High Demand In Southern California Will Strengthen Industrial Market Prospects

Key Takeaways

• Rexford's strong market position in Southern California supports future rent and revenue growth due to high demand and occupancy rates.
  
• Strategic investments in redevelopment and acquisitions are projected to boost returns, earnings, and operational scale.
  
• Macroeconomic and political uncertainties, slower leasing activity, rent declines, redevelopment delays, and California's regulations could hinder Rexford's revenue and earnings growth.

Catalysts

Rexford Industrial creates value by investing in, operating and redeveloping industrial properties throughout infill Southern California, the world's fourth largest industrial market and consistently the highest-demand with lowest-supply major market in the nation.

• Rexford Industrial's portfolio is well-positioned for future rent growth in the infill Southern California markets, given the high occupancy rates and tenant demand fundamentals. This is likely to increase revenue and net operating income.
  
• The company projects approximately 34% cash NOI growth over the next three years, which indicates solid embedded potential within existing properties, potentially enhancing earnings.
  
• Rexford's investment in repositioning and redevelopment projects is anticipated to yield higher returns, with weighted average unlevered stabilized yields on total investments ranging from 7.6% to 8.4%. This could improve net margins.
  
• The strong leasing spreads of 39% on a net effective basis and 27% on a cash basis reflect continued revenue potential despite current market conditions, indicating positive rent roll and earnings growth.
  
• The potential for $200 million in acquisitions under contract could drive future growth in revenue, earnings, and increase the scale of operations, contributing positively to financial performance.

Rexford Industrial Realty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rexford Industrial Realty's revenue will grow by 15.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.3% today to 27.9% in 3 years time.
• Analysts expect earnings to reach $386.5 million (and earnings per share of $1.67) by about January 2028, up from $265.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $444.4 million in earnings, and the most bearish expecting $246.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.7x on those 2028 earnings, down from 34.5x today. This future PE is lower than the current PE for the US Industrial REITs industry at 34.7x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.04%, as per the Simply Wall St company report.

Rexford Industrial Realty Future Earnings Per Share Growth

Risks

• The macroeconomic uncertainty, including geopolitical unrest and domestic political factors, could slow tenant decision-making, impacting occupancy rates and potentially hindering revenue and earnings growth.
  
• The decrease in market rents, with sequential declines of 2.5% and year-over-year declines of 7.5%, reflects a normalization that could negatively impact future rent and revenue growth if the trend continues.
  
• Tenant hesitancy to take on higher rent leases amid economic uncertainty suggests a potential slowdown in leasing activity, which may adversely affect revenue and earnings if prolonged.
  
• The redevelopment timing challenges and longer lease-up periods could delay the realization of projected stabilized yields and NOI growth, impacting earnings and expected returns on invested capital.
  
• The increased restrictions from California's AB 98 could hinder development opportunities, potentially limiting future revenue growth and affecting the net asset value of the portfolio.

Valuation

• The analysts have a consensus price target of $46.0 for Rexford Industrial Realty based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $58.0, and the most bearish reporting a price target of just $40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $386.5 million, and it would be trading on a PE ratio of 33.7x, assuming you use a discount rate of 7.0%.
• Given the current share price of $41.2, the analyst's price target of $46.0 is 10.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.