Shares of Rexford Industrial Realty (NYSE: REXR) got a huge boost from investors coming out of the pandemic. It was, at that point, a story stock thanks to increased demand for warehouses at the time.
Wall Street has moved on to new stories, like artificial intelligence (AI), and Rexford’s stock price has lost around half its value since its high point in 2022. The dividend yield is now an attractive 4.1%.
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Here’s why this stock should be seen as a buy and hold for long-term income investors.
Rexford is a real estate investment trust (REIT), which means it buys properties and leases them out to tenants. It’s a fairly simple business to understand. However, the company is highly focused. For starters, it only buys industrial assets. That’s not odd, as many REITs have a property type they emphasize.
However, Rexford only buys industrial properties located in Southern California. That’s pretty unique, with most of its industrial peers preferring to have more geographically diverse portfolios.
Image source: Getty Images.
In some ways this is a high-risk business model. Rexford would be in big trouble if anything should go wrong with industrial assets in Southern California. But that has to be juxtaposed against some other facts.
For example, Southern California is the largest industrial market in the United States, thanks to the fact that it is a gateway into the country for Asian goods. Vacancy rates in the region, while rising since 2023, are lower in Southern California than the average vacancy of industrial assets in the broader U.S. market.
There are reasons to expect Southern California to remain advantaged as well. Notably, supply is tight thanks to a limited supply of land and the fact that industrial assets are frequently converted to other purposes, particularly housing. Also, redevelopment of assets, something Rexford is adept at doing, doesn’t increase supply, it just makes existing supply more attractive to potential tenants.
Southern California is an attractive market and there’s no reason to believe that’s going to change. If you had to pick a regional focus in the industrial sector, it would be a good choice.
As noted, the story for industrial properties was heightened demand coming out of the peak of the COVID-19 pandemic. That led to large rent increases. With demand cooling off somewhat, highlighted by the broad decrease in occupancy in Southern California since 2023, perhaps the sell-off in Rexford’s stock is because of problems that the business is facing. Not really.
In mid-November 2024, Rexford put out a press release providing an update on some key statistics. For starters, occupancy stood at 95.9%, which is a pretty strong number. Sure, that’s lower than it was during the peak of demand, but it is hardly at worrying levels.
Second, the company’s average rental increase on leases that were renewed or newly signed in roughly the first half of the fourth quarter were at rates that were 80% higher than the expiring lease they replaced. And they included annual rent bumps of 3.9%, which is a pretty strong figure and will support future earnings for years to come.
Perhaps the Southern California industrial market isn’t as strong as it was, but it is still strong.
REXR Dividend data by YCharts
On top of that, the company estimates that it has around $450 million in capital spending projects as it continues to redevelop existing assets. That, in turn, will allow for more rental increases in the future. In fact, the backlog of work is projected to last through 2027, so redevelopment is a yet another multiyear tailwind.
All in, it appears Rexford remains a well-positioned industrial REIT. But the real attraction here is the 4.1% dividend yield, which is near the highest levels in the company’s history. In other words, it seems like this well-positioned REIT has been placed on the sale rack because of the market’s broader concerns about industrial real estate.
Given Rexford’s focus on an advantaged market and still strong performance, it seems like it could be a worthwhile buy for dividend investors who think in decades and not days.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Rexford Industrial Realty. The Motley Fool has a disclosure policy.
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