Investors are a fickle lot, often getting caught up in a good story and driving stock prices to unreasonable heights. That's pretty much what happened with Rexford Industrial (REXR -1.04%), which has now lost roughly a third of its value as investors have moved on to other investment ideas. The only thing is that this real estate investment trust (REIT) is still operating at a high level thanks to its unique industry positioning.
Location, location, location
Rexford owns warehouses, which are vital cogs in the global economy. After all, the products made in one country have to be put someplace in the destination market as they move through the supply chain before they get sold. Rexford is there to help with the roughly 44 million square feet of space in its portfolio. What's unique here is that 100% of the company's portfolio is in the infill Southern California market. That's vastly different from peers like industry giant Prologis (PLD -1.15%), which has a globally diversified portfolio. Even most domestically focused competitors take a broader approach, with assets in multiple U.S. markets.
Image source: Getty Images.
There is no question that this focus increases the risk in Rexford's portfolio. If something should go wrong in the infill Southern California market, then Rexford will likely be the hardest-hit warehouse REIT. That's something that investors need to keep in mind as they watch this company and compare it to peers.
And yet, in the first quarter of 2023, Rexford's business continued to shine. Occupancy was a very high 98%. It was able to raise rents by a massive 80% on 1.8 million square feet of space across new leases and renewals in the quarter. And core funds from operations (FFO), a key metric for REIT performance, grew 8.3% year over year. It was a very good quarter by any measure.
What about the future?
This strong business performance might make investors wonder about the big stock decline of 33% since early 2022. The share-price increase leading up to the 2022 peak came out of the coronavirus pandemic, when people staying at home to slow the spread of the illness resulted in a surge in online shopping. Those products had to move through the warehouse system and that increased demand. Investors have since cooled on the warehouse sector and the stock has headed lower.
What's interesting is that Rexford's performance suggests that it is still doing quite well despite the stock's slump. In fact, the company expects occupancy to remain robust throughout the year and it actually increased its FFO forecast slightly after the strong first quarter. The company clearly doesn't expect the business to fall off a cliff, a point that's reaffirmed by industry giant Prologis. That competitor's chief executive officer, when asked about the California market Rexford serves, stated that he wasn't at all concerned that performance would weaken materially.
So the roller-coaster ride that Rexford's stock has been on seems like it has been driven mostly by investor sentiment. In fact, according to Rexford, the vacancy rate in its market is a tiny 1.5% or so. That suggests that demand remains very high, which is clearly indicative of a healthy business. Being so close to Asia, California is a prime warehouse hub, and Rexford is well positioned within the state.
Worth a deep dive
Rexford and its narrow regional focus won't be a great fit for all investors, with conservative income-seeking types probably better off with a more diversified warehouse landlord. However, over the past five years, the REIT has raised the dividend at a very rapid 15% or so annualized clip. And given its fundamental strong performance, dividend growth could remain robust for longer. Dividend investors might want to dig in here following the big price pullback.
