Rexford Industrial NAV Calculations and Industrial REIT Commentary

Hey members,

It’s clearly been a wild week. One of the sectors getting crushed particularly hard since Liberation Day is the industrial REITs. The sector was already out of favor, but this sector is particularly exposed to tariffs. Imports go through industrial real estate. Of course, local manufactured products would still go through some industrial real estate. Not the same chain, but still creating some demand. However, even in the most optimistic scenarios, growth in domestic manufacturing would be a slow process.

Industrial REIT Expectations

Given the tariff environment, I expect all industrial REITs to lower guidance for:

• Same property NOI
• Occupancy
• FFO and/or AFFO per share

The headwind is pretty simple. If you had a potential business that relied on importing, how eager would you be to sign a lease in this environment? Exactly. You would probably postpone any expansions. If you had a lease coming up for renewal, you would probably be negotiating for much shorter terms or lower rates. If you’re a tenant who relies on importing from China, your entire business plan may have been invalidated over the last 10 days.

Would you dare to sign a lease based on hoping the tariffs would disappear?

Even if you’re importing from the EU, the 90-day “pause” wouldn’t reverse your concerns about the viability of your business. If you’re big enough to force your increased costs onto customers, it would be less of a concern. Then again, Apple is pretty big and operates in a duopoly. They have a stronger position to pass on costs than most companies. Can they pass on the full cost of tariffs? Seems unlikely. They are already moving their production facilities to India.

Industrial REIT Net Asset Value

I would expect that the market for industrial REIT assets suddenly has huge bid-ask spreads. Sellers may be looking for similar prices, but bids may be much lower. I also believe consensus NAV estimates will be revised materially lower in the following weeks.

Consequently, I thought it would be helpful to share some industrial REIT NAV calculations with our members. 

Rexford Industrial Net Asset Value

I enhanced our NAV model over the last week and I plugged in the data for Rexford (REXR).

Guidance for REXR calls for same-store cash NOI growth around 2.5%. However, given the tariffs, I slashed that to 0%. Did I cut far enough? Too far? Noone knows. Noone can tell us what tariff rates will be expected on Friday of next week.

We calculated at NAV using cap rates from 4.0% to 7.5%. Recent industrial real estate deals traded around a 5.5% cap rate based on stabilized NOI. This table shows the calculations using the different cap rates:

Note: Values are in thousands, except for “per share” values.

Today, REXR is trading around $31.80. Well, “today” is much too broad. As I’m putting the finishing touches on the article, shares are around $31.80.

Implied Cap Rates

We can work the model in a different direction to reach the implied cap rates:

The consensus estimates for REXR’s NAV range from $55.04 on the high end to $39.50 on the low end. In theory, that means cap rates of 4.2% to 5.42%. However, “in theory” does some heavy lifting there. I’ve seen too many analysts prepare NAV estimates that prove they don’t know how to calculate NAV. If they can’t calculate NAV correctly, then they could have plugged in any cap rate to reach the number. However, when we run the formula, we reach a low estimate of 4.2% and a high estimate of 5.42% for cap rates. Of course, they might have used a different forward growth rate from the 0% we used.

The more interesting part here is that the market implied cap rate is already up to 6.33%. A few years ago, the industrial REITs had vastly lower market-implied cap rates. 

Conclusion

Discount to NAV is far less reliable for equity REITs because consensus NAV estimates are less reliable (compared to an agency mortgage REIT or a BDC). However, it can still be a useful tool. We can also enhance it by running the calculations using our own cap rates or reversing the calculations to find the implied cap rates. 

These REITs have strong enough balance sheets to withstand a harsh environment. That’s very important for long-term success.

REXR’s total debt and preferred equity only comes out to $16.84 per common share and unit. That’s pretty low. I'm not even using net debt for that figure. If we offset it with cash on hand, the value drops a bit further. Strong balance sheets give REITs more flexibility, which is important when the market gets rough. The REITs that were demolished in the Great Recession typically had far too much leverage. They were forced to dump assets at terrible prices. We’re not getting into those kinds of REITs.

I’m still in the bullish camp on Rexford and the industrial REIT sector. I find the high market-implied cap rates very attractive. These cap rates are still lower than some other sectors, but it is a dramatic change for industrial real estate. I’m not attempting to predict the exact bottom. Not even close. But I’m sharing my perspective, as I may increase my industrial REIT position again.

However, investing in the sector faces dramatic new challenges from tariffs. Some people will refuse to invest regardless of the implied cap rates. That’s okay. If you’re one of those people, it’s better to know that before entering the sector.

Let me know in the comments if you find the NAV calculations and implied cap rates helpful.

Disclosure: I am long REXR, Prologis (PLD), and Terreno (TRNO).