude leases without comparable space or lease data.
Outlook, commentary, risks and unusual items
- Management described Southern California industrial market conditions as generally strong, citing high occupancy, rising asking rents, limited supply and tenant demand. It expected positive renewal spreads for the remainder of 2016 and positive growth on 2017 expirations, while noting that future market conditions are difficult to predict. No quantitative company-wide earnings or revenue guidance was provided.
- Management estimated approximately $67.5 million was needed to complete six repositioning projects, with most spending expected over the following seven quarters. Nine properties were in repositioning or lease-up; portfolio occupancy was 89.7%, or 95.8% excluding vacant repositioning and lease-up space.
- Leases representing 17.5% of portfolio rentable area and 19.3% of annualized base rent were scheduled to expire in 2017. Management estimated expiring rents were, on average, below current market asking rents.
- Risks include leasing and tenant-credit conditions, acquisition and redevelopment execution, construction costs and delays, regional economic and real-estate conditions, interest rates, refinancing and access to capital, REIT qualification, and environmental liabilities. All properties were located in Southern California.
- A $1.2 million environmental remediation liability for the West 228th Street property was matched by a $1.2 million indemnification asset; management expected no material impact but cautioned that environmental exposures and indemnification are not assured. The company also reported $7.0 million of tenant-improvement and construction commitments.
- After quarter-end, the company acquired two properties for a combined $20.2 million and declared common and preferred dividends. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Separate organic same-property growth from acquisition-driven revenue growth, and assess whether leasing spreads and occupancy improvements persist.
- Track the 2017 lease expirations, vacant repositioning and lease-up space, and the timing, total cost and leasing progress of the $67.5 million redevelopment program.
- Review debt maturities, covenant headroom, refinancing access and exposure to interest rates; distinguish current floating-rate debt from forward swaps that take effect in 2018.
- Reconcile GAAP earnings with FFO, NOI and cash flow, particularly the effect of the $11.6 million property-sale gain and joint-venture-related income.
- Monitor dividend coverage and funding needs alongside acquisition activity, capital expenditures, debt, and the preferred stock’s cumulative 5.875% dividend obligation.