Rexford Industrial Stock: My Oh My, Another Strong Buy (NYSE:REXR)

This article was coproduced with Wolf Report.

We’ve re-examined a couple of real estate investment trusts, or REITs, we reviewed a year ago and more.

Specifically, we’re talking about Rexford Industrial Realty, Inc. (NYSE:REXR). I last examined this particular REIT back in September of 2022, when I found the valuation to be somewhat prohibitive for the sort of excellent upside that we typically look for.

Also, the yield isn’t spectacular.

A 2.75% yield in this environment, where I can get 3.65% from a savings account, not even a CD?

You’ll have to really persuade me of that one, given the variance in risk-reward.

However, REXR has become convincing, which is the reason I decided to upgrade this one to a Strong Buy (My oh My).

We’re now going to share this with you and clarify why this “sharp shooter” is a STRONG BUY!

Rexford: The Basics

The REIT is not healthcare or office – it’s industrial.

Once upon a time, I began investing in STAG Industrial (STAG). Here’s my very first article HERE (back in 2011).

Different times, different risk allocations.

I’ve never sold one share of STAG…and I don’t plan to, even though its valuation isn’t cheap right now.

My point being, industrial REITs at the right price are great investments.

As is REXR.

REXR is a BBB+ rated industrial REIT with a market cap of over $11B. It has over 20 years of history, it’s a member of the S&P500 (SP500) with 44.2 M square feet owned.

Return for the past 5 years is 112%, which means outperformance, and the company’s annual dividend growth over the past 5 years is 19% – outperformance here as well.

The company is the largest pure-play U.S.-focused Industrial REIT out there. Others are either smaller, not pure-play, or not U.S. Competition includes businesses like STAG, Plymouth Industrial (PLYM) First industrial (FR), and EastGroup Properties (EGP).

The company, however, is a play on a very specific geography, that might not be your cup of tea – specifically, the company has a 100% infill in southern California.

However, before you go negative, take a look at what the company actually offers in terms of portfolio and upside – because there’s more to this story than Southern Cali – though the industrial area of Southern California does deserve highlighting.

We believe such a part of the presentation should be viewed with a modicum of salt, but at the same, should not be discounted.

It’s unquestionable that the historical appeal of this area is not the same thing as the forward appeal – but because REXR has such mission-critical tenant locations, we don’t think it can be equated with some of the problems currently present in the state.

The fact that there’s an extreme scarcity of land within the Infill SoCal means that there really are very few alternatives for the businesses that operate there – they need to turn to REXR.

We’ve also been vocal proponents, through investing in apartment REITs like AvalonBay (AVB) and Essex (ESS), that things are not as bad as they seem on the West Coast.

They’re challenging, and can even be characterized as bad in certain areas, like San Francisco, but trends are not as bad across the entire state, with cities like San Diego being far less affected by the downturn.

So why REXR?

Because the company’s portfolio is found here.

Take a look at some of those vacancy rates – and the 1.5% infill SoCal vacancy.

Due to the scarcity and diminishing supply, this creates a persistent supply-demand imbalance that for me is reminiscent of some of the things going on in certain areas in Sweden.

Because nothing is being constructed, and there is such a scarcity, housing prices cannot fall beyond a certain point, regardless of the interest rate.

Wolf Report saw the same in the GFC. Sweden was never as affected as some of the other European countries exactly because of what REXR is describing here, but for a different sector.

But wait, it gets even worse in SoCal – because of local housing mandates that dictate the conversion of industrial supply to housing, this further reduces available supply. It increases demand from construction for industrial space and increases both population and consumption from the SoCal infill portfolio the company has.

The company “plays” in the highest-demand industrial market in the nation, and already owns the mission-critical tenant locations that, while not guaranteeing, do make fairly certain that appeal is going to be there.

And here is the tenant-specific diversification of that portfolio, which as you can see is…pretty diverse. Mostly wholesale and warehousing, which is a positive.

It’s unlikely that these are going anywhere. Out of 1,600 total tenants, the bad debt as % of revenue is 0 bps. Furthermore, REXR’s ABR (annualized base rent) on a per-square foot basis is almost twice as high as the rest of the peers, and exceeds them by 75%, reflecting the strength of the specific market.

Spreads are truly excellent in terms of renewals, with continued high leasing spreads at 80% GAAP and 60% cash. The company’s leasing expiration schedule is well-filled, though, with about 40% coming due before 2026 – so we’ll want to keep an eye on renewals here, but at a 13.5% YoY market rent growth with the fundamentals we see, we don’t see any issue or concern here.

Fundamentals for the company are beyond solid.

$1.85B of liquidity, BBB+, and a 3.6x net debt/Adjusted EBITDA, making it one of the least-leveraged REITs we’ve looked at – ever. The company’s total debt as a percentage of EVs is less than 15%. That goes some way to lighten the impact of that sub-3% yield.

Expirations are very solid, with a 3.6% weighted average interest rate, and around 5.3 years average maturity. 100% of the debt is at a fixed rate, with no exposure to floating whatsoever.

REXR is in many ways the gold standard for what an Industrial REIT “should” be.

It has a vertically integrated platform with experienced management – proprietary research and origination, M&A’s, good finance/capital market processes, lease and marketing, and construction to accounting and finance.

No one in management has less than 15 years of real estate experience, and the current chairman has 49 years of RE experience.

The weaknesses in this particular thesis or risks, are simple.

The negative sentiment over California, where REXR operates – there’s no telling how long it will last, or how bad it will get. This uncertainty is really spilling over not only to other companies but to REITs and Industrial ones as well.

However, beyond its geographical focus, we really can’t see any risk here.

The company’s leverage is too low to really start talking about downturns due to increased debt costs. The fundamentals are beyond solid, and consensus projections are up significantly.

The company’s yield is not only conservative, but it’s also extremely well-covered.

Leasing spreads are stellar. The overall situation in the company’s operating geography means that no new significant supply is likely.

New starts are also down, simply because the building is expensive. The company’s dip in occupancy is easily explained because REXR themselves caused it – properties are being put into redevelopment.

In short, we expect the company outperformance to continue, and choose to completely disregard any valuation-related downturn here, ascribing it to an irrational market.

Now let us present the upside for the REIT.

REXR Upside – The valuation

REXR does not “look” cheap.

It trades at a mixed average P/FFO of 26.5x, which is more than we usually accept for a REIT. However, the combination of very attractive leverage coupled with fundamentals and a very solid upside in the double digits despite macro, spells out why we’re positive on REXR here.

REXR typically trades at a normalized P/FFO of around 33x.

We would normalize that to around 30x on a forward basis at most, but even on a 30x P/FFO, the company’s upside here is well-covered, as the company is forecasting between 10-20% FFO growth on an annual basis for the next few years.

How likely is this?

Well, we said in the previous section some of the qualities as to why we believe this to materialize.

But we can also look at historical trends – we have 10+ years of them after all.

FactSet analysts only miss forecasts here negatively around ~10% of the time, with the company beating consensus around 11% of the time – the rest of the time, forecasts and guidance are within the range at a 10% margin of error.

This translates into an above-average conviction and guidance/forecast accuracy, and for that reason, we say that the company’s estimates can be “trusted” here.

After all, we’re seeing all the right signs from the company’s earnings reports.

The upside even on a conservative forecast of below 30x P/FFO is significant. Based on high-conviction forecasts, that could result in almost 25% RoR on an annual basis, or over 70% RoR in a few years.

You could even, as a matter of fact, forecast the company as low as 17x P/FFO, and you’d still not lose money (inclusive of dividends).

Your downside in this investment is extremely protected, as we see it, and there is upside to be had in spades.

We wouldn’t touch the company about a year ago when it traded above 33-34x P/FFO. The upside at that point was so-so, and there were far better alternatives out there.

Alternatives still exist – many good ones, actually – but REXR has gone from being on my radar to being on my “STRONG BUY” list here.

S&P Global analysts give the company an average range of $52 to $77 at this time, with an average PT of $65/share. That’s down from almost $85/share a year ago.

What has changed?

The perception of California, we’d argue – because you can’t really argue anything fundamentally having changed to the negative to really impact it as much.

A year ago, the high-point price target (“PT”) for this company was above $100/share. We see this as a good example of the short-term perspective of some of these analysts. 10 analysts follow the company, 7 of which are “BUY” or equivalent here.

We add our voices to this chorus, as well as to our IREIT rating, and give the company a “STRONG BUY” rating but going up to $80/share for the long term.

Thesis

• REXR is perhaps one of the highest-quality industrial REITs out there. It’s fundamentals and overall safety are remarkable, with one of the lowest leverage out of any REIT we’ve researched. This goes some way to make up for the yield that’s currently below a savings account interest rate.
• The upside here is coupled reversal, yield, and growth. That upside is massive – and because of this, this investment is far better than any savings account. We give the company a conservative PT of $80/share, representing a conservatively-adjusted 2025E 29-30x P/FFO level.
• Based on this, we consider this company an impressive “STRONG BUY” here, and like with apartment REITs such as AVB or ESS, we’re choosing to take the contrarian view of California here and go “BUY.”

Remember, we’re all about:

1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, we harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, we buy more as time allows.

4. We reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here’s our criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.