Rexford Industrial Realty, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited. The company is a REIT focused on industrial properties in Southern California infill markets.
Business context
At quarter-end, the consolidated portfolio included 107 properties totaling approximately 10.6 million rentable square feet. Occupancy was 88.4% and leased occupancy was 90.0%. The company also held a 15% interest in a joint venture and managed 19 additional properties.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $22.7 million | $15.0 million | $44.1 million | $28.7 million |
| Net income | $196,000 | $81,000 | $277,000 | $1.51 million |
| Funds from operations (FFO) | $10.7 million | $6.2 million | $20.7 million | $11.7 million |
| Net operating income (NOI) | $16.4 million | $10.6 million | $31.6 million | $19.6 million |
| Cash NOI | $15.8 million | $10.2 million | $30.7 million | $19.1 million |
- Q2 rental revenues were $22.4 million, up 52.5% year over year; total portfolio revenue growth primarily reflected acquisitions. Same-property rental revenue rose 4.1% in Q2 and 4.8% for the first half.
- Q2 net income attributable to common stockholders was $139,000; reported basic and diluted EPS rounded to $0.00. First-half 2014 net income included $2.1 million of discontinued-operations income, primarily a property-sale gain; there were no property dispositions in the first half of 2015.
- First-half operating cash flow was $17.8 million, compared with $9.4 million in 2014. Investing activities used $114.2 million and financing activities provided $97.8 million. Capital expenditures were $9.6 million.
- At June 30, assets were $1.04 billion, cash was $10.0 million, and notes payable were $296.3 million carrying value ($296.7 million principal), down from $356.4 million carrying value at year-end 2014. The company reported $163 million available on its $200 million revolver and net debt equal to approximately 25.6% of total market capitalization.
- Quarterly dividends declared were $0.12 per common share, unchanged from 2014. The filing reports no separate GAAP operating-margin figure.
Changes, leasing and portfolio operations
- The company acquired nine wholly owned properties during the first half, totaling approximately 823,000 square feet, for a stated purchase price of $111.3 million; cash acquisitions in the cash-flow statement were $105.5 million net of assumed liabilities.
- Q2 new-lease cash and GAAP rent spreads were 7.1% and 14.4%; renewal spreads were 6.9% and 15.9%. For the first half, spreads were 6.3% and 14.8% on new leases and 5.6% and 13.5% on renewals. First-half retention was 51.4% by square footage; 721,000 square feet vacated, including 141,000 square feet associated with tenant defaults.
- Six properties totaling approximately 680,000 square feet were undergoing redevelopment or repositioning and were 7.3% occupied at quarter-end. Excluding these projects, the remaining portfolio was approximately 94.0% occupied.
- Leases representing 9.1% of annualized base rent expire in 2015 and 27.1% in 2016. Management said these rents were, on average, slightly below current market asking rents and anticipated potential renewal-rate increases if market conditions continued to improve.
Outlook, financing, risks and unusual items
- Management expected to close acquisitions aggregating $250 million or more in 2015. As of August 7, it reported approximately $133 million closed, $58 million in escrow and letters of intent for approximately $63 million. This is an acquisition expectation, not earnings guidance.
- A February 2015 Fitch rating of BBB- was assigned to the revolver and term-loan facility. The company stated it was in compliance with its debt covenants at June 30. Approximately 87% of period-end debt was variable-rate; swaps had fixed $30 million, with additional forward swaps scheduled to take effect. Management estimated a 50-basis-point LIBOR increase would raise annual interest expense by approximately $1.3 million; a 50-basis-point decrease would reduce it by approximately $0.5 million.
- Subsequent to quarter-end, the company issued $100 million of 4.29% senior notes maturing in 2025 and used part of the proceeds to repay the $42.75 million Glendale Commerce Center loan and $48.5 million secured term loan. These transactions occurred after June 30 and are not reflected in period-end debt balances.
- Key stated risks include tenant defaults, bankruptcies and non-renewals; vacancy and rental-rate changes; acquisition and redevelopment execution; refinancing and variable-rate interest exposure; Southern California market concentration and natural disasters; REIT qualification; and environmental liabilities.
- Environmental remediation at one property carried a $1.2 million recorded liability and a corresponding $1.2 million indemnification asset. The company cautioned that remediation costs or recoveries could differ. A previously disclosed lawsuit involving pre-IPO investors was settled during Q2 for an amount described as not material. Tenant improvement and construction commitments were approximately $5.3 million.
Most important facts for investors to verify
- Whether acquisition-led revenue growth converts into sustained same-property rent, occupancy and NOI growth.
- Progress leasing the 680,000 square feet under redevelopment and the effect of lease expirations, tenant defaults and retention on cash flows.
- Debt levels and interest-rate exposure after the post-quarter $100 million note issuance and repayment of secured loans; confirm subsequent-period liquidity and covenant compliance.
- Actual acquisition closings and funding needs compared with management’s 2015 acquisition expectation, including any ATM equity issuance.
- Whether environmental remediation costs remain within estimates and whether the related indemnification is fully recoverable.
FFO, NOI and Cash NOI are non-GAAP supplemental measures; the filing cautions that they are not substitutes for GAAP net income or operating cash flow and may not be comparable across REITs.