Rexford Industrial (REXR 0.94%) isn't a household name even in the real estate investment trust (REIT) sector. With a market cap of just $11 billion or so, it is tiny compared to its largest industrial REIT peer Prologis (PLD +0.47%), which has a market cap more than 10 times as large ($120 billion).
But small companies can provide big results, and it looks like that's exactly what Rexford will do thanks to this $200 million-plus secret weapon.
A quick overview of Rexford Industrial
As Rexford's name implies, it owns industrial assets like warehouses, distribution facilities, and light manufacturing buildings. But it has a unique focus that sets it apart from peers like Prologis, which owns a globally diversified portfolio. Rexford goes to the other extreme: It owns a geographically concentrated portfolio. All the REIT's properties are located in Southern California.
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On the surface, that sounds like a fairly risky proposition. And on some levels, it is. However, Southern California is one of the largest industrial markets in the world because of its location near key seaports and is larger than any other industrial market in the United States. Demand for warehouses is very strong there.
Now add in some key external factors, and the story gets even better. For example, there is little available land to build new properties in this highly developed region. And there's a higher call for residential development, which has led to industrial land being re-zoned for residential or commerical. So Rexford is operating in a market with very attractive supply/demand characteristics.
The foundation for Rexford's growth
This is where the rubber hits the road: Rexford believes that it can add $240 million or more to its net operating income (NOI) by 2026. That would represent a huge 42% increase over the fourth-quarter 2023 NOI run rate. The best part is that the foundation for all of that NOI expansion is already in place within the company.
For example, management expects to see a $95 million benefit from redeveloping existing properties. Basically, it is taking older assets and modernizing them so the REIT can charge higher rents. Another $95 million or so is set to come from existing leases rolling over to higher rental rates as the old leases end. This is not some fanciful projection -- in the fourth quarter of 2023, Rexford was able to sign new leases with 77% higher rents than the expiring leases.
NYSE: REXR
Key Data Points
Those will be the two biggest drivers of NOI growth over the next three years, but they aren't the only ones. Another $40 million will come from rental increases that are written into existing lease contracts. And $10 million will come from recent acquisitions.
This one, however, is a bit of a wild card, since Rexford is always looking for acquisition opportunities. The $10 million figure is related to what it has already bought, and there could be material upside if the REIT buys more properties.
But the big story here isn't the opportunity presented by future acquisitions. Those are impossible to predict. The really attractive part of Rexford's investment thesis is that everything needed to support the NOI growth opportunity highlighted here is already in the portfolio waiting to be exploited.
More dividend growth to come from Rexford
Rexford Industrial is not a high-yield REIT, given that its dividend yield is only around 3.2%. By comparison, the average REIT, using Vanguard Real Estate ETF (VNQ +0.22%) as a proxy, is yielding about 4%.
But what Rexford lacks in yield, it makes up for with dividend growth. Over the past five years, it has increased its dividend at an annualized rate of 22%! That's an incredible figure for any company, let alone a REIT. And given Rexford's strong internal growth prospects, there's no reason to believe this dividend growth machine is about to slow down.
