Rexford Industrial Realty, Inc. (REXR) is a self-administered and self-managed full-service real estate investment trust (REIT) focused on owning and operating industrial properties in Southern California infill markets. REXR has delivered impressive financial results, reporting annual net income of $238,016,000, annual revenue of $797,826,000, annual operating cash flow of $427,548,000, and annual free cash flow of $160,984,000 in its latest fiscal year.
In the second quarter of 2024, REXR reported strong financial performance, with revenue increasing by 21.4% year-over-year to $237.57 million. The company's net income for the quarter was $86.02 million, up significantly from $56.91 million in the prior-year period. REXR's funds from operations (FFO) per share for the quarter was $0.60, beating the Zacks Consensus Estimate of $0.58 per share.
REXR's impressive results are a testament to the strength of its differentiated business model and the resilience of its infill Southern California industrial portfolio. The company's focus on acquiring, improving, and operating high-quality industrial properties in prime infill locations has enabled it to consistently outperform the broader market.
Business Overview
Rexford Industrial is the only industrial REIT focused exclusively on investing in infill Southern California, a market that the company believes offers superior tenant demand fundamentals and substantial opportunities to add value through its value-add investment approach. REXR's portfolio consists of 422 properties with approximately 49.7 million rentable square feet, with an average space size of 26,000 square feet.REXR's strategy is to acquire leased, stabilized properties as well as properties with value-add opportunities to improve functionality and deploy its asset management programs to increase cash flow and value. The company also selectively acquires industrial outdoor storage sites, land parcels, or properties with excess land for ground-up redevelopment projects.
A key component of REXR's growth strategy is to acquire properties through off-market and lightly marketed transactions that are often operating at below-market occupancy or below-market rent at the time of acquisition, or that have near-term lease roll-over or provide opportunities to add value through functional or physical repositioning and improvements. Through various repositioning, redevelopment, and professional leasing and marketing strategies, the company seeks to increase the properties' functionality and attractiveness to prospective tenants and, over time, to stabilize the properties at occupancy rates that meet or exceed market rates.
As of June 30, 2024, REXR had 28 properties under current repositioning or redevelopment and six properties in the lease-up stage. The company also has a pipeline of six additional properties for which it anticipates beginning repositioning/redevelopment construction work between the third quarter of 2024 and the second quarter of 2025. Over the next four years, REXR estimates it has up to approximately 5.0 million rentable square feet of additional repositioning/redevelopment projects embedded in its portfolio.
Operational Highlights
REXR's strong second quarter performance was driven by the continued strength of its high-quality portfolio and the execution of its entrepreneurial team. The company reported 400,000 square feet of positive net absorption, contributing to a 70 basis point increase in its same-property occupancy, which ended the quarter at 97.3%. This compares favorably to the overall infill market vacancy of 3.9% according to CBRE.REXR's leasing activity during the quarter was also impressive, with the company completing 2.3 million square feet of leasing, generating leasing spreads of 68% on a net effective basis and 49% on a cash basis. The company's strong renewal demand resulted in a second quarter retention and backfill rate of 80%.
The company's value-add investment strategy continues to drive growth, with REXR stabilizing two repositioning projects totaling 85,000 square feet during the second quarter, generating a weighted average unlevered stabilized yield of 9.5%. Looking ahead, the company has 4.2 million square feet of value-add repositioning and redevelopments in process or projected to start within the next 18 months, with an estimated remaining incremental spend of approximately $340 million, which are expected to deliver a 6% unlevered stabilized yield on total investment.
REXR's acquisition activity during the quarter was also robust, with the company completing $170 million of investments comprising approximately 500,000 square feet, generating an aggregate initial yield of 5.8% and a projected unlevered stabilized yield of 6.1% on total cost. The company currently has approximately $160 million of investments under contract or accepted offer, which are subject to customary closing conditions.
Financial Strength and Liquidity
REXR's balance sheet remains strong, with net debt to EBITDA of 4.6 times at the end of the second quarter, near the company's long-term target leverage range of 4 times to 4.5 times. The company has nearly $2 billion of total liquidity, comprised of approximately $830 million from forward equity proceeds available for settlement, $126 million of cash on hand, and its $1 billion revolving credit facility.The company's differentiated business model is positioned to continue delivering near and long-term outsized NOI growth, with $229 million of incremental cash NOI growth embedded within its in-place portfolio realizable over the next three years, irrespective of market growth. This growth is expected to be driven primarily by the company's value-add property improvements, repositioning, and redevelopment, which are projected to deliver $95 million of incremental NOI, as well as the mark-to-market of below-market leases to current market rates, which is expected to generate an additional $82 million.
Guidance and Outlook
For the full year 2024, REXR has increased its FFO per share guidance range by $0.01 at the low end, and it is now $2.32 to $2.34, representing 6% to 7% year-over-year earnings per share growth. The company's guidance for full-year 2024 same-property cash and net effective NOI growth is estimated to be 7% to 8% and 4.25% to 5.25%, respectively, in line with the expectations set at the beginning of the year.REXR's management team remains cautiously optimistic about the near-term outlook for its infill Southern California industrial markets, expecting some nominal levels of volatility in occupancy and rents. However, the company believes the long-term fundamentals of its target markets remain exceptionally strong, supported by a virtually incurable supply/demand imbalance and the scarcity of available, highly functional industrial product.
Risks and Challenges
While REXR's performance has been impressive, the company faces several risks and challenges that investors should be aware of. These include:1. Macroeconomic Conditions: REXR's operations and financial results are susceptible to changes in the broader economic environment, including factors such as inflation, interest rates, and political uncertainty, which could impact tenant demand and the company's ability to execute its value-add strategies.
2. Competition: The infill Southern California industrial market is highly competitive, with a large number of private owners and investors vying for acquisition opportunities. REXR's ability to continue executing its value-add strategy and maintaining its competitive edge will be crucial.
3. Construction and Development Risks: REXR's repositioning and redevelopment projects are subject to various risks, including construction delays, cost overruns, and the ability to successfully lease up the completed spaces.
4. Tenant Concentration: While REXR's tenant base is diversified, the company could be vulnerable to the financial health and performance of its larger tenants, should any experience financial difficulties or downturns in their respective industries.
5. Regulatory and Environmental Risks: REXR's operations are subject to various federal, state, and local regulations, as well as potential environmental liabilities, which could result in increased costs or operational disruptions.