Redevelopment And Infill Projects In Southern California Will Unlock Value

Key Takeaways

• Rexford's strategic redevelopment projects and asset stabilization enhance cash flow and earnings, improving future revenue growth prospects.
  
• Focus on high-demand Infill Southern California properties and strong leasing performance supports long-term portfolio value and revenue expansion.
  
• Declining market rents, economic uncertainty, and increased supply could pressure Rexford's occupancy rates, rental rates, and delay revenue 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's redevelopment and repositioning projects are expected to generate $70 million of incremental NOI in the near term, enhancing cash flow growth and potentially increasing future earnings.
  
• The company's strategy of stabilizing assets at above-market yields and disposing of properties at low cap rates supports cash flow accretion, which could positively impact net margins and earnings.
  
• With over $1.6 billion in liquidity, including significant cash reserves and available credit, Rexford is well-positioned to opportunistically navigate market uncertainties, which could impact long-term revenue growth.
  
• The focus on Infill Southern California properties, benefiting from a long-term supply-demand imbalance, could enhance the value of the portfolio, positively impacting future revenue and earnings growth.
  
• Rexford's reported significant rental spreads of 24% and 15% for net effective and cash rents, respectively, from executed leases suggest strong leasing performance that could contribute to future revenue growth.

Rexford Industrial Realty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rexford Industrial Realty's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.0% today to 26.2% in 3 years time.
• Analysts expect earnings to reach $316.2 million (and earnings per share of $1.33) by about May 2028, up from $272.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.6x on those 2028 earnings, up from 29.2x today. This future PE is greater than the current PE for the US Industrial REITs industry at 25.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.81%, as per the Simply Wall St company report.

Rexford Industrial Realty Future Earnings Per Share Growth

Risks

• Market rents across Rexford's portfolio have declined 9.4% year-over-year, impacting potential revenue growth and net margins.
  
• The introduction of new tariffs has created economic uncertainty, leading some tenants to defer leasing decisions, which could impact occupancy rates and leasing revenue.
  
• There is increased supply for spaces above 100,000 square feet in certain submarkets, such as Mid-Counties and Inland Empire West, which may pressure rental rates and occupancy levels, affecting overall revenue.
  
• The company's projected lease-up timing has increased to 9 months, which could delay revenue realization and impact net operating income.
  
• Recent lease activity showed a negative cash leasing spread of 5%, suggesting potential downward pressure on lease renewals and effective rents, which could impact future revenue streams and net income.

Valuation

• The analysts have a consensus price target of $39.706 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 $45.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $316.2 million, and it would be trading on a PE ratio of 46.6x, assuming you use a discount rate of 7.8%.
• Given the current share price of $33.68, the analyst price target of $39.71 is 15.2% 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.