Rexford Industrial – Still Focusing On Growth, Rather Than Shareholder Growth (NYSE:REXR)

Late in 2023, I concluded that Rexford Industrial Realty, Inc. (NYSE:REXR) was focusing on growth rather than growth per share. The pure play on industrial buildings and land in Southern California employs a focused strategy, which has its potential up- and as well as downfalls.

With the company focusing on absolute growth, rather than growth per share, I was leaning a bit cautious, as shares of the REIT did not look too attractively priced. Ever since, shares have been lagging further as anticipated interest rate cuts did not materialize, while Rexford continues to issue shares on the cheap to buy properties with tighter cap rates.

About The REIT

Rexford is an industrial REIT which focuses solely on Southern California, an area in which it owns about 40 million square feet of industrial real estate, with this square footage ten-folding over the past decade. This looks great, but in part because of continued share issuances, a $15 stock in 2014 has “only” risen to the mid-fifties in 2023, after peaking at $80 in 2021.

This narrowly focused REIT (in terms of scope and geographical area) is working on the thesis and observation that the region is running out of land to develop, as well as seeing stricter zoning put in place. In fact, some of the designated industrial zoning has been re-zoned to make room for residential properties, with major hubs in this region, of course, including Los Angeles, San Diego, Orange and Ventura Counties, among others. The thesis applies to these locations, although the potential benefits from concentration create some risks as well, including those related to natural disasters and climate effects.

The company posted (rental) income of $631 million in 2022 from assets being carried at a $9.3 billion valuation on its books. The company posted GAAP earnings of $157 million, less than a dollar per share, with so-called funds from operations, or FFO, coming in a few pennies short of $2 per share, after adding back depreciation charges, and like.

The company was conservatively financed, as the company operated with some $6.6 billion in shareholder equity. While this still marked a premium compared to book value, it were continued transactions and willingness to issue new shares at falling levels (while the balance sheet was strong), which made me cautious. This is certainly the case as FFO multiples were still somewhat demanding versus its peers.

Through the third quarter of 2023, the company saw rental income trending, exceeding $800 million per annum, with FFO guided to come in around $2.15 per share. This meant that the total balance sheet grew to $10.6 billion, supported by a big equity base of $7.5 billion, as a $48 stock traded at a $10 per share premium to book value. Given the equity premium of $2 billion (over book value), the implied $12 billion valuation of the assets implies that the assets were valued at a 6.8% cap rate based on annualized revenues of $820 million.

With equity trading at a premium of 22 times FFO multiple, expectations remained high, although the conservative financial practices of the firm make risks relatively low, with this really being a long-term bet on real estate scarcity in California.

Stuck

Shares of Rexford actually rose to the mid-fifties in January amidst optimism about lower interest rates and the anticipated positive implications on real estate at large. However, with the rate cuts increasingly more unlikely and/or becoming smaller (at least the anticipation), shares have gradually fallen to current levels of $45 per share.

The company started the year with two bolt-on acquisitions of two buildings at an aggregate investment of $70 million, after investing a total of $1.5 billion in 2023.

In February, the board announced a 10% hike in the quarterly dividend to $0.4175 per share. This came as 2023 FFO was reported at $2.19 per share, but the company offered some cautionary statements as well. Same store GAAP growth was seen at 4-5% for 2023, down from 8.2% in 2023, while occupancy rates were anticipated to slip towards 96.5-97.0%. All this would likely result in much lower FFO growth, seen improving to $2.27-$2.30 per share.

By March, Rexford announced the sale of a huge chunk of shares, selling 17.2 million shares to an existing investor at the prevailing price of nearly $49 per share, raising some $840 million in gross proceeds.

That timing looked odd at the announcement, but just two days later, the company announced that it would buy 3 million square feet of industrial real estate properties from Blackstone Real Estate at a $1.0 billion price tag. The 48 properties comprise just over 3 million square feet and benefit from 98% occupancy rates. Somewhat disappointing was to see a mere 4.7% initial unleveraged cash yield projected, even as this stabilized yield would improve to 5.6%.

Recent Updates

In April, Rexford reported first quarter results as the company raised the FFO guidance by four cents for the year, as quarterly rental income grew to $215 million. The total balance sheet grew towards $12.4 billion, while net properties on the balance sheet rose to $11.4 billion, as the company maintained the financial guidance.

By now, the book value per share has risen to $37 per share (aided by the stock issuance) with the gap to the market price narrowing to $8 per share, implying that assets trade at a mid-6s unleveraged cap rate, while recent transaction activity has been taking place at much tighter spreads.

To me, this indicates that the business might have been better off buying back shares, which implicitly implies buying property at cap rates in the mid-6s, rather than growing the portfolio with real estate purchases at cap rates significantly below this percentage.

Given the continued focus on growth, rather than growth per share, I am still somewhat cautious here. After all, there are some signs of vacancy being on the rise after a few strong years of rental growth. While this might be evident in the market for bigger buildings, typically occupied by 3PLs, the average Rexford tenant is just 26,000 square feet large, as the company claims that these are entirely different markets with different tenant dynamics.

All in all, Rexford Industrial Realty, Inc. remains an incredible play on the shortage of space in Southern California and restrictive zoning plans being in place. This long-term thesis remains a decent bet, although there are the risks related to natural disasters, the climate, but also state-specific issues, such as (economic) policies which might limit demand for business activity and storage here.

Amidst all this, I like the better yield which Rexford Industrial Realty, Inc. is earning at current levels, although I do not like the continued acquisition activity of properties at lower yields. The focus is too much on growth, making me still cautious to get involved with Rexford Industrial Realty shares here.