Rexford Industrial Realty (NYSE:REXR) has fared the current environment well, with its share price rising by 6.3% since the start of the year. As an industrial REIT, it’s benefited from the acceleration of e-commerce this year due to the pandemic. Unlike geographically diversified REITs, such as Prologis (PLD) and Duke Realty (DRE), Rexford adopts a niche focus on the coveted Southern California region. In this article, I evaluate whether if Rexford makes for an attractive buy at the current valuation, so let’s get started.

(Source: Company website)

A Look Into Rexford

Rexford Industrial is a mid-sized REIT that is focused on owning a high-quality portfolio of industrial warehouse properties in Southern California, with 232 properties covering 28 million square feet. What’s attractive about Rexford is its focus on Southern California, which traditionally has had low vacancy rates due to favorable supply and demand characteristics. As seen below, the majority of Rexford’s properties are located in the prime areas of the Greater Los Angeles area, with vacancy rates below 3%.

(Source: November Investor Presentation)

As seen above, per CBRE (CBRE), Rexford’s core markets are projected to grow at much higher rates than the national average over the next five years. Rexford has a number of things going for it. First, as mentioned earlier, the Southern California area is densely populated, with a scarcity of supply and growing demand.

Second, the current pandemic has accelerated consumer online shopping habits; and third, Rexford has a strong balance sheet and should benefit from the current low interest rate environment. Plus, it maintains a diversified tenant base, with no tenant comprising more than 2.8% of ABR (average base rent), with the largest tenant being FedEx (FDX).

Rexford continues to show strong growth. In the latest quarter (Q3’20) core FFO/share grew by 6.4% YoY, to $0.33. Same-property NOI grew by 5.0% YoY, and same-property occupancy was very strong, at 98.4%, which is up by 80 basis points sequentially, from 97.6% in Q2’20. Rent collection is also tracking well, at 96.8%, and management noted that nearly all prior deferrals had been brought up to date as of September 30th. As seen below, Rexford continues to generate high leasing spreads, with a combined new/renewal leasing spread at 20% on a cash basis for this year to date.

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(Source: November Investor Presentation)

Given the strong operating metrics, management boosted its 2020 guidance range, from $1.26 – $1.29 in July, to $1.29 – $1.31 in October. If we were to take $1.30 as the midpoint, the renewed 2020 guidance represents a 5.6% YoY growth, from a core FFO of $1.23 for full year 2019. As such, I see Rexford as being an “all-weather” REIT, which is able to grow its profitability during both good times and bad. Plus, management remarked on the attractive supply and demand dynamics of the Southern California industrial market, and on the growth of e-commerce, as noted during the recent conference call:

Further due to extreme constrained supply within infill Southern California our tenants will be challenged to find similar quality space anywhere else within our submarkets. Meanwhile, tenant demand continues to expand driven by growth across a range of sectors from consumer staples and food distribution, healthcare and medical products, renewable energy and electric vehicles, space exploration and aerospace technology among many other growth sectors.

Further the dramatic growth in e-commerce which has been accelerated by the pandemic continues to drive unprecedented new demand for space within our target infill markets as we are positioned within the largest first mile as well as the nation’s largest last mile of goods distribution and consumption in the United States.”

Looking forward, I don’t see Rexford slowing down, as it acquired three Los Angeles area properties during Q3, at stabilized yields in the 5.1% to 6.5% range, while disposing of three non-core properties, two of which are in San Diego, with one of those two being vacant. Subsequent to quarter end, Rexford acquired another Los Angeles area property for a stabilized yield on cost of 4.7%.

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Rexford didn’t issue any equity under its ATM (at-the-market) program during Q3 and has $259.8M in remaining capacity. As such, I wanted to calculate the WACC for the company. I calculated the cost of equity at 2.7%, based on the $1.30 FFO/share guidance divided by the current share price of $48.55. The cost of debt is currently 3.1%.

Based on a 26% LT debt to Common Equity ratio (based on Seeking Alpha data), I calculated the WACC to be 2.8% (26% x 3.1% + 74% x 2.7%). As such, I see Rexford as getting attractive investment spreads in the ~2.8% on equity raises at the current valuation. This compares favorably to high quality net lease REITs, which typically see investment spreads around 2%.

Rexford has an impressive track record of shareholder returns. As seen below, Rexford has generated 10% average annual core FFO/share growth since 2016, surpassing that of its peers, and since 2013, it’s produced 336% total return.

(Source: November Investor Presentation)

Meanwhile, Rexford maintains a strong balance sheet, with a net debt-to-adjusted EBITDA ratio of just 2.9x, which is far below the 6.0x that I generally consider to be safe for REITs. Its fixed charge coverage ratio remains strong, at 3.6x. Rexford also maintains $740M in liquidity, with no debt maturing until 2023. The 1.8% dividend yield remains safe, at a 66% payout ratio, with a 5-year CAGR of 9%.

Investor Takeaway

Rexford Industrial Realty is an “all-weather” REIT, which has continued to grow its profitability in the current environment. It benefits from favorable supply and demand dynamics in the Southern California market. Despite the constrained supply, Rexford is able to grow in an accretive manner, through its low cost of capital. It should be noted that, as with all REITs, Rexford is subject to interest rate risk. A rise in interest rates could put a damper in its growth ambitions.

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I see the valuation as being rather high. At the current price of $48.55, Rexford is trading at a forward P/FFO of 37.3 (based on midpoint of 2020 guidance). As seen below, Seeking Alpha has an overall Neutral Quant rating for the company, with an “A” for Growth, a “B” for Profitability, and an “F” for Value. I recommend waiting for a better entry point. Rexford is a solid Hold at the moment.

(Source: Seeking Alpha)

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.