Rexford Industrial Realty, Inc. (REXR) is a self-administered and self-managed real estate investment trust (REIT) focused on owning and operating industrial properties in Southern California's infill markets. The company has built a diverse portfolio of 423 properties totaling approximately 50.1 million rentable square feet as of September 30, 2024.
Business Overview and History: Rexford Industrial Realty, Inc. was formed as a Maryland corporation on January 18, 2013, along with its Operating Partnership, Rexford Industrial Realty, L.P., of which Rexford Industrial Realty, Inc. is the sole general partner. The company's primary focus has been on acquiring, owning, improving, repositioning, redeveloping, leasing, and managing industrial real estate principally located in Southern California infill markets.
In its early years, Rexford Industrial Realty faced the challenge of establishing itself as a new player in the competitive Southern California industrial real estate market. The company employed a value-add investment strategy, acquiring properties through off-market and lightly marketed transactions that were often operating at below-market occupancy or rents. This approach allowed Rexford to build up its portfolio and establish a strong foothold in its target markets.
A significant milestone for Rexford Industrial Realty came in 2017 when the company completed its initial public offering, raising capital to further expand its portfolio and operations. This transition to the public markets brought new visibility and scrutiny, but also provided the company with greater access to capital to fuel its growth.
Rexford is organized and conducts its operations to qualify as a real estate investment trust (REIT) under the Internal Revenue Code. As a REIT, the company is generally not subject to federal taxes on its income to the extent it distributes its income to its shareholders and maintains its qualification as a REIT.
Financial Performance and Metrics: For the nine months ended September 30, 2024, Rexford reported total revenue of $693.5 million, net income of $221.0 million, and core funds from operations (Core FFO) of $383.1 million. The company's net debt to EBITDA ratio stood at 4.7x as of the same date, within its target leverage range of 4.0x to 4.5x.
Rexford has demonstrated consistent financial growth, with a 9.3% increase in Core FFO per share for the first nine months of 2024 compared to the prior-year period. The company's same-property net operating income (NOI) growth was 4.7% on a net effective basis and 7.7% on a cash basis for the same period.
For the most recent fiscal year (2023), Rexford reported revenue of $797.83 million, net income of $238.02 million, operating cash flow of $427.55 million, and free cash flow of $160.98 million. In the most recent quarter (Q3 2024), the company achieved revenue of $241.84 million, net income of $70.72 million, operating cash flow of $127.24 million, and free cash flow of $7.25 million. Year-over-year growth for Q3 2024 showed revenue increasing by 17.7%, net income by 14.5%, and operating cash flow by 17.0%, while free cash flow decreased by 81.2% due to higher capital expenditures for repositioning and redevelopment projects.
Operational Highlights and Strategic Initiatives: During the first nine months of 2024, Rexford completed $1.4 billion in total investments, representing 55 properties with 4.3 million rentable square feet of buildings on 206 acres of land. The company also executed 351 new and renewal leases totaling 7.1 million rentable square feet, with leasing spreads of 36.1% on a GAAP basis and 26.4% on a cash basis.
Rexford's value-add strategy has been a key driver of growth, with the company currently having 24 properties under repositioning or redevelopment and 9 properties in the lease-up stage. The company expects to generate approximately $222 million in embedded NOI growth over the next three years, including $91 million from repositionings and redevelopments, $72 million from the portfolio cash mark-to-market, $51 million from portfolio annual embedded rent steps, and $8 million from recent acquisitions.
Guidance and Outlook: For the full year 2024, Rexford has increased its FFO per share guidance to a range of $2.33 to $2.35, representing 7% year-over-year growth at the midpoint. The company's same-property NOI growth guidance is now 4.25% to 4.75% on a net effective basis and 7.0% to 7.5% on a cash basis.
The drivers of the same property NOI growth range include expected 2024 average occupancy of 96.5% to 96.75%, full year leasing spreads of 55% on a net effective basis and 40% on a cash basis, concessions of approximately 1.75 months, and bad debt as a percentage of revenue in the 50 basis point area.
Rexford's long-term growth prospects remain favorable, driven by the strong fundamentals of its target markets, its value-add investment strategy, and the ongoing shift towards e-commerce and last-mile distribution, which are expected to drive continued demand for high-quality industrial space in infill locations.
Risks and Challenges: While Rexford's business model has demonstrated resilience, the company is not immune to broader economic and market conditions. Factors such as rising interest rates, increased construction costs, and potential slowdowns in tenant demand could impact the company's future performance.
Additionally, Rexford operates solely in the Southern California market, making it vulnerable to regional economic and real estate trends. The company's reliance on value-add acquisitions and repositioning projects also exposes it to execution risk and potential cost overruns.
Financials: Rexford Industrial Realty's financial performance has been strong, as evidenced by its revenue growth and consistent increases in Core FFO. The company's disciplined approach to capital allocation and its focus on value-add opportunities have contributed to its solid financial results.
The company's revenue structure primarily consists of rental income, which includes rental revenue, tenant reimbursements, and other income related to lease agreements. For the nine months ended September 30, 2024, rental income increased by 16.9% to $682.36 million compared to the prior year period. This was driven by an increase in average rental rates on new and renewal leases, as well as incremental revenue from properties acquired since January 1, 2023.
Rexford also generates revenue from providing property management and leasing services to related party and third-party property owners. For the nine months ended September 30, 2024, management and leasing services revenue decreased by 14.5% to $444 million compared to the prior year period.
Additionally, the company recognizes gains on the sale of real estate. During the nine months ended September 30, 2024, Rexford recognized $18.01 million in gains on the sale of five properties.
Liquidity: The company maintains a healthy liquidity position, with a well-managed balance sheet and access to various sources of capital. Rexford's conservative leverage profile, with a net debt to EBITDA ratio of 4.7x, provides financial flexibility and supports its ongoing growth initiatives.
As of the most recent reporting period, Rexford had a debt-to-equity ratio of 0.27, cash on hand of $61.84 million, and an available credit line of $995 million out of a $1 billion revolving credit facility. The company's current ratio and quick ratio both stand at 0.79.
Industry Trends: The infill Southern California industrial real estate market has seen strong fundamentals, with high demand and limited new supply. Market rents increased over 80% on average during the pandemic, and have since moderated, declining 7.5% year-over-year in Q3 2024. Despite this recent moderation, the long-term outlook for the market remains positive due to the strategic importance of Southern California's logistics infrastructure and the ongoing growth of e-commerce.
Conclusion: Rexford Industrial Realty is a well-positioned industrial REIT with a strong track record of growth and a focused strategy in the attractive Southern California market. The company's disciplined approach to acquisitions, repositioning, and operational improvements has allowed it to deliver consistent financial performance and position itself for continued long-term success. While the company faces some near-term challenges, its solid balance sheet, experienced management team, and focus on high-quality industrial properties in infill locations make it a compelling investment opportunity in the industrial real estate sector. With a clear growth strategy and robust internal cash NOI growth embedded within its current portfolio, Rexford Industrial Realty is well-equipped to navigate market fluctuations and capitalize on opportunities in the dynamic Southern California industrial real estate market.