Key takeaways: With REXR on our Long Bias list, we are highlighting some key takeaways from the call yesterday:
- Achieving contractual annual rent escalators above the historical ~3% average – more than half of 2Q21 leasing activity was achieved above +3% and as high as +4%. This necessitates upward bias to investors’ underwriting in terms of long-term rental revenue and NOI CAGRs
- Projecting $64 million or +20% embedded NOI growth within the operating portfolio, excluding any acquisition activity, over the next 1.5-2 years for a +10% CAGR
- Of the nearly ~2 billion SF of space in REXR’s target markets, about ~50% was built prior to 1980 which offers a large opportunity set to acquire value-add projects and deploy capital
- Market rents for REXR’s portfolio increased +16.8% Y/Y, with average in-place rents now approximately ~19% below market (recall similar to PLD’s reported ~17%). Mark-to-market for ~1.8msf expiring over balance of FY21 is ~24%
- All guidance excludes acquisition, disposition and balance sheet activity (does reflect Series A redemption, however), and REXR has about ~$650 million of investment under contract to close in 2H21. We think Core FFO guidance will be raised through balance of FY21 and Street numbers need to come up above the current $1.50/share. We will be updating our model after the 10Q filing
- Currently 3msf of planned value-add and redevelopment planned across the portfolio, with expected yields in the ~6% range well above current ~4% market cap rates
- Cash SSNOI growth was +11.3% adjusting for the easy comp against last year due to short-term rent deferrals (versus +22% reported)
- Collections are not an issue approaching ~99%. Interestingly, REXR assumes ~100bps of bad debt expense in 2H21 bringing FY21 to ~70bps, but did not account for potential recoveries in the back half so we believe it is likely that number comes in closer to 50-70bps and overall SSNOI guidance is conservative. As a reference point, bad debt averaged ~50bps pre-pandemic
- One item that did not come up on the call that we are curious about – turnover costs/capex has been trending up over the last few quarters on both a psf per annum and % of initial rent basis. While low from an absolute perspective, we are curious how much is (1) related to a higher proportion of new leases (mix effect) which typically come with higher upfront capital commitments, (2) general inflationary pressures on construction and materials and (3) push/pull to drive higher face rents and/or escalators with additional capital. To be clear, the trend on net effective rents is still up and to the right and overall lease economics are improving, but still something to watch in coming quarters
- We are re-attaching our 2Q21 model variances for reference:
Figure 1: 2Q21 Earnings Variances
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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