Rexford Industrial: High Yield And Undervaluation Make It A Top REIT Pick

seekingalpha2024-11-18

Rexford Industrial offers a compelling buy opportunity with a 4% dividend yield, trades near its 52-week low, and has strong growth prospects.REXR's focus on the supply constrained Southern California...

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Guido Mieth  As an income-focused investor, I care about growing my recurring cashflow stream. One of the best ways to do that is to look at stocks whose yields have gone up due to share price weakness, and so long as the long-term investment thesis isn’t broken, bargain hunting on income stocks can be a great way to grow cashflow. This brings me to Rexford Industrial (NYSE:REXR), which I last covered in September, highlighting its attractive market positioning and forward growth prospects. It’s suffice to say that my thesis hasn’t yet panned out, with the stock declining by 16.7% since my last piece as optimism around the pace of rate cuts has waned and as post-election volatility has picked up. As shown below, REXR recently hit its 52-week low of $41.16 and at its current price of $42.01, it’s trading just a couple of points above of that. This has boosted the dividend yield to 4%. Seeking Alpha In this article, I revisit REXR including its Q3 performance and discuss why the stock is a compelling buy at the moment for potentially strong income and long-term growth, so let’s get started! Why REXR? Rexford Industrial is currently the cheapest amongst Industrial REITs that are focused on Tier 1 markets, alongside peers Prologis (PLD) and Terreno Realty (TRNO) and First Industrial (FR). What sets REXR apart from peers is its sole focus on the supply constrained Southern California market. At present, it has 424 properties covering 720 buildings and 50 million square feet, serving over 1,600 tenants. Despite recent share price weakness (which has also affected peers as well), REXR has produced outstanding growth, with FFO per share rising at a 16% CAGR over the past 5 years. As shown below, NOI and Dividend per share CAGRs of 30% and 18% have also outpaced its peer group. Investor Presentation REXR’s unparalleled focus on the SoCal market means that it has local market expertise and first mover advantage in its exposure to prime locations. This market is the largest in the U.S. and is the 4th largest around the globe, and traditionally carries a low vacancy rate, with it currently sitting at just 4.2%. Meanwhile, REXR delivered respectable FFO per share growth of 5.4% YoY to $0.59 during Q3 2024. This was driven in part by base rental growth of 3.9% on existing leases. Plus, REXR continued to see robust new and renewal leasing, which came in on 1.6 million square feet worth of space, with solid spreads of 39% and 27% on GAAP and cash basis, respectively. Over the first nine months of the year, REXR was able to deliver 9.3% FFO per share growth over the prior year period, driven by solid cash NOI growth of 7.7% on a cash basis. Moreover, REXR continues to see higher occupancy than peers at 97.6%, reflecting the continued in demand nature of its target market. Management is guiding for full year FFO per share of $2.34 at the midpoint of range, representing 6.8% growth from $2.19 in 2023, and 7.25% same-property NOI growth this year. This is based on anticipated move-outs and also includes timing delays in lease commencements. Looking further down the road, REXR has a robust development pipeline, and it has a good track record of realizing high starting yields. This includes seven projects completed year-to-date with a high average starting yield of 8.4%. Over the next 3 years, REXR has $222 million worth of internal cash NOI growth embedded in the current portfolio. This includes incremental NOI from repositionings of properties and redevelopments, embedded rent rolls of 19% on mark-to-market as leases expire, and average annual rental growth of 3.7% on existing leases. As shown below, REXR also has a favorable supply/demand backdrop as new construction has tapered off in the current higher interest rate environment, thereby supporting the case for stability in growth in rental rates. Investor Presentation REXR carries a strong balance sheet with a BBB+ credit rating from S&P. This is supported by a low net debt to enterprise value of 22% and net debt to EBITDA ratio of 4.7x, sitting far below the 6.0x safe level for REITs. This lends support to the 4% dividend yield, which is well-covered by a 71% payout ratio, sitting at about the same level as the 70% payout ratio of peer Prologis. REXR’s dividend also comes with a high 5-year CAGR of 18%. As shown below, REXR’s dividend yield sits at a historical high mark. (Note: the following shows TTM yield. Forward yield is 4%) YCharts Lastly, I continue to view REXR favorably at the current price of $42.01 with a forward P/FFO of 17.8x, comparing favorably to the 20.9x P/FFO of peer Prologis. While REXR lacks the geographical diversification of PLD, I believe investors are well compensated for this shortcoming with a lower valuation and leverage. As shown below, REXR’s P/FFO valuation also sits well below its historical norm of 28.3. FAST Graphs While the market appears to be bearish around REXR due to slower growth this year than prior years, I believe this represents a normalization before growth kicks back up with the aforementioned catalysts over the next 3 years. Analysts estimate 7.5% FFO/share growth next year and 10-12% annual growth in the 2026-2027 timeframe. Considering all the above, I believe REXR makes for a compelling buy while market sentiment is working against the stock. More conservatively minded investors may want to consider the Preferred Series B stock (REXR.PR.B), which at the current price of $22.85, trades at an 8.6% discount to its $25 par value. REXR.PR.B currently yields 6.4% and its dividends are cumulative, which means that missed payments must be made up unless if the company goes belly up. While REXR.PR.B is currently trading past its call date of 11/13/22, that shouldn’t be concerning since it trades at a discount to par value, which means that investors would see an immediate share price gain and dividends collected along the way. At the current discount, it’s also apparent that the market isn’t concerned about it being called away anytime soon. Risks to the thesis include the potential for higher interest rates, which could put downward pressure on the common stock due to higher cost of borrowing for the company. Higher rates could particularly negatively affect the preferred stock due to its bond-like nature. Moreover, REXR’s concentration in the SoCal market carries inherent regional risks such as potential tariffs imposed by the incoming Trump administration, which could negatively impact trade coming into the port of Los Angeles and thereby affect some of REXR’s tenants. Lastly, a longer-than-expected normalization of supply and demand in the SoCal market may result in a slowdown in NOI growth. Investor Takeaway Rexford Industrial presents a solid opportunity while trading near its 52-week low for income-focused investors seeking growth and long-term value. REXR's focus on the supply constrained Southern California market, its robust balance sheet, and strong operational metrics position it as a standout in the industrial REIT space.  With a historically high dividend yield of 4% that’s well-covered by FFO, a low valuation, and strong growth prospects as supply/demand trends normalize, patient value investors could see potentially strong total returns in REXR from the current discounted price. For those seeking a more conservative option, REXR.PR.B offers a 6.4% yield and trades at a meaningful discount to par value.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.4","shortVersion":"4.29.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484666949"}