This small dividend stock has a secret weapon worth over $200 million.

rexford industrial (Rex -0.55%) is not even well-known in the real estate investment trust (REIT) sector. With a market capitalization of only about $11 billion, it is small compared to its largest industrial REIT peers. Prologis (PLD -0.98%)the market capitalization is more than 10 times ($120 billion).

But even small businesses can make a big difference, and that’s exactly what Rexford seems set to do with this $200 million-plus secret weapon.

Overview of Rexford Industrial

As the Rexford name suggests, the company owns industrial assets such as warehouses, distribution facilities, and light industrial buildings. But the company has a unique focus that sets it apart from peers like Prologis, which has a globally diversified portfolio. Rexford is at the opposite end of the spectrum, with a geographically concentrated portfolio. All of the REIT’s assets are located in Southern California.

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On the surface, that sounds like a pretty risky proposition. And on some levels, that’s true. However, due to Southern California’s proximity to major ports, it is one of the largest industrial markets in the world and is larger than any other industrial market in the United States. Warehouses are in high demand there.

Adding some important external factors here makes the story even better. For example, this highly developed region has little land available to build new properties. And demand for residential development is increasing, resulting in industrial land being rezoned for residential or commercial use. Rexford therefore operates in a market with very attractive demand/supply characteristics.

The foundation for Rexford’s growth

The problem is solved here. Rexford believes he can increase net operating income (NOI) by more than $240 million by 2026. This represents a significant increase of 42% compared to his NOI run rate in Q4 2023. The best part is that all the foundations for NOI expansion are already in place in-house.

For example, management expects to generate $95 million in benefits from the redevelopment of existing properties. Essentially, REITs are taking older assets and modernizing them so they can charge higher rents. Another $95 million or so will come from rolling over existing leases to higher rental rates as older leases expire. This is no fanciful prediction. In the fourth quarter of 2023, Rexford was able to enter into a new lease at a rent that was 77% higher than the expiring lease.

These will be the two biggest drivers of NOI growth over the next three years, but they are not the only ones. An additional $40 million will come from rent increases built into existing lease agreements. And $10 million will come from recent acquisitions.

However, this is a bit of a wild card as Rexford are always looking for acquisition opportunities. The $10 million figure relates to what the REIT has already purchased, and there could be significant upside if the REIT buys more properties.

But the big story here isn’t the opportunity presented by future acquisitions. It is impossible to predict them. The really fascinating part of Rexford’s investment thesis is that everything needed to support his NOI growth opportunities highlighted here is already built into the portfolio, waiting to be exploited. That’s it.

Further dividend growth expected from Rexford

Rexford Industrial is not a high-yield REIT, as its dividend yield is only about 3.2%. By comparison, the average REIT is Vanguard Real Estate ETF (VNQ -1.26%) Instead, the yield is around 4%.

But what Rexford lacks in yield, it makes up for in dividend growth. It has grown its dividend at an annual rate of 22% over the past five years. This is a staggering number for any company, let alone a REIT. And given Rexford’s strong organic growth outlook, there’s no reason to believe this dividend growth machine is about to slow down.