Once we wrote about Rexford Industrial Realty, Inc. (NYSE:REXR) in 2021, we scoffed at the concept that shopping for it at 35X funds from operations (FFO) would make you cash.
At 35x 2022 FFO, we now price this as a promote. We’re quickly reaching a degree the place the expansion charges are more likely to disappoint and traders ought to hit the exit earlier than that. Whereas we do not deny the standard right here, the numbers simply do not make sense at this stage of the cycle.
Supply: Stretched Valuation Creates Poor Danger-Reward
The inventory value journey since then was fairly fascinating, because the euphoria took a great whereas to die-off. REXR was up 35% at one level however lastly succumbed to the realities of the scenario.
We study the place we stand at present and let you know the place we might probably purchase this.
Rexford has been the play for industrial properties. The southern California-focused REIT has grown quickly and produced spectacular returns for its shareholders.
It additionally has completed that whereas preserving leverage ranges terribly low. Beating peer FFO development charges by such an enormous margin with out gorging on debt is definitely applause-worthy.
Driving this efficiency has been an especially tight industrial market in Southern California.
In keeping with Rexford, the tightness will proceed for the foreseeable future. Lack of developable land and excessive limitations to entry make Rexford’s future about as safe as it might get.
Quantifying this isn’t a straightforward activity for traders. In spite of everything, the place do rents go in such a decent, unbalanced market. Fortuitously, Rexford helps on the market as properly. The most recent reported internet working revenue (NOI) for This autumn-2022 is predicted to extend by $200 million!
Top-of-the-line methods to take a look at this story is to see how FFO estimates panned out. Again in 2021, once we wrote the bearish piece, FFO was anticipated to return in at $1.92 for 2023. It was anticipated to leap to virtually $2.50 in 2025.
Quick-forward to at present and Rexford will exceed the 2023 quantity by 13%. It additionally will in all probability hit the $2.50 mark a yr forward of schedule. That is regardless of rates of interest having moved up aggressively since then.
However these footage simply underscore how silly the valuation was again in 2021. We’re nonetheless at 23X 2024 FFO ranges. Now, for a fast-growing industrial REIT, we’re approaching extra cheap ranges. Rexford additionally seems to be one of many rarer REITs that is producing large development even now. Different REITs like Crown Fort Inc. (CCI) and Digital Realty Belief Inc. (DLR) are properly previous their glory days and can present a flat FFO profile for the close to future. So, in contrast to the previous, we will now not argue that Rexford is dear. Hazel View, a bull on the story, places the embedded development on this context.
Rounding out our funding thesis for Rexford in 2023 is valuation, which we really feel is very compelling at present. Rexford at the moment trades at a 22% low cost to our ahead NAV estimates and an implied cap price of roughly 4.1%. Whereas the implied cap price might sound low on the floor, we once more be aware that Rexford’s in-place rents portfolio-wide sit 60% under present market rents. If this in-place revenue stream was marked-to-market at present, that implied cap price could be nearer to six.6%. Though there’s a point of murkiness relating to the place cap charges are at present for industrial property, we’ve a excessive diploma of confidence that the appropriate quantity is a number of hundred foundation factors under 6.6%, particularly in Rexford’s Southern California market, which is arguably essentially the most engaging in the USA.
Supply: Hazel View
Once more, there’s nothing we will argue with over there. Rexford has grown into the valuation and sure presents a great, compelling upside story, within the subsequent increase.
Our take-home message comes all the way down to “within the subsequent increase.” Whereas Rexford seems pretty valued for its development, we do not assume the cycle will finish with simply truthful valuation. Excesses in a single route create excesses within the different, and that is simply as sure as day follows evening. That pendulum by no means stops proper within the heart, and that was a comforting thought once we issued the Promote score two years again. At current, we’re more likely to see a sub-20X FFO a number of, on the minimal because the cycle reaches its conclusion. We might look to purchase round $45 within the subsequent 12-18 months, as that’s more likely to be a ballpark of the capitulation lows.
The Most popular Shares
Rexford has two units of most well-liked shares excellent.
1) Rexford Industrial Realty, Inc. 5.875% PFD SER B (NYSE:REXR.PB)
2) Rexford Industrial Realty, Inc. 5.625 CUM PFD C (NYSE:REXR.PC)
They yield about 6.5% every based mostly on their final closing costs and symbolize a approach to take average rate of interest danger, with just about zero credit score danger.
Rexford’s steadiness sheet is the most effective (not the most effective, the most effective), amongst REITs we observe and by shopping for the preferreds you will have a stable 6.5% yield and prospects for capital appreciation (since each are about 10% below par) within the subsequent price reducing cycle. We had advisable traders change to Rexford preferreds from these of DLR just lately, as we see an precise existential risk to DLR down the road. As a direct buy, we might look to purchase if both of these two yields over 7%.
Please be aware that this isn’t monetary recommendation. It might seem to be it, sound prefer it, however surprisingly, it’s not. Traders are anticipated to do their very own due diligence and seek the advice of with an expert who is aware of their targets and constraints.