Redevelopment And Leadership Changes Expected To Improve Future Profitability

Key Takeaways

• Rexford's redevelopment strategy and leadership changes aim to enhance value and improve operational efficiencies, potentially boosting revenue and margins.
  
• Strong tenant demand in Southern California and effective cost controls are set to improve occupancy and increase shareholder value.
  
• Economic uncertainties and decreased rents are pressuring Rexford's revenues, while limited acquisitions and focus on redevelopment may hinder near-term growth opportunities.

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 focus on repositioning and redevelopment projects with a projected unlevered stabilized yield of 6.1% aims to enhance value creation and support future revenue growth.
  
• The addition of new leadership roles, with Mike Fitzmaurice as CFO and Laura Clark as COO, is expected to improve operational efficiencies and profitability, potentially impacting future net margins positively.
  
• Tenant demand in Rexford’s infill Southern California market shows signs of improvement, with a pickup in lease negotiations that could drive higher occupancy rates and increase rental revenue.
  
• Rexford’s commitment to cost control and operational efficiency, as evidenced by maintaining flat G&A expenses despite growing NOI by 17% in 2024, could enhance net margins in the future.
  
• The company's capital recycling strategy, focusing on higher-return redevelopment opportunities and potential stock buybacks, is designed to increase shareholder value and earnings.

Rexford Industrial Realty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rexford Industrial Realty's revenue will grow by 10.9% annually over the next 3 years.
• Analysts are assuming Rexford Industrial Realty's profit margins will remain the same at 28.1% over the next 3 years.
• Analysts expect earnings to reach $358.4 million (and earnings per share of $1.72) by about March 2028, up from $262.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $415.7 million in earnings, and the most bearish expecting $301.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 41.6x on those 2028 earnings, up from 35.2x today. This future PE is greater than the current PE for the US Industrial REITs industry at 31.5x.
• Analysts expect the number of shares outstanding to grow by 4.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Rexford Industrial Realty Future Earnings Per Share Growth

Risks

• Recent macroeconomic, interest rate, and political uncertainties are impacting near-term projected growth for 2025, which could affect overall revenue and earnings.
  
• A decline in market rents for quality products, including Rexford's portfolio, with a 1.5% sequential decrease and an 8% year-over-year decline, suggests pressure on net margins and rental revenues.
  
• Rexford's occupancy levels have been impacted, with a decline in average same-property occupancies by 120 basis points and a projected further 100 basis point decline, affecting rental income and net operating income.
  
• Guidance for 2025 indicates elevated downtime and increased concessions, contributing to projected same-property net effective NOI growth of only 1%, potentially impacting profitability and cash flow.
  
• No current acquisitions are under contract, and a projected capital allocation for 2025 heavily focused on repositioning and redevelopment rather than expansion may limit near-term revenue and NOI growth opportunities.

Valuation

• The analysts have a consensus price target of $44.588 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 $55.0, 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 $1.3 billion, earnings will come to $358.4 million, and it would be trading on a PE ratio of 41.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of $40.71, the analyst price target of $44.59 is 8.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.