REXR - Rexford Industrial: The Rally Is Just Getting Started
2023-12-15 07:00:00 ET
Summary
- Rexford Industrial Realty, Inc. has outperformed the S&P 500 by double since October.
- This blue-chip REIT has strong fundamentals, including a dividend yield more than twice that of the S&P 500 and 15-20% annual AFFO growth prospects.
- Despite Rexford's 20% rally in the past month and a half, there is still room for further growth, and Rexford remains a top pick in the REIT space.
The S&P 500 (SP500) is up 9.8% since the end of October. But, many of my favorite real estate investment trusts, or REITs, are crushing those returns.
For instance, Rexford Industrial Realty, Inc. ( REXR ) is up 21.2% since Halloween.
And yet, looking at this stock’s fundamentals, I think this rally has a lot of room left to run.
Rexford is a blue-chip REIT trading well below its historical averages.
It has a dividend yield (2.90%) that is more than twice the size of the S&P 500’s dividend yield of 1.41%.
And looking ahead, it has 15-20% annual adjusted funds from operations, or AFFO, growth prospects.
To me, this is a recipe for major success and therefore, even after its 20% rally during the last month and a half, it’s not too late to buy more shares.
Rexford remains one of my favorite picks in the REIT space today, with a “Strong Buy” rating.
Stick With Quality
Sometimes investors overcomplicate things.
The simplest, easiest way to make money in the stock market is to buy blue chip stocks when they’re trading with an attractive margin of safety.
In this situation, investors set themselves up to benefit from the reliable fundamental growth that these wonderful companies generate…as well as capital appreciation created by multiple expansion as the market realizes its pricing folly and mean reversion occurs.
Well, when it comes to quality, it doesn’t get any better than Rexford Industrial.
Rexford scores 99/100 on the iREIT® IQ quality rating system.
That makes REXR one of the 4 highest rated REITs in my coverage spectrum.
No one has a perfect 100/100 rating currently, and there are only other 3 REITs with 99/100 iREIT® IQ ratings.
They are:
Obviously, that’s great company to keep.
And, therefore, when thinking about sleep well at night ("SWAN") REITs, Rexford is always one of the first that comes to mind.
Company Overview
I’m not going to write an in-depth overview of Rexford’s operations here since we did that a couple of weeks ago in this article .
In short, this is an industrial REIT, which means it owns warehouse properties…and in Rexford’s case, they’re all in southern California markets.
This company has used its expertise to build the best-in-class portfolio of industrial buildings that surround the Port of Los Angeles, which is the busiest seaport in the western hemisphere.
For a decade now, REXR has benefitted from the influx of goods arriving into the U.S. from Asian markets. And while it’s true that there’s a major onshoring/nearshoring trend going on right now with regards to manufacturing, demand for space in Rexford’s buildings isn’t going anywhere, anytime soon.
To me, this chart succinctly sums up the advantages of owning a geographically concentrated portfolio like Rexford does.
Because of the unique supply and demand metrics that play out in the southern California infill market, Rexford has been able to produce fundamental results that reliably beat its peers.
Even if America gets to the point where it is the leading manufacturing hub in the world (which is something that would take decades of investment to achieve), Rexford’s warehouses near our biggest West Coast port would still be incredibly profitable due to rising exports.
It doesn’t matter whether goods are coming or going…all of the shipping that takes places between San Pedro and Long Beach is a permanent source of demand for this company.
Southern California infill markets boast lower vacancy rates, lower supply risk, and higher same-store NOI growth than any of the other major U.S. markets.
And with that in mind, I’m more than happy to overlook the concentrated nature of REXR’s portfolio. Sometimes diversification is "diworsification," and that’s exactly what this company’s management team would say about other markets.
REXR has the cash flows to build out asset portfolios elsewhere in the U.S. (or around the world) if they wanted to. But it appears they do not. They’re content with the returns that they can generate in SoCal…and looking at their outperformance, who can blame them?
Valuation Breakdown: Rexford Has Plenty Of Room Left To Run
In that recent article, I was putting a spotlight on the record-breaking Thanksgiving/Black Friday and several logistics companies and industrial REITs which will help Santa deliver all of those presents.
Rexford was one of them…and its shares are up by 9.8% since I published that piece.
Sometimes it’s hard to buy shares of a stock after such a strong rally.
But, I wanted to pen another piece on Rexford to hammer home the idea that this stock got way too cheap earlier in the year, and now that the sentiment surrounding shares has changed, I think there’s another 15-20% of upside potential left in the tank.
Today, REXR shares trade for $52.42.
Their blended price to AFFO multiple is 30.65x.
At first glance, that might seem like a lofty premium. However, it’s well deserved considering REXR’s propensity for double-digit bottom line growth.
Despite its share price weakness during 2023, Rexford has had a solid year of growth thus far.
It looks like the company will produce AFFO growth of ~10% in 2023…and right now the consensus analyst estimates for AFFO growth in 2024 and 2025 are 16% and 19%, respectively.
Assuming REXR’s Q4 results meet expectations and the stock hits that 10% growth rate in 2023, that will mean double-digit growth during 5 out of the last 7 years.
And looking ahead, REXR’s growth is expected to accelerate due to ongoing same-store growth and recent property acquisitions and developments coming online from a cash flow perspective.
Paying 30x for a stock that has the potential to compound its earnings at a 15%+ rate is a fine price to pay.
If you look outside of the REIT sector, valuations like this are common on some of the highest quality stocks in the market.
For instance, Mastercard (MA) (another stock that I highlighted in that helping Santa Claus article) currently trades for 34x earnings, with forward-looking EPS growth prospects that are essentially in-line with Rexford’s AFFO estimates.
Mastercard is expected to post 17% growth in 2024 and 18% growth in 2025.
MA’s price-to-earnings growth ("PEG") ratio is actually higher than Rexford’s.
And REXR offers a dividend yield that is nearly 5x the size of MA’s…more generously paying investors while they wait for future cash flows to justify current valuations.
Obviously this isn’t a perfect apples to apples comparison, but the numbers match up well.
I know that REIT investors aren’t accustomed to paying such high premiums for shares, but Rexford’s unique growth prospects more than justify its AFFO multiple in my opinion.
Looking at the chart below, you’ll see that REXR’s long-term average P/AFFO multiple is 35.5x (the blue line).
During the last 10 years, REXR’s average annual AFFO growth rate is 14%.
Being that its forward-looking growth prospects are actually above that long-term average, history states that mean reversion back to that 35x level would make sense.
However, in a higher interest rate environment I think a discount makes sense.
I included a custom pink line on the chart showing the 30x AFFO threshold.
You’ll notice that this level has served as strong support for REXR shares throughout the last decade and, therefore, to me, it represents a conservative multiple target.
30x forward expectations is approximately $60/share.
REXR’s forward annual dividend is $1.52/share.
Looking ahead to the end of 2024, assuming the dividend is paid and analyst estimates are correct, REXR offers annualized total return prospects of roughly 16.5%.
Due to accelerating growth prospects in 2025, that annualized ROR increases to 19% over the next 2 years.
And, if REXR shoots past my conservative 30x target back up to its long-term AFFO average in the 35x range, those total return calculations go even higher.
Those 1-year and 2-year annualized ROR figures soar to 34.1% and 27.8%, respectively, when using consensus growth estimates and a 35x multiple.
Conclusion
Either way you slice it, absent significant multiple contraction (which doesn’t seem rational, due to REXR’s upwards AFFO trend), REXR’s growth prospects point towards attractive upside potential.
And the best part of this story is: investors get paid to wait for this bull thesis to play out.
REXR shares yield 2.90%.
They’ve been growing that dividend for 10 consecutive years.
REXR’s 5-year dividend growth rate is 18.41%.
Its most recent dividend increase was 20.6%.
This growth rate means that REXR’s dividend is doubling every 4 years or so.
With that in mind, I don’t worry about the relatively low yield (for REITs) in the short term.
REXR’s 2.90% yield today will compound into a much higher yield on cost for patient investors.
Rexford’s dividend growth outpaces inflation by a wide margin. That protects the purchasing power of my passive income stream. And that makes this a perfect SWAN stock for me in today’s broader economic environment.
This company’s low yield doesn’t scare me. Its unique, geographically concentrated portfolio doesn’t scare me. Instead, I focus on Rexford Industrial Realty, Inc.'s best in class returns and the fact that this company has arguably the best long-term growth prospects of any mature company in all of REITdom.
For further details see:
Rexford Industrial: The Rally Is Just Getting Started