10/26/21 07:15 AM EDT

PLENTY OF SHIPS, HARDLY ANY SPACE IN SOCAL | 10.26.21 | (REXR)

Rob Simone, CFA

Takeaway: Adding logistics REIT REXR to Best Idea long list

After digging in post-3Q21 results, we are moving Rexford Industrial Realty (REXR) up from the bench to the Best Idea Long list. In our view REXR stands apart from the rest of the Industrial/Warehouse subsector for several reasons from both a fundamental perspective and Macro perspective in Quad 2:

Macro: Smaller size/cap relative to PLD & DRE, higher beta, and more "cyclical" growth over-and-above the underlying secular growth in industrial owing to its SoCal market exposures where space is tight and rents are exploding higher. The stock works well in both Quad 2 and great in Quad 4 (see Figures 3-5 below).
From a fundamental perspective we see a (1) a positive RoC trend on NOI and Core FFO earnings through the back half of FY22, (2) another mismodeled higher-growth REIT where Street estimates need to come up ~10%, and (3) a favorable setup here to earn at least a mid-teens IRR through the end of FY22. With another ~$300 million of potential acquisitions under LOI and the bucket likely to continue to grow + additional redevelopment on the come, external growth will most likely help REXR surprise to the upside on growth.
Keeping it as simple as possible, the ~$94 million of embedded NOI growth in the existing portfolio over the next 18-24 months (70% from recent acquisitions + repositioning, 30% from recent leasing on a cash basis and excluding future rent bumps on that cash) we estimate translates into a +17-20% Core FFO earnings CAGR through FY23 after leverage and new share issuance. This excludes any additional acquisition activity and redevelopment, which would obviously be additive to this number. The Street is modeling just a +13.7% earnings growth CAGR through the end of FY23. Numbers need to come up, and Hedgeye is +10% above consensus on both FY22 & FY 23 numbers. Figures 1 & 2 below lay out the case and math.