Rexford Industrial (NYSE:REXR) is expected to deliver strong results. The bar is automatically high. When we're setting our "buy under" target at more than 36 times consensus AFFO, investors should expect massive growth. However, REXR outperformed my expectations in the Q2 2022 earnings release and earned an increased price target.
Shares plunged recently and dipped into our "Strong Buy" range.
Since fundamentals look great and the price is plunging, I responded by purchasing shares. Now I want to share a large part of our REXR report for subscribers.
We've got several factors to consider:
There was only one bad part in the earnings release, and it took a while to piece it together. In the bullet points for the press release, REXR states:
Issued a total of 6.0 million shares of common stock for total net proceeds of $419.4 million.
That gives us an average price of about $69.90 per share. I'd consider that slightly above average for the quarter. Far from perfect, but that wouldn't appear to be a weakness.
The issue is that on the third page it says:
During the second quarter, the Company executed on its prior and renewed ATM programs, selling 12,002,480 shares of common stock subject to forward sale agreements at an average price of 62.55 per share for a gross value of $750.8 million. On June 29, 2022, the Company partially settled these forward equity sale agreements and outstanding forward equity sale agreement from the prior quarter by issuing 5,967,783 shares of common stock for net proceeds of $419.4 million.
Allow me to break that down into a story that will make sense to people who don't have an accounting background.
Before Q2 2022, REXR used a "forward equity offering" to lock in the price for issuing some shares in the future. Specifically, they had $232.2 million locked in. During Q2 2022, they issued those shares at the price they had locked in. However, during Q2 2022, they had another "forward equity offering".
During Q2 2022, locked in the price for another 12 million shares at a weighted average price of $62.55. They issued about 25% of these shares prior to the end of Q2 2022. The other 75%, about 9 million shares, have not been issued yet. However, the price is locked in.
Therefore, the average price of $69.90 per share was a mix of prices locked in before Q2 2022 and prices locked during Q2 2022.
Meanwhile, the next 9 million shares to be issued have a locked-in price of only $62.55 per share, which is clearly on the low end of what we think REXR should accept for their stock.
That's the negative part of REXR's release. Since they already have these shares issued, they may use them to fund a significant portion of their upcoming acquisitions. However, it still wouldn't cover all of the acquisitions expected for the rest of 2022.
REXR was aggressively putting cash to use:
REXR only had $34.3 million of cash on hand, but they had about $1.5 billion in liquidity at the end of Q2 2022. That comes from combining:
The forward equity proceeds refer to shares REXR agreed to sell in the future at a predetermined price, $62.55.
Since cash on hand and forward equity proceeds were about equal to the total of $587 million in transactions that already occurred early in Q3 2022, REXR either needs to be issuing additional shares or using their credit facility. During Q2 2022, REXR increased the capacity on their credit facility from $700 million to $1.0 billion. I think they may put some of that to work in Q3 2022 as part of their financing strategy, but it wouldn't surprise me at all if REXR is also issuing additional shares. I don't expect the $500 million that had not closed yet to all be funded with debt.
To be clear, these acquisitions are generally accretive. Management has done a great job of selecting individual properties for the portfolio. Their selection of properties enabled them to enhance growth in AFFO per share by issuing new equity and putting the capital to work efficiently. The fact that REXR agreed to issue equity at a mediocre price suggests that management believes they are getting a great deal on their acquisitions. Based on their record, it would be wise to assume they are right.
The acquisitions have a weighted average unlevered initial yield (cash rent divided by purchase price, same as cap rate) of 2.5%. However, management estimates the stabilized yield on their investment will be 5.1%. Clearly, the properties should see dramatic rental rate increases in the near future. These acquisitions don't look accretive to AFFO per share right now because of the low 2.5% yield. However, when it jumps to 5.1% it would become quite accretive.
Year-to-date through the earnings release, total acquisitions are $1,644 million. REXR provided the initial yield and stabilized yield for transactions in Q1 2022, in Q2 2022, and in total year-to-date. They didn't break out the initial yield or stabilized yield for their transactions subsequent to Q2 2022. However, they gave us all the parts necessary to calculate it (subject to rounding errors):
The stabilized yield on the subsequent transactions is lower than I would've expected, given that REXR was willing to issue shares at $62.55. However, there could be very good reasons for that. For instance, REXR may have been purchasing properties where it expects rental rates to grow at a higher compounding rate over the next decade. That would certainly justify having a lower stabilized yield in the near future.
Mixing the positive surprise on leasing spreads and increased guidance for same property NOI with the negative surprise on so many shares being sold at $62.55, targets for REXR are only increased by 2%. If REXR's forward equity offerings came in around $68.00 per share or higher, targets would be getting a bigger boost.
Our outlook as of 8/11/2022 was only neutral, but it ripped higher.
The initial part of the article was sent to our members on 08/11/2022. Our targets for REXR remain at the same level as indicated above. However, shares plunged dramatically.
This resulted in shares moving into the Strong Buy range:
You may also notice our allocation increased from 0.96% to 2.47%.
That's because we picked up more shares.
We added 286 shares of REXR at $52.68 and 147 shares of Prologis (PLD) at $102.3882:
As usual, my money and mouth go together. In my opinion, PLD and REXR both deserve the strong buy rating here. However, I think Terreno Realty (TRNO) also deserves a strong buy rating. TRNO is one of our other industrial REIT positions. We added to TRNO 3 times since the start of May. Those purchases were at $63.40, $57.81, and $55.83. Today, shares are $54.25.
Here are the index cards for PLD and TRNO:
You should try our service. Unlike most services, our service is backed by a real portfolio. Not a "model" portfolio. Not hypothetical positions. Not 7 different portfolios we made up in Google Sheets so we can brag about the good one. None of that crap.
You get real-time alerts on every trade. See current and past positions. I'm sick of analysts who have to retroactively pick a "portfolio" or get creative about defining "returns". Beat the index or get out.
Ask your analyst to share their portfolio value each month so you can verify their returns. When they object, try us.
This article was written by
Securities for the buy-and-hold investor generally carry much lower risk. If we enter a high-risk position, we plan to capitalize on a change in the valuation. We monitor those positions very carefully, rather than hoping everything turns out well over the next several years. That’s why we have so few losses in our investing.
We post our portfolio for you. You also get real-time alerts on every trade we place. Our reasoning for placing a trade is explained in clear English. You can even see the exact trades with the images we include from our stock accounts. We don’t offer you several different “portfolios”, instead, we show you exactly what we own, when we bought it, and how we are doing in that position. We make it simple for investors to follow our strategy.
You’ll find several reports on The REIT Forum that don’t get posted to the public side of Seeking Alpha. Many of our public reports are dramatically reduced versions of subscriber articles. If you enjoy our public articles, you’ll love the content we keep for subscribers.
Disclosure: I/we have a beneficial long position in the shares of REXR, PLD, TRNO either through stock ownership, options, or other derivatives. 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.