Rexford’s Recent Issuance and Acquisitions
Note: Brief summary at the end: Under 180 words.
Rexford Industrial (REXR) REXR 0.00%↑ recently (3/25/2024) had a press release announcing an unusually complex equity issuance. We came out criticizing the plan.
REXR came out with a few more announcements in quick succession:
3/26/2024: REXR announces the pricing for the $840 million of common shares ($48.95).
3/26/2024: REXR announces 2 series of new notes, each for $500 million. Total $1 billion.
Because of the underwriter’s option (already used), this will actually be $575 million each. The total will be $1.15 billion.
The notes are due 3/15/2027 and 3/15/2029. Rates are 4.13% and 4.38%. (Average 4.25%)3/28/2024: REXR announces purchasing industrial assets from Blackstone for $1 billion.
Initial cash cap rate of 4.7% appears immediately accretive because 4.7% > 4.25%. Stabilized yield (market rate + 95% occupancy assumption) projected at 5.6%.
Note: I believe item 2 and item 3 are related. They both started with $1 billion in total value. I think it is fair to say the goal of issuing these notes was almost certainly to buy the industrial portfolio from Blackstone.
Let’s go through those quickly.
Issuing shares at $48.95: I don’t like the price for issuing shares. An 8% increase in shares outstanding at a poor price. Below NAV, so this issuance is diluting NAV per share. We already reduced REXR’s targets for this decision.
Issuing debt at 4.25%: That looks good at a glance, but we will go deeper.
Buying from Blackstone: Unless Blackstone is forced to sell these assets due to redemptions on some underlying funds, the deal is unlikely to be below market value. We prefer to see REXR getting property via smaller transactions with motivated sellers, such as owners who don’t want to refinance their properties via mortgages at unattractive rates.
When to Buy Assets at Market Value
Buying assets around market value is a good deal if:
The purchase can be funded by issuing shares at a significant premium to NAV. If REXR could issue shares at $60 to $65 today for cash in hand, I would really like issuing that equity and buying the real estate. Above $65? I would call it a slam dunk. This is not happening. REXR issued debt for this deal and recent issuance was below NAV.
There’s a strong reason to believe the company can extract more value from tenants or otherwise expects substantial appreciation that the former owner didn’t recognize. Unlikely with Blackstone.
The property comes with very favorable terms on debt. For instance, if Blackstone was providing the financing at an average rate of 4.25% with no other qualifications. While REXR did issue debt, it was a bit more complex. Therefore, this scenario is not happening either. I would consider this situation pretty rare.
Example: Realty Income (O) O 0.00%↑ tends to acquire an enormous amount of real estate most years. The reason Realty Income is constantly acquiring real estate is primarily because of scenario 1. Realty Income is issuing shares far above NAV. Often, there is some element of scenario 2 involved as well. A material portion of Realty Income’s returns so far this century are a result of this recipe.
In many years, REXR and several of the other industrial REITs have been able to use the same strategy. They would issue above NAV while negotiating off-market deals to buy up individual properties or small portfolios where they had significantly more expertise than the prior owners. Consequently, they were creating value by issuing above NAV and then creating additional value by enhancing the property. You’ll see Terreno (TRNO) TRNO 0.00%↑ continuing to make several of these small transactions.
I prepared a few images to demonstrate when we want REXR issuing shares:
With that image, I want to mention that the consensus NAV estimates are far from perfect. There is some margin for error in those estimates. Unfortunately, GAAP (Generally Accepted Accounting Principles) doesn’t have management of equity REITs providing their own estimates for NAV. Those estimates could improve transparency as management has access to significantly more data than the analysts.
Since we mentioned Realty Income, I want to include a 10-year chart to show just how many opportunities Realty Income had to use this technique: