Why We Still Buy Rexford (NYSE:REXR)
Reford (New York stock market :REXR) is one of my favorites REITs. We increased our position and bought more shares as recently as 10/20/2022. We bought 230 shares at $51.40 that day, which brings us to 670 shares.
Let me take you back in time for just a few weeks. When I was looking at industrial REITs in our October Portfolio UpdateI wrote:
Removing outliers from (STAG) (-7.7%) and (ILPT) (down 26.6%), the others fell from 11.6% to 18.4%. Good deals. An update of Prologis (PLD) reported that rental rate growth remained very high in the third quarter of 2022.
We spent just over $41,000 to buy the dip. This is the opportunity we wanted to see in industrial REITs. The entry opportunity has been waiting for so long, and it has finally arrived. We don’t know when industrial REITs will rise, but the fundamentals are exceptional in the short and long term. Growth in AFFO per share is expected to be extremely strong for at least a few years. Longer-term forecasts are difficult to make, but there is a good chance that rental growth will remain high and continue to generate strong growth in AFFO per share. Since debts are relatively low, higher interest rates should only have a very minor impact on interest charges, as small amounts of debt are rolled over.
The ILPT is the exception. In my opinion, they have absolutely insane debt and substandard management. These two things often go together. I covered ILPT a bit more in the previous update.
We’re not going to dive any deeper into ILPT here, as it’s one of my favorite REITs. However, investors should be aware that massive leverage is a critical factor in ILPT’s performance and one of the reasons we exclude it from a typical industrial REIT discussion.
We went on to say:
The huge fluctuation in industrial REIT prices will cause some investors to panic. I understand. REXR is trading just 61% off its all-time high. A drop of 39% will cause panic. Yet the consensus NAV (net asset value) was only down 11% from the all-time high:
It’s not just REXR, it’s the case of many REITs with major assets:
With that in mind, I want to move on to the results of Publication of REXR’s third quarter 2022 results and our latest report.
Latest news on Rexford
We provided a huge updated report on REXR to subscribers shortly after the REIT released third quarter 2022 results. We are sharing part of that report here.
We were doing a full review of the REIT, but we also included third quarter results earlier today.
Here are the main points:
- REXR’s 2022 Q3 was awesome. I rate it 10/10. However, this article is much larger than a quarterly update. We dive deep into REXR again.
- REXR’s fundamentals continue to strengthen. The massive rental is spreading, prompting management to raise the forecast yet again.
- After a thorough review of the portfolio and growth expectations for FFO and AFFO per share, we have determined that the consensus estimates for 2023, 2024 and 2025 appear too low.
- Even taking into account the negative impact of higher interest rates, integrated growth should drive values higher.
- REXR was actively issuing shares, but they did so at $65.43. That’s 27% more than today’s price. Issuing at $65.43 was a good idea.
Note: The reference to “today’s price” is from the original subscriber report with REXR stock at $51.32.
Now we can dive a little deeper.
Rexford absolutely dominates on the fundamentals. Stocks appear to have found support just above $50.00. The 52-week low is located precisely at $50.00. In our view, REXR shares should be worth significantly more. What’s holding REXR back? Clearly, all REITs (and most stocks) have been pounded this year. Industrial REITs have been hit harder than most. However, REXR’s fundamentals are beating analysts’ estimates.
In addition to beating the estimates, they also increase the forecasts:
Sound familiar? After Q2 2022, they also had to raise their forecasts:
Yes, there is a pattern here.
They are having an exceptional year on the fundamentals, despite the weakness of the share price. However, this article is not intended to be an update for the third quarter of 2022. It is designed to provide an overview of the growth of FFO and AFFO per share over the next few years. We will, however, include some figures from the third quarter of 2022.
You can completely ignore missing titles on GAAP EPS. Nobody cares. REXR delivered in Q3 2022 a Core FFO per share of $0.50. This beat the last consensus estimate of $0.48, and it beat the estimate of $0.49 from a few weeks ago. It’s the typical “hit and raise”. Well, if a typical beat and raise can include cash leasing spreads of 63%, then that’s a typical beat and raise.
Some readers ask me to provide a simplified income assessment. I rate the quarterly results at 10/10.
It’s not just REXR that’s generating massive growth. We are also very optimistic on Prologis and Terreno (TRNO). These three REITs combine to represent approximately 14.1% of my portfolio. Since stock prices change and we have an actual portfolio rather than a hypothetical portfolio with arbitrary allocations, this allocation will change over time because stock prices change.
We expect the dramatic growth in AFFOs per share to continue for industrial REITs. Except for ILPT. We do not enter the ILPT. For the rest, we expect dramatic growth in AFFO per share. This growth is expected to be largely driven by a strong comparable RNE performance. This NOI of the same property should be boosted by strong rental spreads. These rental differentials are the result of existing leases at low rates and a dramatic increase in market rents over the past few years.
The limited development of new supply combines with a move towards e-commerce (which requires much more industrial space and virtually no retail space) to create a structural imbalance of supply and demand. It might be possible to develop more industrial real estate, but in most cases the opportunity costs would be enormous. These opportunity costs (and zoning challenges) are significant enough to create a significant barrier to new supply in the most desirable areas.
Industrial real estate still has fairly cheap rents per square foot. This gives landlords the opportunity to increase rents. Tenants can pay the new rent or leave. They could sign a competitor instead, but they would still face huge rental rate increases. This leaves us in an ideal environment to see AFFOs per share and dividends continue to grow at a rapid pace.
Valuations: strong buy on REXR, TRNO and PLD