Rexford Industrial Realty, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter filing; unaudited Q4 results are also summarized below. Unless indicated otherwise, financial amounts are in U.S. dollars.
Business context
Rexford is a self-managed REIT focused on owning, operating, acquiring and repositioning industrial properties in Southern California infill markets. At year-end, its consolidated portfolio included 151 properties and 18.5 million rentable square feet; it also managed 19 properties with 1.2 million square feet. The portfolio was 95.5% occupied, with 1,367 leases and no tenant contributing more than 1.6% of annualized base rent.
Key financial and operating metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $161.4 million | $126.2 million | +27.9% |
| Net income | $41.7 million | $25.9 million | +$15.8 million |
| Net income attributable to common stockholders | $34.4 million; $0.48 per share | $22.8 million; $0.36 per share | Per-share earnings increased |
| FFO attributable to common stockholders | $68.6 million | $54.4 million | +26.2% |
| Net operating income (NOI) | $118.3 million | $91.6 million | +29.1% |
| Cash NOI | $111.3 million | $87.1 million | +27.8% |
| Cash from operating activities | $76.7 million | $56.4 million | +$20.2 million |
| Cash used in investing activities | $(606.9) million | $(361.2) million | Greater acquisition and investment spending |
| Cash and cash equivalents at year-end | $6.6 million | $15.5 million | Down $8.9 million |
| Total debt principal | $671.7 million | $502.5 million | Up $169.2 million |
Annualized portfolio base rent was $156.8 million, or $8.88 per occupied square foot. Average debt interest rate was approximately 3.45%, with a 5.7-year average term to maturity. Fifty-eight percent of debt was effectively fixed-rate at year-end; planned swaps would raise the fixed-rate share to 91% once effective. Net debt to total combined market capitalization was 21.0%. The company reported compliance with debt covenants.
Common dividends declared were $0.58 per share for 2017, compared with $0.54 in 2016. The board subsequently declared a $0.16 quarterly common dividend for payment in April 2018. The Series A and Series B preferred stocks carry a 5.875% cumulative dividend rate.
Material changes versus prior periods
- Revenue growth reflected both portfolio expansion and improved same-property performance. Same-property rental revenue rose 7.7%; same-property weighted-average occupancy increased to 96.0% from 93.7%.
- Full-year portfolio occupancy was 95.5%; excluding properties under repositioning or lease-up, occupancy was 98.2%. New and renewal lease spreads were respectively 23.0% and 11.2% on a cash basis.
- The company acquired 21 properties totaling 4.2 million square feet for an aggregate contractual cost of $666.7 million. It sold six properties for $98.7 million gross and recorded $29.6 million in gains; $77.8 million of net proceeds was reinvested through 1031 exchanges.
- Operating cash flow increased, while investing outflows and debt rose with acquisitions. Interest expense increased 36.1% to $20.2 million, including costs associated with new notes, term-loan borrowings and greater revolver usage.
- Common equity issuance was substantial: 11.97 million shares were sold through ATM programs for $331.6 million net proceeds. The company also issued $72.5 million net proceeds of Series B preferred stock and $125 million of 10-year notes at a fixed 3.93% rate.
- 2017 net income included $29.6 million in real estate sale gains. FFO excludes property-sale gains and is a non-GAAP measure, not a measure of liquidity or funds available for dividends.
Fourth-quarter results and outlook
Unaudited Q4 2017 revenue was $45.9 million, NOI was $33.6 million, net income was $14.1 million and net income attributable to common stockholders was $11.8 million, or $0.15 per share. Q4 2016 comparatives were $34.8 million, $25.3 million, $8.5 million and $6.9 million, or $0.11 per share. Quarterly earnings varied materially during 2017; investors should consider transaction gains and other period-specific items when assessing the trend.
Management described Southern California infill industrial fundamentals as favorable, citing strong tenant demand, low vacancy, limited new supply and expected rental growth through 2018. It expected positive 2018 renewal rates and leasing spreads, but provided no formal numerical earnings or FFO guidance. The company estimated approximately $43 million of capital requirements over the six quarters from Q1 2018 through Q2 2019 to complete identified redevelopment and repositioning projects, subject to construction schedules and budgets. At filing, $184.5 million of acquisitions were under contract or letter of intent; completion was not assured.
Risks, contingencies and other notable items
- Concentration: All properties are in Southern California, exposing results to regional economic conditions and earthquakes, wildfires and other natural hazards. Earthquake coverage has material deductibles; some extraordinary losses, including wildfire losses, may be uninsured.
- Leasing and tenant credit: Leases representing 12.9% and 14.8% of portfolio square footage were scheduled to expire in 2018 and 2019. Management noted that most tenants are non-investment-grade, and renewal, vacancy, concessions and tenant-improvement costs may affect cash flow.
- Debt and capital access: Variable-rate debt, refinancing needs, covenant restrictions and reliance on equity markets create financing risks. A 50-basis-point LIBOR increase was estimated to raise annual interest expense by approximately $1.4 million, before any management response.
- Development and environmental exposure: Repositioning projects may exceed budgets or take longer than expected. A $1.1 million estimated remediation liability for the West 228th Street property was paired with a corresponding indemnification asset; recovery and final remediation remain subject to uncertainty.
- Tax and accounting: The 2017 Tax Reform Act’s full effects were still being assessed. The company early adopted the revised business definition standard, accounting for its 2017 acquisitions as asset acquisitions and capitalizing related acquisition costs.
- Other disclosures: The company reported no legal proceedings expected to have a material adverse effect, no off-balance-sheet arrangements, and effective disclosure controls and internal control over financial reporting. The auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether same-property rent growth, occupancy and lease spreads persist as the 2018–2019 lease expirations roll over, and how actual rents compare with management’s market-rent expectations.
- Progress, cost and lease-up timing for repositioning projects, including the estimated $43 million of remaining capital requirements.
- Acquisition underwriting and returns, including the $184.5 million under contract or letter of intent, and the effect of continued acquisition spending on debt and equity issuance.
- Debt maturities, variable-rate exposure, swap effectiveness, covenant headroom and liquidity available beyond the reported $6.6 million of year-end cash.
- The contribution of asset-sale gains to reported net income and the distinction between GAAP earnings, FFO, NOI and cash available for distributions.
- Tenant credit quality, geographic and industry concentration, uninsured catastrophe exposure, and the resolution of the West 228th Street environmental matter.