Rexford Industrial (REXR) surged following news that the famous activist investor Elliot Management had taken a substantial stake in the company.
Their investment was so big that they have now become one of the biggest investors in the company:
Elliott is one of the most renowned activists in the world, commonly targeting undervalued companies and then pushing them to unlock value via major M&A deals.
As an example, Elliott was recently involved in the take-private deal of City Office REIT (CIO), which is one of the latest REIT buyouts.
Is Rexford now their next target?
On paper, there are a lot of factors that would make Rexford a great target for a buyout.
It trades at a steep discount to private market values, and that’s despite owning very desirable assets, having a strong balance sheet, and a shareholder-friendly management team.
Even then, I think that a buyout is unlikely due to one simple reason, and it is that Rexford is very big, owning about $20 billion worth of properties. That’s likely too big a deal even for the biggest alternative asset managers like Blackstone (BX).
Therefore, a buyout likely isn’t their intention.
I think that it is likelier that they will try to push Rexford to sell some of their assets at private market values, and then reinvest the proceeds in large buybacks to create and unlock value.
I think that Elliott is seeing this and thinking that they can pressure them to simply double down on this capital allocation plan and push them to sell assets more aggressively to buy back stock.
Private market cap rates for some of its top assets are in the mid-4s. They are so low because these are truly irreplaceable assets in strategic locations that are already fully built out. Moreover, their lease rates are often deeply below market, offering an opportunity for sizable rent bumps in the future.
In comparison, its own stock is trading at a high-5 implied cap rate.
Therefore, selling assets in the private market to buy back stock in the public market would be highly accretive and immediately expand its FFO and NAV per share.
This is what Farmland Partners (FPI) and BSR REIT (HOM.U:CA) have been doing in recent years to create value.
But the difference between Rexford and these smaller REITs is that it has a far stronger balance sheet, which could allow it to be even more aggressive.
Its current loan-to-value is just about 25%, a historic low. It also has limited debt maturities over the coming year.
This means that the REIT could also further accelerate buybacks by taking on some leverage. With its BBB+ rated balance sheet, it could likely secure long-term debt with an interest rate in the high-4s to buyback shares in the high-5s, resulting in immediate accretion. It could then take its time in gradually selling assets to pay off this leverage.
I would bet that this is the plan.
I don’t think that Elliott will seek to sell the whole company. It appears much more likely to me that they will simply push the management to double down on buybacks.
Their $100 million buybacks year-to-date are a positive sign, but they don’t truly move the needle for a company of this scale.
However, if they did 5-10x more buybacks, it would create meaningful value and also likely help the market sentiment of the stock.
This is likely why Elliott got interested.
We reaffirm our Strong Buy rating, increase our Buy Under Price to $52, and welcome you to read our recent article on how we think that Rexford could turn into one of the biggest winners of the AI revolution in the REIT space.
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of all companies held in the CORE PORTFOLIO, RETIREMENT PORTFOLIO, and INTERNATIONAL PORTFOLIO either through stock ownership, options, or other derivatives. We also own a position in FarmTogether. High Yield Landlord® (’HYL’) is managed by Leonberg Research, a subsidiary of Leonberg Capital. All rights are reserved. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. The newsletter is impersonal and subscribers/readers should not make any investment decision without conducting their own due diligence, and consulting their financial advisor about their specific situation. The information is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The opinions expressed are those of the publisher and are subject to change without notice. We are a team of five analysts, each contributing distinct perspectives. Nonetheless, Jussi Askola, the leader of the service, is responsible for making the final investment decisions and overseeing the portfolio. We do not always agree with each other, and an investment by Jussi should not be taken as an endorsement by other authors. Past performance is no guarantee of future results. Our portfolio performance data is provided by Interactive Brokers and believed to be accurate but its accuracy has not been audited and cannot be guaranteed. Our portfolio may not be perfectly comparable to the relevant index. It is more concentrated and may at times use margin and/or invest in companies that are not typically included in REIT indexes. Finally, High Yield Landlord is not a licensed securities dealer, broker, US investment adviser, or investment bank. We simply share research on the REIT sector.
