Q3 2019 Earnings Call
Greetings and welcome to the Rexford Industrial Realty third quarter 2019 earnings Conference call.
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Hey brief question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Steve Swett. Please see our thank you Sir you may begin.
Thank you for joining us Rexford Industrials third quarter 2019 earnings conference call.
In addition to the press release distributed yesterday after market close we posted a supplemental package in the Investor Relations section on our website.
W.W. Dot Rexford industrial dotcom.
Today's call management's remarks, and answers your questions contain forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
We're looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discuss today.
More information about these risk factors, we encourage you to review our 10-K and other STC filings.
Rexford industrial assumes no obligation to update any forward looking statements in the future.
In addition, certain <unk> certain information presented on this call represents non-GAAP financial measures.
Earnings release supplemental package <unk> GAAP reconciliations and an explanation of why such non-GAAP financial measures are useful to investors.
Today's conference calls hosted by Rexford Industrials co Chief Executive officers, Michael Franco and Howard Schwimmer, together with Chief Financial Officer deal Count.
They will make some prepared remarks, well open the call for your questions.
Now I'll turn the call over to Mike.
Thank you and welcome to Rexford Industrials third quarter 2019 earnings calls, we're extremely pleased with our third quarter performance, which reflects both the ongoing strength of the Rexford industrial operating platform as well as our focus within the infill Southern California industrial markets.
In terms of results, it's been a tremendous quarter and an exceptional year, so far a deal where elaborate on our financial results and guidance, but from an operational perspective. The team has been firing on all cylinders.
We signed 91 leases for approximately 1 million square feet, our leasing spreads were 31.2% on a GAAP basis, and 19.4% on a cash basis on new leases, our spreads were 38.2% on a GAAP basis, and 26.1% on a cash basis and at the end of the quarter our state.
Same property portfolio was 97.7% occupied.
We completed approximately $227 million of acquisitions in the quarter and including transactions close after quarter end our year to date investment volume is $773 million.
75% of this years investments acquired through off market or lightly marketed transactions leveraging our proprietary originations platform.
Further our acquisitions as well as our completions from our value added Fissioning work continue to generate strong above market cash yields, which Howard will elaborate upon shortly.
As we near the ended the year it seems appropriate to reflect briefly on a few key elements that make the rexford opportunity and our performance somewhat unique.
To begin with the Rexford opportunity is unique their focus on the largest supply constrained industrial market in the nation with the sharpest Submarket focus of any industrial read 100% of Rexfords portfolio is located within the exceptionally high barrier infill Southern California, industrial markets, where their supply haven't done.
[noise] real property is extremely scarce and is generally diminishing overtime.
Keith tenant demand fundamentals within our target infill markets are principally driven by this long term supply demand imbalance, which is magnified by increasing urban land values.
Our decades of experience have also demonstrated that this market tends to be more stable through economic cycles, when compared to non infill or secondary industrial markets.
Further as the nations largest zone of consumption comprising the largest first and last mile of distribution infill Southern California is positioned to benefit from the growth in e-commerce and the demand for shorter delivery time frames like no other U.S. industrial markets.
These dynamics are driving increased demand for warehouses in closer proximity to consumers and businesses. One of many reasons Rexfords portfolio is exclusively focused in submarkets that are among these infill population and business centers.
In fact, I just released CBR you research study found that rental rate growth within southern California totaled 57% over the prior five years for warehouses sized below 120000 square feet, which represent over 75% of the southern California infill markets as opposed to much lower rent.
Growth.
35% over the same five year period for larger warehouses sized above 120000 square feet, which are more representative of big box non infill locations that are not rexfords focus.
However, key to Rexford strategy is our ability to leverage our proprietary originations platform and created value at approach to investing enabling us to construct a portfolio within infill southern California comprised a premier locations with superior functionality.
Consequently, when we acquired vintage assets, we generally proactively renovate and reposition them to enable those properties to outcompete within their submarkets.
As a result of this approach we're constructing an irreplaceable portfolio of superior quality within the nations largest supply constrained markets.
Rexfords proprietary originations platform conveyed significant benefits to the company and to all shareholders.
To begin with our acquisition volume is driven by originations methodology and our ability to catalyze a high volume of accretive off market or lightly marketed investments. Consequently, we are successfully executing on our mandate to cure rate a portfolio and incorporate new acquisitions with the capacity to journey to generate lips to.
On a b and lift at that FFO per share over the medium to longer term irrespective of the capital markets cycle.
Second and more importantly, our originations platform enables us to identify and to execute on value add and stabilized investment opportunities capable of generating substantially higher cash returns on investment as compared to similar fully marketed transactions.
Consequently, our analyte growth profile is also somewhat unique as it is driven by our continued execution of a significant volume of value add improvements throughout our portfolio overtime.
Therefore at Rexford at all I growth is not merely driven by market rent growth for the mark to market of in place leases, we are positioned to generate an NOI growth through a value Edward irrespective of market rent growth.
With Rexfords market share currently at only just over 1% of the so called infill markets and with over 1 billion square feet built prior to 1980 within our target markets, our ability to leverage our originations platform to identify and invest in accretive value add opportunities is substantial into the foreseeable.
Future.
As a result, Rexford has also uniquely positioned as a growth company.
Got a historical basis, we have grown consolidated and Hawaii <unk>, 38% on average every quarter since our 2013 IPO on a year over year basis and on a go forward basis, we are positioned for accretive growth given the magnitude of our internal and external growth prospects.
Finally, rexfords greatest differentiator is our team we'd like to thank each one of our Rexford staff for your outstanding dedication and commitment to building our great company.
No very pleased to turn the call over to Howard.
Thanks, Michael and thank you everyone for joining us today.
The infill southern California, industrial market remains exceptionally strong.
With a supply demand imbalance that continues to drive rents and occupancy levels benefiting owners of well located industrial real estate.
Our target markets, which exclude the eastern inland Empire ended the second quarter at 2% vacancy with asking rents up 7.8% on a weighted average basis over the past 12 months.
With regard to recent investment activity during the third quarter, we completed nine acquisitions totaling approximately $227 million, adding 943000 square feet to our portfolio.
In aggregate in place rents for these acquisitions are estimated to be 13.9% below market.
All the one or low coverage sites with excess paved land for container or vehicle parking which is ideal for last mile ecommerce. She is.
Seven of these transactions about 78%, we're off market or lightly marketed and sourced through our proprietary research and broker relationships.
In July we acquired escape drive a 27000 square foot building on over three acres of land in the central San Diego Submarket for $8.2 million.
22 foot clear building has only 21% site coverage with a large paved yard and it was leased long term during escrow to a national tenants stabilizing at a 6.2% yield on total costs.
We acquired the fee interest in a land lease for a one acre pay parking lot. That's a rexford own Glendale Commerce center located within the L.A. San Fernando Valley Submarket.
$3 million.
August in a sale leaseback transaction, we acquired east and the Street.
806000 square foot building on 6.1 acres of land located within the L.A. self pay submarket for $18.8 million equivalent to just land value.
Initial yield 6.1% and at least roll the planned to implement a value add plan to reduce the building size and that 25 loading physicians, creating a low coverage and logistics facility.
We were we acquired main street, a 42000 square foot low covers industrial site also when they self pay submarket.
$6.8 million.
Property is fully leased a long term basis and generates an initial yield of 4.4% increasing to 5% by year three and growing from there.
We acquired ever need to fill oral a 312000 square foot fully leased last mile distribution facility on 38.6 acres within the North San Diego County, Submarket for $73.6 million.
The modern 32 foot clear building has 99 dock positions with excess paved land and is leased long term at an initial yield of 5.6%.
In September we acquired adults lower Boulevard.
My 0.9 acre industrial land sites with 54000 square feet of buildings and substantial excess land in the late mid county, Submarket for $16.3 million.
The properties leased to an entrenched tenant nearing their lease expiration.
And to either renew the existing lease or execute a redevelopment of the site.
Projected stabilized yield on total cost for the renewal or redevelopment is approximately 6%.
We acquired Imperial Highway a 3.7 acre trucking and container storage yard in the late mid county, Submarket for $10.5 million.
We acquired the property in a short term sale leaseback and following lease roll and value add enhancements, we expect to stabilize the property at an approximately 5.5% yield on total costs.
We acquired storm Parkway and eight building 268000 square foot modern industrial complex within the L.A. selfish submarkets for $66.2 million.
The project contains buildings from 20000 to 38000 square feet and is 91% leased the 12 tenants at rents estimated to be 13% below market.
The initial yield of 4.1% is projected to increase to 4.4% in year, two and grow from there.
Finally in September we acquire Teller Road 826000 square foot multi tenant complex located in Newbury Park within the Ventura County, Submarket for $23.3 million.
The properties, 93% leased to 14 tenants at rents estimated to be 19% below market and generates an initial yield of 4.3% projected to increase to approximately 5.3% upon stabilization.
Subsequent to quarter end, we completed three transactions for $60.8 million, we acquired Slawson Commerce Center Athree hundred 36000 square foot industrial complex located within the L.A. central Submarket for $41.3 million at an initial yield of about 5%.
We acquired West Mannville Street, a 60000 square foot building in the L.A. self pay submarket for $11.5 million at an initial yield of 5.3%.
We also acquired crust more point 56000 square foot building in the Central San Diego Submarket for $8 million at an initial yield of four and a half reset.
With regard to asset sales in July we sold one property for $1.3 million and subsequent to quarter and we sold a proxy property for well $11.2 million.
Year to date, we've completed $24 million of dispositions and we expect to continue to pursue asset sales opportunistically to unlock value and recycle capital.
Turning to our repositioning activity year to date, we have stabilized five projects totaling 414000 square feet for an aggregate return on total cost of 7.1%.
We currently have 1.4 million square feet.
Space under repositioning for future development with several completions targeted by yearend.
Finally, we continue to leverage our deep industry relationships and our proprietary research as we add to our pipeline of acquisitions. We currently have all $198 million of new investments under LOI or contract subject to completion of due diligence and satisfaction of customary closing conditions.
We will provide more details as transactions are completed.
I'll now turn the call over to a deal.
Thank you Howard beginning with our operating results for the third quarter 2019, net income attributable to common stock holders.
Proximately $9.7 million or nine cents per fully diluted share.
This compares to $6.3 million or seven cents per fully diluted share for the third quarter of 2018.
Well the three months ended September 32019 company share core AFFO was $33.9 million.
That's compared to $26.1 billion for the three months ended September 32018.
Representing a 30% increase.
On a per share basis company share of core up before was 31 cents per fully diluted share.
Representing a 10.7% increase year over year.
And solid property NOI was 50.9 million up by 24% on a GAAP basis, and 22% on a cash basis.
Sure.
Same property NOI was $38.8 billion in the third quarter.
Which compares with $36.8 million for the same quarter in 2018, an increase of 5.2%.
Our same property NOI was driven by a 4.8% increase in same property rental revenue.
3.7% increase in same property operating expenses.
Cash basis same property NOI increased by 6.8%.
Turning now to our balance sheet in financing activity.
I do continue to seek opportunities to drive long term growth.
To maintain a strong liquidity position.
Balance sheet capacity to a loss maximum flexibility.
Total access to capital during the third quarter, we should approximately 1.2 million shares of common stock.
Our ATM program at a weighted average price of $44 in 24 cents for sure.
Which resulted in net proceeds to rexburg of approximately $51.1 million.
September we closed on an 86.3 million dollar offering.
5.6% to 5% series C preferred stock.
Net proceeds would be used to fund near term acquisitions and repositioning activities.
At the end of the third quarter, we had approximately $197.5 million of cash.
All availability on a $350 million credit facility.
We also entered the quarter with $483.1 billion reliability.
On our ATM program.
September 30, we had no debt maturities until 2022.
And our liquidity position is strong with a net debt EBITDA ratio of 3.4 time.
Equating to about 11.2% debt to total enterprise value.
With regard to our dividend on October 22019.
Our board of director declared a cash dividend teaching and a half since for sure.
Fourth quarter 2019.
Label on January 15, 2022, common stock and unitholders of record on December 31, 2019.
Additionally, our board of directors declared a series, a and B preferred stock cash dividends.
Maybe 37 cents per share.
Fourth quarter of 2019 payable on December 31, 2019.
Preferred stockholders as of December 13, 2019.
Also our board of directors declared a series C preferred stock cash dividend.
It's meant to 39 cents per share greater for the third quarter and for the fourth quarter of 2019.
Table on December 31, 2019.
Through our preferred stock holders as of December 13, 2019.
Finally, we're increasing our full year 2019 guidance for company share of core up before.
The range of dollar $22 22 per share my previous range of dollars 19 to dollar 21 for sure.
New guidance range is supported by the falling updated assumptions.
Same property NOI growth.
Range from 5.5% to 6.5%.
Previous range of 5% to 6.5%.
DNA, we anticipate a full year range from $29.5 million to $30 million from a previous range of 20 $930 million.
The rest of our guidance assumptions are unchanged and detailed on page 24, our Threeq Q2 thousand 19 supplemental information package.
Please note there I guidance does not include the impact of any transactions.
Capital market activities that have not yet unannounced.
And our acquisition cost.
The cost that we typically eliminates when calculating this metric.
That completes our prepared remarks.
On the line for taking my question.
Thank you we will now be conducting a question answer session.
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Thank you. Our first question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Great. Thank you.
I guess just to start looking at your retention rate in the quarter down to 62% can you talk about you know how we should think about that versus what it's been in prior quarters, where there any particularly large move outs or anything we should be thinking about.
Hi, Jamie it's Howard.
For your voice no I know this past quarter was a fairly typical there weren't really any any larger move out. So it was just a bunch of blocking and tackling as usual.
And it's you you might recall the retention bounces around from quarter to quarter, but a you know seems typically the ended the year, averaging somewhere in the range of 70% and don't forget part of our strategy has always been to actually pushed tenants out of our spaces. When we can capture substantially higher rents.
From some of our repositioning work so that that actually has quite an influence on the retention. So all in all its actually probably not a good indication of what's happening within the portfolio because of some of these forced vacates.
[noise].
Oh, sorry, I was on mute Yeah I was on me had a great question, though.
So no I was just kind of say the uinta supplemental it shows expiring leases placed into repositioning.
And that was actually zero, so wouldn't that say most of these were actual move outs instead of course the about.
Yeah, Hi, Jamie its Michael.
It's really about you know what attendant expires did not necessarily going into repositioning so that was probably.
Not really capturing the entire essence of the activity, but more often than not you know when a tenant doesn't renewed.
Yeah, it's it's not because they didnt necessarily want to stay it's because we saw an opportunity to re tenant at a much higher rate and walk not that doesn't require repositioning a may maybe just carpet and paying a little fluff up with the space or just remarketing of the space. So I think that probably a little more clarity Jamie just too.
Add to what Howard and Michael just added absorption is very important if you take a look at absorption number for the quarter was flat, but that's also very telling sign and I think that kind of males drives the nailing the coughing and that.
So in fiber we were just talking about is that absorption and where the occupancy levels are that also gives you. The Q that you know, while we're not renewing absorbing.
Yeah, and also Jimmy it's not all of the spaces that we pushed tenants out up to capture those higher rents land on the repositioning page you know space has to be down for a minimum of six months, a and hit a certain size social I think it's about 35000 feet right now so that that really doesn't capture a lot of the a repositioning.
And value at work, we're doing just only looking at the repo pitch.
Okay.
Then I guess bigger picture I mean your markets are clearly in high demand you know we've seen downward pressure on cap rate.
You guys. It sounds like you're doing a lot of investment stabilizing in kind of the mid fives low to mid fives.
Can you just like help us talk through kind of strategically what gives you guys comforting kind of continue on this plan given you know given how.
Aggressive pricing is becoming your markets.
Sure Jamie first I think when you talk about pricing you're talking about market pricing on on marketed transactions and that's the bulk of what gets reported into the into that or you know trades and whatnot and I think is important to realize that as we stated in our and our comments about 75% of our acquisitions this year than threw off.
Market and lightly marketed transactions, which directly translates into better than market cash yields I think key to our business is that we focus and are able to continue to catalyze a lot of value add opportunities that are able to generate substantially higher yields than marketed transactions and also from time to time, you'll see us buying.
Some stabilized opportunities and you know our mandate is when we combine it altogether it delivered to the market as you know substantially better than marketed deals in the best industrial market in the nation and we also believe that there is a place in our portfolio for stabilized assets that may be slightly lower yields that are.
You had opportunities because we do know that you know in our portfolio. We have a lot of product that is multi tenant which were where we're continually capitalizing on opportunities to create value and so that creates transitions throughout our portfolio overtime and when we have those transitions, it's very nice to have more stable.
Product that is continuing to deliver on very consistent you know maybe more moderated cash flow growth, but consistent cash flow growth through periods, when we're having transitions and maybe driving space vacant for a short period of time to create some value. It's also a great hedge against stuff you know the general economy or to the extent there could be.
Be a correction at some point in the future, although we don't see any signs today. So we really do see a place in our portfolio for a blend.
Some of the value added product as much as as we can find frankly as well as stabilized product does that help answer question.
Sure that is helpful. Thank you.
And then I guess just last for me.
How about your same store growth rate.
Yeah, we've seen a moderation.
On a quarterly basis.
Certainly this quarter can you just talk about as we think about next year like what are the key drivers that could.
You know keep you at either at a similar level or maybe has to go lower just based on where occupancy is.
We are leasing spreads are.
Yeah, Jamie Thanks for the question and a first of all I think I'll start that how we drive to our guidance for the full year our guidance based on a full year that takes into consideration what the lease roll might look like quarter over quarter for the full year right and it's on a GAAP basis. So having said that when we first started but the guidance.
Beginning to Europe , we knew.
There was going to be a lot of expirations coming in Q3 in Q4 as a matter of fact, when we first launched the guidance. We have stayed at about 70% off our role was going to take place in Q3 in Q4 fairly spread out between the two quarters and if you kind of slice that back for the same pool. It was about 63% or so so that's what you're seeing essentially here in Q3.
And a lot of the role that took place in Q3 was on the back a part of the Q3. So you didn't see the full benefit of right now that being said Q4 should pick the pace backup, but you're going to see the releasing spreads that we did in the quarter and for the year, that's going to benefit. The next few quarters in 2020 to your point.
We'll provide more guidance, but the the least trajectory that we've seen in terms of our ability to win new leases and new leases at the gap releasing spring the cash re leasing spreads naturally will pay off into future quarters, ultimately leading to 22 guidance. So we're very optimistic about that so what you saw in the quarter. It would just simply a product or how the leases are rolling.
And nothing more than that.
Jamie just just to add to that a little bit I mean, I think over half of the renewals during the quarter occurred during the third month of the corridor and so that's pretty impactful considering that the quarter was already very top heavy in terms of the annual expirations for the company. After the same store pool, and if you were to normalize for that meaning if you just.
Take it even on a weighted average through the middle of the corridor in terms of weighted average expiration.
Renewal time frame I think you'd see it's it normalizes to be pretty consistent with what we've been delivering in the last several quarters.
Okay, Great and just to clarify you guys I'll leave you guys talk in terms of gap. If we were to think in terms of a cash same store number what would that look like versus the your GAAP reported number.
Well I think at a cash same store number was reported so I think what you're seeing is there's certainly a cyclical.
And that those leases are expiring. So I think that's also a trend which is kind of matching what the releasing spreads are seeing so you're seeing the cash expiring rents are higher so I think that's what you're seeing essentially I think oh in terms of our guidance I think we continued to provide guidance I think that on a GAAP basis I think that's naturally the wants to think we've done so I think you're seeing a trend.
The expiring cash rents and they are pointing and aligning themselves pretty nicely to what that re leasing spreads you're seeing consistently handle wanted releasing spreads we tracked over 810 12 quarters and they've been very consensus now and being a 30.
And on the GAAP side, and a high twentys, our low twentys and be a cash side.
Right now I was asking on a same store basis same store NOI.
The delta between cash and GAAP, what does that look like these days.
Well I think right Jamie I think that is a product how the leases are rolling I think.
He can flip the other direction I bet. If you were to take a look at a couple of years ago I think at the gap was probably a little higher so I think that's what you're seeing here that's simply a product of other roles takes place. So naturally if if at all else being equal if you had a similar kind of product of in place portfolio. You can see assume a trend come up three to have four years from now I think that's all.
You're seeing in that you know I think so I think we've seen early on in 2014 and 15 trying to go the other direction. The gap is higher so I think thats, all you're saying I think obviously the gap in my opinion, it's a more normalized.
The number to be able to see but I think the cash is simply what that is that on the leases on <unk> the last leg up their cycle or the lack of their.
Tenure.
Okay all right. Thank you.
Our next question comes from a line of Manny Korchman with Citigroup. Please proceed with your question.
Hey, everyone I'm, just wondering does the the lack of.
<unk> institutional ownership of assets in your markets, that's certainly helps or acquisition pipeline, but does it hurt rental rate growth are those private owners.
Sophisticated can they push kitting day.
They like pushing rents versus one institutional owner might be pushing them.
Hi, Matt its Howard.
Well I wouldn't say, we only buy from non institutional owners one of our largest transactions. This year was from an institutional seller and you know that being said they they don't push rents are as hard either as we're able to do a but keep in mind on these new.
All owners, which really gets to the heart of a lot of the off market transactions, we do.
Most most times with what we find is people are trying to solve for keeping tenants in buildings, a long term and the easiest way for these private owners to do that is to not push their rents and they tend to avoid.
Investing capital into the properties, a where as you look at what Rexford does when we buy a property. We go ahead and modernize and really unlock the value. So we're able to a achieve a market rent on on the space. So.
You know you are correct. This these people just don't push those rents a lot of it is also due to their length of ownership of a property and a you know they don't they don't really need to they they're more interested in consistent cash flow versus squeezing the less nickel out of a rent.
And by the way Manny it's very interesting out there is Michael Yeah, when we talk to private sellers and owners as well as institutional sellers and owners, we hear from both camps.
You know some instances, where they're pushing rents, but it just because they are institutional also it doesn't mean, they're pushing rents so that creates tremendous opportunity for us and.
I think that the driver of rent growth in our market is not so much.
The owner behaviors today, it's really about availability or the lack of availability of space and when you drill down a rexfords.
Portfolio in mandate, which is to create and deliver the most functional product in each sub market that we operate and that's really at the end of that how we are able to outcompete not just today when the when things are gone really well, but even more importantly, you know at some point the future when the markets plateaus or we see corrections that's when you.
I see the flight to quality and that's when are really going to be able to outcompete. Even further I think as we did during the great recession frankly.
Thanks Ann in your remarks, you talked about a few assets that had excess land.
Sounds good income ground up in a lot of that what should we expect in terms of timing of those projects and I assume that they would be sort of more speculative in nature, where where you're just going to build inventory and given the type markets I'll fill or would you book to have leases on before you went roundup.
Oh actually really all all the transactions Ah we did in the third quarter.
Oh or assets that yeah, we'd be modernize buildings, we may.
Oh, you know one meant when I mentioned, we're going to tear piece of the building off.
None of them are gonna be ground up and the and the reason why what we're finding in our markets. You know, there's it's really all about the movement of goods and getting product closer to the consumer and that requires more parking for vehicles and containers. So we're funding theres an extraordinary.
Sorry.
It's about a value being created just to deliver sites that have this excess land that can be used for the tenants that are frankly, driving most of what most of the demand in the marketplace.
So you know we build the building here and there we've got a few things for you know about the come out of the growing with.
But in the infill markets a it's not only about development. If you have some excess land.
Thanks, guys.
Our next question comes from the line a Blaine Heck with Wells Fargo. Please proceed with your question.
Hi, Thanks, Good morning up there so I know access to capital is not an issue for you guys whatsoever, but you know just given the high cost of properties in your markets, especially core properties that have been renovated a read developed have you guys considered expanding your disposition program and maybe taking some profits.
On some of the buildings that you guys have done such a good job every developing and stabilizing.
Hey, Blaine its Michael Thanks, So much for your question I'm, you know I'm the one disposition.
We announced recently on Valley Boulevards, a great example of that where we were able to harvest cash flow and also dispose that asset you know there was a little bit more management intensive more multi tenant nature I'm. So you know contributes also to our operating margin in a sense.
But you know.
We do we do continually look at our portfolio frankly, you know on a continuous basis, where and look at where we might prudent and creates make little value through recycling capital. So you can see us do that I think in a similar fashion than we've done in the prior year or so you know I wouldn't underwrite anymore acceleration in that per se.
But we continue to do that and if you look at the portfolio going forward you know, there's a tremendous amount of internal growth to be harvested.
I think we estimate our expirations through the end of next year to be about 18% or so below market just as an indication and if you look at the N.Y. growth profile the company today or at the end of the quarter, assuming we didnt buy another asset pretty interesting on the we looked at having about 19.7% embedded.
Hawaii growth in the in place portfolio as of the end of the corridor and the biggest comp front or that the two biggest conference that starts with the repositioning. So that's a great indications, how we're going to able to continue to create value in these assets and repositioning still only come from new acquisitions, a lot of Repositionings will do overtime come from the legacy.
Acquisitions, where we just couldn't get to the space because we had a drug tenant had to expire for some time, sometimes many years. The second biggest component of that and then why growth.
Comes from leasing spreads and and by the Repositions up 14.5 million over the next 18 months or so of contribution incrementally and then leasing spreads using a very conservative estimate.
Leasing spreads about frankly half of what we've been doing generates about 13.6 million of incremental NOI and so just indicative of some of the embedded value in the portfolio that we intend to unlock a so and that's across the board by the way. So we're pretty excited about the portfolio and our ability create a lot more value than it.
Going forward, but we will continue to prune as it makes sense as well that help answer your question.
Yeah. Thanks, Thanks, Michael that that helps and then just following up on spreads and rent growth I think a few quarters ago, you guys talked about how you're seeing and starting to push kind of 4% Tom on annual rent bumps on some of the leases have you guys seem that become more of the norm at this point.
And or maybe given those there's high increases in Moran Tom expiration. You know are you seeing any pushback on those annual escalators I guess, how do you guys think about balancing each of those rent drivers.
Does Howard Ah, yes. It in selected instances, we are pushing the 4%.
Good.
I think for us, we're not going to give up our ability to maximize the initial rent because we want to 4% increase.
So in some instances, we're able to get them, but I wouldn't say, it's that's common place in the market now a other landlords are or trying it selectively as well.
You know it really is just depends on all the fundamentals of the market. Obviously when you have low vacancy like we do with a 2% mall or infill markets.
Gonna be easier to push a but the markets are quite large and that's really more selective pockets I have the tightest vacancy that what we're trying to push it in a little bit a harder.
Very helpful. Thanks, guys.
Our next question comes from line of John dining with Stifel. Please proceed with your question.
Hi, Good afternoon, everyone. This is job Dempsey on the line for John Just had one question for you. It looks like you purchased a land parcel and the the San Fernando Valley. This quarter I could you just detail.
How many open unencumbered lots you have now and how should we think about potential square footage that can be developed on those slots.
Hi, This is a howard.
Yeah that that parcel was something that was part of a half million square foot business Park, we operate in the San Fernando Valley market and it was really just as an opportunity to buy the fee interest out we had a long term ground lease that the parking lot was operating on and interestingly the in place rents.
We were paying the purchase price equated do a 5% return, but that rent was going to kick up to about 7.6% in terms of return on that cost within the next 18 months. So for US was that there was an opportunity to religious to control costs in line operating that project no as far as other parts.
Tools, all that we have for development.
You know, we don't we don't have a substantial land bank or the infill markets. As you know have very limited land opportunities, but yeah. We do have the ability to build probably right now somewhere in the 700000 square foot range of new product, which is in our pipeline that disappearing.
Raises of entitlement or about the started actually come well a couple of things in the next to the next quarter.
And you know occasionally we find opportunities to buy land, but you know land is very expensive and typically in the infill markets. When you look at construction cost.
It is very difficult to deliver product on a four lease basis or so for us. It's really you know, sometimes we'll find out a land at a substantially below market price that we can still be able to put those numbers together and work sometimes at the site that we buy that has excess land that the lenders are undervalued that we're able to add a little.
Or footage, but for the most part the market is very challenged Oh in terms of those opportunities.
Okay perfect. Thank you so much.
Our next question comes from a line of Tayo Okusanya with Mizuho. Please proceed with your question.
Good afternoon, everyone.
[laughter] question in regards to the acquisition side again, just given that cap rates again continues to be very tight on you guys have pretty low leverage just curious I know your thoughts around using a incremental.
Leveraged to kind of just returns on the acquisitions on.
Yes, Thats, how its Michael you know, it's a very good question and you're right. We have deliberately maintained at very low leverage profile for the company.
And we think thats very appropriate, particularly in general just at this time the cycle and.
We we don't really have it has a current strategy too as you said you know engineer higher returns through increased leverage that's really not a part of the the near term or medium term, the thinking or business model for Rexford and I think what you're looking at it rexford as an exceptional business model that is performing in a way where we can deliver sector leading.
At the FFO per share and AFFO growth.
Without needing to increase that those returns through increased leverage and that's all that luxurious position to be in and we're simply capitalizing on that and we think that overtime everybody all owners all shareholders of record it'll be very happy with.
With our low leverage profile the company.
Gotcha.
And then just going back to Jamie's question.
From earlier on again, when I take a look at the same store NOI guidance.
For the year five five to six five again.
If I look at the first three quarters of the year, where you were kind of you know.
I know a high low single digits high double digits that kind of number you kind of seems to still suggest that same store NOI growth will further decelerate in fourth quarter and I think I heard a deal if they elect is going to accelerate I just wanted to kind of.
Make sure I was.
I'm looking at this correctly I think if it isn't indeed decelerating in fourth quarter, what's kind of like the drivers of the further deceleration.
In the quarter.
Oh, Hi, Tayo. This is a deal so.
I was talking about the same store accelerating in Q4. It was a byproduct of a big quarter in terms of exploration that came in Q3, obviously with us.
Doing a good job in renewing or getting new tenants in that space Q4 is going to benefit from that and as Michael pointed out a lot of that roll took place latter part of the quarter. So Q3 didn't benefit necessarily from the full impact, but Q4 wells. So what you saw in Q3 in terms of the same store a year over year, it's certainly going.
Look better in terms of Q4, not Q4 is still a pretty heavy quarter in terms of role, but again I point, a everybody to our ability to get great releasing spreads on a GAAP and cash basis. Ultimately we are doing a great job in building, a new and why base, which is gonna be beneficial to all the future quarters. So that's what I've met earlier, but.
The Q.
Just because.
Okay that makes more sense and then just one more from my end the same store occupancy for the stabilized portfolio is about 97.7 and for the total portfolio is about 95 clearly you have this fairly large gap because of a lot of the assets in a repositioning is that what we shouldn't be.
So we were looking for that gap, which again is that a historical wide we need to start to close in 2020 and become a meaningful driver earnings growth in 2020.
Hi Tech tower, well I think to put in perspective, you know, we operate single tenant buildings and multi tenant buildings.
I think today were about 65% multi tenant projects. So those those projects typically have a little bit shorter lease terms and then some of the single tenants Oh, yeah. So so that overall portfolio occupancy of you know really I think is more in line with how we would encourage.
Well to underwrite the portfolio in quarter over quarter, it's going to vary but a you know in terms of gaining occupancy and pushing that portfolio. The overall substantially higher I don't I don't think we didnt encourage you to underwrite to that gotcha.
Data point that I'll add to obviously be consolidated occupancy will bounce around based on our acquisitions in the current year did younger Bose.
And interesting year is at about 98 million of our 2019 acquisitions are going to be acute drivers because it repositioning efforts and that's about 770000 square feet called on our repositioning fee. So yes, absolutely to your point that is going to be a driver for future earnings or a in a very meaningful way and that's also the contributing factor to why.
The overall consolidated occupancy lowered van de stabilized same store occupancy.
Gotcha helpful. Thank you.
Our next question comes from the line of Eric Frankel with Green Street Advisors. Please proceed with your question.
Thank you very much a first time car long time, a transcript reader just a couple of questions for you.
Talking about redevelopment activities again and get excluding land values have you ever maybe if you actually were marked at this early in the call is there a larger shadow pipeline your portfolio of larger buildings or maybe older vintage you bought two years, though with a land that is the come up enough and there's not a lot of high quality product out there that it's worth doing a.
More full sell redevelopment that's not the flexing your redevelopment portfolio.
Hi, Eric It's a Howard.
Welcome first time color. We appreciate you being here that's a great question and we look at we look at our expirations ER and consider redevelopment. Each time, we have a single tenant building a that's expiring and what we what we typically find is that there's a bit more E.
Ill to be achieved in some of the repositioning work versus going ahead and performing a full on redevelopment to construct a new building. A you know that that said a you know there are a few things that because of the functionality Oh. We may go ahead and built some new buildings here and there.
Let the market is so tight and there's such a lack of space or the demand is still there and you know I think when when you're thinking about redevelopment versus a new you're probably asking a question of you know the functionality of the clear heights, and so forth and in the infill markets.
Now that you know those those basic factors aren't necessarily as important as if you're in a non infill market for instance, like the inland Empire East where you could have a building that's.
Probably the attrition a quality building in the infill markets, but it's going to be a beer see out there. So that the dynamics function very differently up but you know that said, we're still able to achieve the superior returns in our markets because oh the demand profile.
Gotcha.
Next question is regarding obviously, you guys see that sort of a lot of kind of lightly marketed off market opportunities can you just have really intensive canvassing efforts that have.
Have you seen cap rate for market it transaction trends in any direction. This year do you think that's an activity even more intense in cap rates for you know for widely marketed deals have tried to be below over the last couple of quarters.
Oh, well certainly on larger transactions you know obviously, we've we've all seen some of these larger portfolios transact.
And you know the just the product that's within southern California.
Certainly see those those cap rates come in a one off you know single buildings, we've seen the cap rates tighten a bit but for the most part like I think it it's a bit hard to generalize some of the cap rates it unless you're talking about a newer building with a fully valued lease on a compare.
As a basis, but what we tend to fall fine and what really we're able to arbitrage upon in our acquisitions is the fact that rents all over the board and a lot of the people we buy from don't push rents so depending on where the the rents are on a property in terms of below market.
The cap rate could be lower or higher so we find that it's a little harder and harder to really just sort of put it all into into one of pots and trying to try and make those comparisons but you know in general you know I have we haven't seen the typical transactions you know that that rexfords buying.
All of these $20 million to $40 million deals have any any to a substantive cap rate compression, it's more on the larger stuff.
Gotcha. Thanks, I'm just one final question, obviously sort of human standpoint is that tough the season. The wildfire that are that I've really in southern California can you talk about how that might impact your business, though positively or negatively or in terms of insurance rates or whatever have you.
Yeah, Hey, Eric you know we.
We haven't yet seen any real impact to our insurance rates.
Obviously that would go to that next year, but the bigger impacts for insurance rates historically have not been so much fires in southern California, they've been other actually much larger events throughout the country related to wind and whatnot.
So we haven't seen that so far.
And in terms of or the potential to displace tenants, which could have a it actually impact in our markets. We really we've been fortunate we really haven't seen in the industrial areas that hit in that way I think it has something to do also that topography, you know because all rexfords focus more on these infill markets on the so you there.
Less surrounded by fuel for fires for instance, and so we haven't really seen that as an exact either.
Okay and just to second.
Michael thought earlier and part of the kind of course cannot be answer.
As I discussed the insurance I wouldn't be have the discussions a that aren't carriers.
Rexford is considered a great risk for their profile and a lot of time, it's just the capacity worldwide and what the world is seeing in terms of calamities and all the issues in terms of tornadoes in hurricanes and so on so far so we definitely are better risk profile for the carriers, but you know when we see increases and not necessarily anything contributing because of our portfolio.
The general capacity across the world and how it impacts us.
Right great. Thank you for the contact much appreciated.
Our next question comes from lineup, Chris Lucas with capital. One. Please proceed with your question.
Hey, guys I'm, just maybe a follow up on on the last question as it relates to a slightly different approach, which is on these preventative power outages that the utilities have been running up have you had any properties that event that impacted.
By those.
Hi, Chris its Howard a we haven't heard of anything and most of these outages are all in northern California of Southern California. There's been some discussion of you know some power outages, but we haven't heard anything yet that's impacted any of our buildings.
And then I'm, assuming that your tenants of.
Sure, it's it's a requirement for lease.
Yes, Okay, and then I guess I'm, taking a step back just wanted to understand the.
Capital markets activity Decisioning and third quarter, you did a nice execution on the on the 15 year private placement bond and you did a preferred offering as well, it's a pretty healthy spread in the cost of those two and given the length of the 15 year bond there was the payback period sort of between the two.
Seems to be pretty far out there just kind of curious as to why.
You chose the mix you did.
During the quarter.
Hey, Chris its Michael I think the quarter isn't is indicative of our goal, which is to have a balanced capital structure and to have a diverse array of tools at our disposal the group.
Those are the company and Thats a great question about the preferred but we think that there is a place for the prefer it's in our capital structure, we think it's accretive to common actually they want and even though it does provide a little bit of the hit to free cash flow and at that FFO per share on day, one and in particular for Rexford.
As a growth company because when you think about the fact that those equity investors on the prefer our captive to a 5.6% to 5% yield forever and if you compare you know we have been generating a you know in terms of a return to calm and well in excess multiples of that type of a return.
So everything above the 5.6 to five flows right to common and we've done the analysis in terms of how that's impacted us on our prior prefer it's and it's really really a tremendous benefit to calm and I'm also given the type of investments were able to make.
That are adding value to the portfolio and giving us growth. So we believe that there is a place for preferred in the portfolio, we think they're actually accretive to common day, one and but I understand the question and I think that a lot of folks is that a very short term horizon. They may view of preferred as diminishing our current AFFO per share.
Our cash flow, but the longer term your horizon is longer term. Your view is the more one I believe we would tend to view those preferred as equity.
Because their permanent capital for us and no repayment requirement and a fixed coupon so I'm very attractive for our company in particular and and we do think Theres a nice place for the capital structure.
Great. Thank you that's all I have today.
[noise].
Okay, all right and would that we'd like to thank everybody for joining us this quarter, we wish everybody a wonderful holiday season, and we look forward to reconnecting in about three months. Thank you everyone.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.