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Rexford Industrial: Nosebleed Valuation But Leverage Is Increasing


  • REXR is the only industrial REIT located primarily in the Southern California market.
  • The Southern California industrial market benefits from low vacancy rates and dwindling supply.
  • I am concerned that REXR did not allow leverage to decline in 2019 in spite of nosebleed share price valuations.
  • I am neutral on REXR due to the aforementioned nosebleed valuation.
  • Looking for a helping hand in the market? Members of Best Of Breed get exclusive ideas and guidance to navigate any climate. Get started today »

Rexford Industrial (NYSE:REXR) is a top-notch industrial REIT that attributes its relative outperformance to peers due to its presence in the "So-Cal" market. REXR has grown FFO at an impressive 9.4% clip since its IPO, as it has managed strong comparable NOI growth due to high re-leasing spreads. I believe that the past growth rates must revert to the mean and that the low acquisition cap rates validate that belief. In spite of shares trading at FFO multiples in the 30s, REXR has not allowed leverage to decline in 2019, which is concerning. I am neutral on shares due to valuation.

So-Cal Market Leader

REXR owns a diversified industrial portfolio ranging from warehouses to cold storage, serving tenants ranging from wholesale trade to construction:

(2020 Presentation)

REXR boasts that it has outperformed peers by a huge margin since its IPO in 2013:

(2020 Presentation)

Is it luck? Or is there something more to the madness? REXR believes that its secret sauce is its razor-like focus on the Southern California market:

(2020 Presentation)

Why does that matter? As we can see below, the Southern California industrial market has very low vacancy rates and dwindling supply:

(2020 Presentation)

Southern California has the highest occupancy rates in the nation, which has led it to also have the highest rental rates in the nation:

(2020 Presentation)

Some readers may think that this is a cause for concern - would the higher rents mean that tenants can't afford rent increases? I'd argue the opposite - high rents are indicative of high quality because high-quality properties would have lent themselves to high rent increases in the past. It seems to be working, as REXR has delivered a strong 9.4% compounded annual FFO growth since its IPO:

(2020 Presentation)

In 2019, REXR delivered 10% FFO growth on the backs

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This article was written by

Julian Lin profile picture

Julian Lin is a financial analyst. He finds undervalued companies with secular growth that appreciate over time. His approach is to look for companies with strong balance sheets and management teams in sectors with long growth runways.

Julian is the leader of the investing group Best Of Breed Growth Stocks where he only shares positions in stocks which have a large probability of delivering large alpha relative to the S&P 500. He also combines growth-oriented principles with strict valuation hurdles to add an additional layer to the conventional margin of safety. Features include: exclusive access to Julian's highest conviction picks, full stock research reports, real-time trade alerts, macro market analysis, individual industry reports, a filtered watchlist, and community chat with access to Julian 24/7. Learn more.

Analyst’s 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.

DISCLAIMER: Julian Lin is not a Registered Investment Advisor or Financial Planner. While the information in his articles and his comments on SeekingAlpha.com or elsewhere may seem like financial advice, it is not, and it is provided for information purposes only. Do your own research or seek the advice of a qualified professional. You are responsible for your own investment decisions.

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Comments (17)

What debt to EBITDA ratio do you think would be appropriate for the industrial segment? Do you really think an increase of 0.1x debt to EBITDA is considered a rise to be concerned about? Seems rather consistent to me. If it jumped above 4.0x then that might be worthy of being concerning.
Julian Lin profile picture
An increase of 0.1 sounds "minimal"
But it's horrid when you consider that debt to EBITDA should be declining by 0.3-0.5 times annually considering their stock price valuation.

As long as their stock trades so lofty, I don't think much if any leverage should be used to fund acquisitions.
Medusa's Head profile picture
6.25 million share offering announced today
Einherjar profile picture
They hear you @Julian Lin ;)
Julian Lin profile picture
Highly underrated management team
Thanks for the work.
Julian Lin profile picture
Thanks for reading!
twajetgod profile picture
TRNO is also active in that market, is larger and also very well managed. would it be better?
Julian Lin profile picture
I like TRNO more, but valuation is insane. I like that TRNO is aggressively issuing stock.
William Darusmont profile picture
I recently added REXR which has $3.5B market cap...I won't touch anything with less than $2 as my analysis of 34 REITS showed me. 18 of them were above $3B and 7 of them have had positive returns while none of the smaller ones have and most have had huge losses. Size does matter...at least in stocks these days!
Julian Lin profile picture
Size helps right now in terms of access to capital as well. Great comment!
Allen Greathouse profile picture
$REXR has the most ecommerce exposure of all reits i believe. will be long term holder.
Julian Lin profile picture
Financials should be fairly strong long term indeed
Allen Greathouse profile picture
Short term, there are questions but I cannot predict short term. I invest in all market conditions for the long haul. If you average in short term valuation is not as important. And if one is younger there is even more time to average in.
Should be interesting to see what CW's response would be seeing he was promoting the stock a few days ago
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