Q3 2020 Rexford Industrial Realty Inc Earnings Call
Greetings and welcome to Rexford Industrial Realty third quarter 2020 earnings conference call at this.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
Please note this conference is being recorded.
At this time I will turn the conference over to Steve Swett <unk> Investor Relations you may now begin.
We thank you for joining us for Rexford Industrials third quarter 2020 earnings conference call.
Addition to the press release distributed yesterday after market close we posted a supplemental package on the Investor Relations section on our website at Www Dot Rexford industrial Dot com.
On today's call management's remarks, and answers to your questions contain forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today.
For more information about these risk factors, we encourage you to review our 10-K and other SEC filings.
Rexford industrial assumes no obligation to update any forward looking statements in the future.
In addition, certain financial information presented on this call represents non-GAAP financial measures.
Our earnings release, and supplemental package present, GAAP reconciliations and an explanation of why such non-GAAP financial measures are useful to investors.
Today's conference call is hosted by Rexford Industrials co Chief Executive officers, Michael Frankel, and Howard Schwimmer, together with Chief Financial Officer, Mark Clark and our General Counsel, Dave Atlanta.
Make some prepared remarks, and then we will open the call for your questions now I will turn the call over to Michael.
Thank you and welcome to Rexford Industrials third quarter 2020 earnings call.
We hope this call finds you and your families well and healthy.
Today I'll begin with a brief summary of our third quarter operating results and Howard will then cover our market activity. We are also very pleased to welcome lore Clark who joined Rexford on September 1st as our new Chief Financial Officer.
Bob will provide more details on our financial results balance sheet and outlook. We will then open the call for your questions.
We're very pleased with our strong third quarter results to which we credit the hard work of our entire rexford team and the extraordinary resilience and overall quality of our tenant base with an infill southern California.
Highlights from the quarter include the following we.
We increased company share of core FFO by 20% to $40.6 million and generated a 6.5% increase in core FFO per share to 33 cents.
Consolidated NOI grew by 23.8% on a GAAP basis and by 22.2% on a cash basis are.
Our state stabilized same property NOI grew by 4.4% on a GAAP basis, and our stabilized same property cash NOI grew by 5%.
We signed 101 leases for 1.6 million square feet during the third quarter and achieved leasing spreads of 26.8% on a GAAP basis, and 17.4% on a cash basis.
We achieved 98.4% occupancy in our stabilized same property portfolio during the.
During the quarter, we also acquired five properties for approximately $69 million.
And subsequent to quarter end, we acquired one additional property for $22 million, bringing our year to date investment volume to $375 million.
With regard to rent collections suffice it to say that third quarter and now October are all tracking essentially very close to strong pre pandemic levels.
The strength of our collections is truly a testament to the high quality of our infill tenant base, particularly in light of the fact that many of our tenants have the unilateral right to defer rent under unique California mandates due to cobot.
Laura will provide additional color regarding our collections.
We also completed the quarter with a <unk> a low leverage fortress like balance sheet at 2.9 times net debt to EBITDA, which equaled about 9.7% debt to total enterprise value we.
We ended the quarter in a very favorable position with upwards of $1 billion of liquidity as we move forward.
The company's outperformance has been exceptional rivaling, our strongest pre pandemic quarters as.
As a result, we're very pleased to be increasing our guidance, which laura will be describing in more detail.
Rexford has grown to become the third largest and fastest growing publicly traded logistics REIT focused on the nascent strongest market looking for.
Looking forward, we believe restaurant is very well positioned them to 2021 and beyond.
With regard to internal growth, we are positioned to capture about 18% and a wide growth embedded within our in place portfolio over the next 12 to 24 months, principally driven by our entrepreneurial value add asset management strategies alright.
Our external growth prospects are also strong the ongoing benefit of our proprietary research driven originations continues to increase the volume and quality of our investment pipeline.
We see a very substantial opportunity to consolidate well beyond our current 1.5% market share within our highly fragmented exceptionally large infill southern California industrial market.
We believe a principal reason our market is the most highly valued and sought after industrial market in the country is due to operating history that demonstrates our infill so cal tenant base to be the strongest tenant base in the nation driven by a range of key factors to begin.
To begin with our infill locations are generally mission critical for our tenants their businesses depend upon our infill locations as they generally serve regional consumption and would not be able to do so if located outside infill southern California.
Further due to extreme constrained supply within infill southern California, our tenants will be challenged to find similar quality space anywhere else within our submarkets.
Meanwhile, tenant demand continues to expand driven by growth across a range of sectors from consumer Staples, and food distribution health care and medical products renewable energy and electric vehicles space exploration and aerospace technology, among many other growth sectors.
Further dramatic growth in E Commerce, which has been accelerated by the by the pandemic continues to drive unprecedented new demand for space within our target infill markets. As we are positioned within the largest first mile as well as the nation's largest last mile of goods distribution and consumption in the United States.
As a result of these dynamics tenant demand is as intense as ever in fact, CVR read now projects industrial market rent growth in Los Angeles County to increase a full 41% through 2025, which equates to 7.1% per year compared to only 2.9% per year projected for the rest.
The nation's major industrial markets.
Finally, we are tremendous thank you to the entire Rexford industrial team as we express our appreciation for their superior performance and as they continue to prove themselves as the most effective team in our business and with that I'm very pleased to turn the call over to Howard.
Thank you Michael and thank you everyone for joining us today, despite the impact of COVID-19 and associated shutdowns market fundamentals in infill Southern California industrial market remained very healthy in the third quarter.
They can see in our markets remains persistently low and demand accelerated as we have seen increased leasing for both traditional industries and E commerce growth as a.
As a result, we continue to see strong rental rate growth and net absorption in infill Southern California.
Our target markets with which exclude the eastern Little Empire ended the first quarter at 2.6% vacancy with asking rents up year over year. Despite covet.
During the quarter, we experienced our largest volume of new leasing, which speaks to the incredibly high demand for our quality well located generic warehouse and distribution product.
We generally achieved or exceeded our pre covert projected lease rates, resulting in aggregate leasing spreads at pre covered levels.
The dynamics are directing activity toward they can move in ready space and are driving increased rent growth as demonstrated by our 1 million square feet of new leases signed at Empress It's impressive spreads of 38.9% on a GAAP basis, and 25.5% on a cash basis.
Turning to acquisitions in the third quarter, we acquired five properties for a total cost of $69 million, adding approximately 386000 rentable square feet to our portfolio, which are projected to deliver a 5.5% aggregate unlevered yield.
Post quarter end, we completed one acquisition for $22 million details on acquisitions can be found in our recent press releases and supplemental posted to our web site.
In the next few weeks, we expect to complete the Noncontingent acquisition of Gateway point Industrial Park.
In the L. in mid counties Submarket for $297 million, but.
The modern 989000 square foot four building complex is 100% leased at rents estimated to be 21% below market.
The project is strategically located in proximity to the central Los Angeles, Midtown East and West San Gabriel Valley sub markets.
Buildings are 32 foot clear at first Bay with an elevated dock loading ratio excess container parking and currently serves the high demand E commerce and last mile distribution sector.
The initial stabilized yield is 3.6% and using conservative right growth projections grows to over 4% with mark to market upside as leases roll over the next several years and.
Additionally, it is important to note that this project is one of the highest quality industrial properties and one of our strongest submarkets and is ideally positioned to capture the excess market rent growth projected by sea Butare that Michael mentioned earlier, which is not incorporated in our underwriting.
As you May recall, our investment strategy to acquire a blend of core core plus and value add opportunities and gateway quite fits squarely into our core bucket, which provides cash flow growth and stability in future periods, when some value add projects maybe in transition.
We continue to leverage our information advantage through our deep market knowledge and research driven platform, which has enabled us to complete 77% of our acquisitions this year through off market or lightly marketed transactions.
As we look ahead, our acquisition pipeline remains strong with approximately $675 million of new investments under LOI or contract.
Including Gateway point.
These acquisitions are subject to the completion of due diligence and satisfaction of customary closing conditions, we will provide more.
We will provide more details as transactions are completed.
Regarding dispositions as announced last week, we sold three properties totaling $44 million during the third quarter.
The proceeds will be used to tax efficiently fund a portion of the gateway point acquisition and moving forward, we expect to continue to sell assets opportunistically to unlock value and recycle capital.
Finally, I'd like to provide an update on our value add repositioning program.
Our repositioning projects have remained on track through coven with only nominal impacts from slowed permit processing through.
During the third quarter with stabilized or Preleased for repositioning projects totaling 349000 square feet at an aggregate unlevered yield on total cost of 5.8%.
In light of recent recent increase demand for our vacant space and amid a backdrop of very low vacancy we feel very good about future performance for the 1.4 million square feet or projects that are planned or currently under repositioning or development.
I'm pleased to now turn the call over to Laura.
Thank you Howard I am excited to join the Rexford team and to be with you all today over the past eight years Rexfords highly differentiated strategy irreplaceable high quality property, leading internal and external growth all supported by best in class balance sheet have solidified rexford, a leading platform.
In the industrial sector. The future opportunities ahead for Rex are great and I am excited to be a part of our next level of growth.
Today I'll begin with the highlights of our operating results.
And the third quarter stabilized same property NOI was up 4.4% driven by a 5% increase in rental revenue related to higher occupancy and leasing spreads offset by bad debt expense.
Property operating expenses increased 6.9%, which was mostly related to some repair and maintenance expenses that were delayed into the third quarter you should the pandemic on.
On a cash basis same property NOI was up 5% in the quarter.
Regarding rent collections and deferrals, we're pleased with third quarter cash collections at 96.8% near pre covert leveled and 920 basis points above the second quarter.
October collections are tracking in line with the third quarter at this point in the <unk> at 91.7%.
It's important to note that nearly all deferrals had burned off in the quarter. So these strong collection numbers are a true testament to the health of our tenant base and a strong infill southern California market dynamics.
In regards to rent deferral, we've executed approximately 4.6 million of base rent deferrals, including 700000, and a third quarter or 20 basis points of HDR with an average deferral period of one and a half months.
And the third quarter, we collected $160000, a deferral rack, representing a 100% of an upscale.
As of October 19th we have collected approximately 85% of the one and a half million deferred rent due in October with only 220000 remaining to be collected.
About $3.6 million or nearly 80% of all deferrals are scheduled to be paid back in the fourth quarter.
Turning now to our balance sheet and financing activities at Rexford, we have a commitment to maintain a leading a best in class low leveraged balance sheet. Our strong balance sheet has allowed us to capitalize on our value add model overtime as we have produced sector leading growth while at the same time, maintaining a low leveraged balance sheet.
A true testament to our internal and external value creation.
We have never been better positioned for the future growth opportunities ahead, while at the same time being well positioned for any teacher disruption.
At the end of the third quarter, we had approximately $286 million of cash on hand, which includes 42 million up 10, 31 proceeds related to our third quarter just physician [noise].
We remain in a very strong liquidity position with no debt maturities until 2022 five.
I had a million available on our revolver and approximately 260 million available on her under our ATM program.
As Howard discussed we anticipate closing on the acquisition of Gateway point in the coming weeks for approximately $297 million we.
We will initially use cash on hand, and our revolver to fund this accretive acquisition acquisition.
We estimate that this transaction will contribute approximately seven cents per share to core FFO and 2021.
Before turning the call over for your questions I would like to discuss our updated 2020 guidance given our performance to date, including the out of visibility. We now have on collections as well as the announced acquisition acquisition of San Fernando Road, and the eminent closing of Gateway point, we're increasing guidance for core.
FFO per share to $1.29 to $1.31 per share from our previous guidance range of $1.26 to 29 per share.
As a reminder guidance does not include assumptions for perspective acquisitions dispositions or capital transactions that have not yet been announced.
We have also increased our expected 2020 same property NOI growth range to 3% to 3.5% driven primarily by occupancy gains to date as well as lower than expected bad debt expense in the third quarter as the overall health of our tenant base remains solid.
Our updated guidance range includes the assumption of bad debt expense of approximately 180 basis points for the full year.
Well, we continue to be very pleased with the collection level.
We do feel we do feel that it is prudent to remain cautious given the uncertainty of the current environment.
Lastly, we anticipate you're in the stabilized same property occupancy will be in the range of 97.5% to 98% and no change to our previous guidance range of $36.5 million to $37 million, which includes 12 and a half million dollars noncash equity compensation with that I would now like to.
Turn the call over to the operator for your questions.
Thank you at this time, we'll be conducting a question and answer session. If you.
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One moment, please totally poll for questions.
Thank you and our first question comes from the line of Emmanuel Korchman with Citi. Please proceed with your questions.
Hey, everyone good morning and afternoon.
Maybe this is one for Howard or maybe Laura I have you thought about the change in guidance from Twoq to Threeq, you, obviously, the occupancy and same store assumptions changed significantly in a positive way.
Maybe what did you or didn't you see happened during the third quarter that that drove that change and sort of your projections are sentiment for fundamentals.
Hi, My name is Laura all start without one so I think it's really important to go back to to the time when our prior guidance with that so if we can all remember back to July when we were experiencing and the way that struck shutdown and much uncertainty remain so fast for.
Three months and while I'm uncertain to Stoke certainly continues we have much more visibility and so leasing demand as demonstrated by record leasing levels this quarter and as well as record absorption lover levels that are at pre cobot outlet.
Our updated guidance ranges really reflects what we're seeing in regards to the demand for our portfolio as well as what we're seeing from a collection standpoint, when you see our cash collections that nearly 97% and the collections over deferrals that were really pleased with at nearly 85%.
[noise] right and Laura on on Bad debt I think you gave guidance for the year of 180 basis points could you just give us the actual numbers for Threeq, you and where you are year to date.
Yeah, absolutely year to date bad debt expense is approximately 120 basis points of revenue and in the third quarter that was it was one and a half million or 170 basis points of revenue on a same property basis, a bad that impacted our threeq you same property NOI growth by approximately.
200 basis points or 1.1 million.
So as I mentioned in my prepared marks remarks, we anticipate bad debt expense for the full year to be in the 180 basis point range.
Great. Thank you very much.
You're welcome.
Thank you thanks.
Your next question comes from the line of Jamie Feldman with Bank of America. Please.
With your question.
Great. Thank you I guess just to confirm on the bad debt expense. So you've taken 120 year to date and then.
And then 180 in the guidance does that mean, there 60 more to go I just want to make sure. We're thinking about this the right way.
Yeah, absolutely. So you know kind of think about think about how it rolls. So we've taken 120 to date and we're estimating that to get to 180 for the full year. So that would mean that you know for Q. Our Fourq you asked the man of bad debt, a as you know higher than what we've what we've experienced in the prior quarter. So.
I think it's important to to die then here a little bit and talk about you know what we're seeing in terms of the drivers of our increase in bad debt expense. So as you can see with our cash collections at 97%, where we're actually doing pretty well and we've always taken a very conservative approach in regards to our watch list in our bad debt.
And you know despite the fact that some of the tenants that are on our watchlist today are actually quite healthy and are taking advantage of the March moratoriums on place. So when I think about the drivers of the bad debt increased I think the drivers can really those tenants can really be broken down into two buckets. It's first tenants that are following the California, California.
Kornya moratoriums that are in place and then it is there's a bucket of about half of that is as tenants that are struggling. So in terms of the first bucket that represents about half and half of the non payers. These are generally healthy tenant a better following the California municipal moratoriums that has given them the unilateral right to defer Brett.
Once the moratoriums left we do believe that these tenants will pay rent again and you pay back the amount that they show the second bucket of tenants are those that have businesses that have been impacted by the pandemic and and maybe struggling a post kobe. So we we certainly are looking to the opportunity to.
Proactively worked to take up back that space as that will allow us to release to better quality tenants at higher rents and so we have the opportunity to do that this quarter as well. So I think what's really important when you think about our bad debt and what I, what I would say, it's really a cumulative impact of our conservative approach.
Two our bad debt reserve, it's how we account for about that so regardless of the reason attendant isn't paying rent on either the moratorium or credit risk if a tenant accrues more than two months of a base Roe.
A base rent, we fully reserve for the rent and our bad debt expense. So for example, if you have tenants that are following the moratoriums that are in place our bad debt expense will continue to grow until those payments can once again, so we're continuing to evaluate our policy as we gain further insight into you know new information that we have them.
Sure overall collections as well as with the visibility we have into deferral pain that but again I think it's important to note that list of tenants on our watch list a and that aren't pain is relatively small as you can see in our nearly 97% collection levels that are near pretty up pandemic levels.
Okay. Thank you that's helpful.
And then yeah.
Yeah, you have a large acquisition coming soon can you just talk about how the acquisition market has changed during the pandemic I mean, if you I know you there's a lot of potential sellers you've been speaking to for years.
Do you think that they're going to be more willing to sell and in a downturn or it's just not a downturn and it's not really going to matter.
That's right.
Sure Hi, Jim It's Howard.
Well first of all from the results we've put up this quarter.
She didn't know the word co that you'd probably be thinking things were just pretty typical in terms of our business. So.
You know that carries through to the entirety of our market. There's a significant amount of demand in the market vacancy is still incredibly low and you know the the amount of tenants for instance, our portfolio that Laura just Scott described that are having trouble paying around or just take advantage of the moratorium.
As you know is fairly small so when you really look at the entirety of the market.
There is not really any distressed assets out there you know, there's there's a few things going on here and there but no.
That's not leading to a sellers so thinking because of the pent up like they need to sell their real estate I think if anything they've they've seen rents increasing to radically and values as well as through some of the recent transactions and some that are about or about to hit us so the market.
So the marketing incredibly strong and we don't really see any signs of any financial issue that would create any more selling in that respect.
Yeah, Jamie its Michael I do think it's a great question and just to add to it I think we are seeing continued maybe growing interest for instance from potential upgrade poverty country contributors on the other side.
Now there are some very major long term trends in the market that arguably could be accelerating a little bit.
You know, we track well over a billion square feet owned by these private owners, who own you know small and large portfolios and that activity is yeah. We did a 210 million dollar deal for instance in every transaction earlier this year and we have a lot of those in the Hopper and and we are seeing some interest from some of the corporate owner users.
On the sale leaseback, which you know over the years, we've been pretty active on the sale leaseback front, we're probably seeing incrementally a little more activity there but.
But hard to say that that's directly tied to the pandemic.
Okay. Thank you and I know you had mentioned seven cents accretion from Gateway point in 2021.
Thats, putting cash to work in your revolver to fund it but how do you think about either.
Either as long term debt on that for it sounds I think you said, you're also going to fund with disposition.
So you're talking about right like cap rates on dispositions just the moving pieces.
To get to that seven cents.
So are you on mute.
Oh, yes.
Thank you and our based on our position today I'm, assuming no other capital transaction, that's what that seven cents is based upon in terms of the acquisition has eight weight point, it's really a steady state seven cents, but you know we have a strong pipeline of near term acquisition opportunities of about 675 million, including gateway.
That are under contract or L. Lie so the capital structure is obviously somewhat fungible in terms of our go forward funding. So we'll continue to evaluate really a full range of debt and equity options available to us.
And importantly, we're committed to maintaining our low leverage balance sheet and named best think are great profile as we move forward.
Okay, and then finally any large 21 expirations, we should be aware of or known move outs.
You know.
You know there is 5.1 million square feet.
Oh that expire in 2021, but you know the largest oh it was maybe 200 or 200000 put building.
The rest of them are you know hundreds and lush and so no nothing dramatic in fact, we're you know we're in discussions with explorations right now.
Well see is expiring tenants a we've already done some more renewal work with the remaining 2020 expiration at the end of the quarter. There were 733000 feet remaining as of today, that's about 548000 and.
And it's actually even lower when you break it down because more than half of that remaining square footage goes into or Repositionings and so today. We're now starting full bore tackling those 2021.
Explorations and Ah I think in the top.
20 of those I think we have activity and discussions and renewal taking place probably within the range of <unk> more than 30%.
All of those occupants and <unk> and so I think from a real standpoint, we feel pretty good about where we sit in the market. As you know we tend to have the best quality product and each of these submarkets and Theres just limited options for tenants in terms of relocating and moving Oh so.
Well, we're excited about the discussions that are already taking place on some of those earlier renewals.
Okay all right. Thank you.
Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Oh, great. Thanks, Good morning out there can you comment on the October collections, a little bit first of all how does the pace of regular rent collection compare with prior quarters and then second on the deferral of repayments do you have any sense of kind of what that 84% collections at this point.
The month means for your ability to collect the rest of those deferrals that are owed to you in October.
Yeah, Hey, Blaine thanks for joining us today, so yeah in terms of kind of where we are in October. So October to this point is that 91.7% and when we look back over Q3, that's really right in line with where we were at at at this point in the month and the prior quarter. So you know.
We have visibility and to enter seen those october collections be at or near where we were in Q3 in terms of the deferral payment I actually just got a note from our team. This morning, I'm Hot off the press that we actually got another deferral payment and this morning. So we're now at deferral collection.
So about 88% compared to the compared to the 83%, 83.4% that we reported last evening. So you know that leaves under about under 200000 to be collected in October and we have you know, it's it's still relatively early in the month.
Standpoint, so we have pretty good visibility and to you know, there's deferral collection percentages to be pretty in line with what our contractual billing collection percentages are about 90, 596% area.
Okay. That's helpful color and congrats on that additional collection and then just following up on one of Jamie's questions. You know you guys Didnt issue any shares on the ATM this quarter, which is pretty atypical, but but you clearly have the capacity to increase leverage a little bit.
I think if you calculate pro forma leverage including the $297 million portfolio deal. It's still remains in the low fours on a debt to EBITDA basis. So the question is you know looking forward how much additional capacity do you think that affords you before hitting kind of the top of your your leverage.
For targets and how should we think about ATM issuance going forward as well.
Yeah, Blayne, so and in terms of our ATM issuance. The square I think it's important to note that we had a pretty significant cash balance sheet cash and our balance sheet. This quarter and ended the quarter with 286 million. So we have we really had ample capacity to fund.
Find our knee our our our needs this quarter, so that really drove kind of the lack of ATM activity in terms of your question on our balance sheet strategy. You know, we we believe our balance sheet is really one of our core competencies and our competitive strengths and maintaining that strong investment grade profile.
Well, it's really a key objective of ours so.
You know our way leveraged balance sheet today, we certainly have ample capacity and that provides us with what what I think is ultimate flexibility to execute on both our internal and enter internal and external growth opportunities and does position us well for you know what what could be future future disruptions, so and I think that if there's a.
Anything that this and other downturns have taught us is that it doesn't take much disruption to move leverage considerably. So you know we feel like we've never been better positioned than we are today given those are the legislature low leveraged nature of our balance sheet and and you know expect to continue to maintain.
And the strategy going forward.
Great. Thanks color thanks, guys.
<unk>.
The next question comes from the line of Dave Rodgers with Baird. Please proceed with your question.
Yeah, Michael Howard, maybe I'll start with you a question on the tenant demand that you're seeing both on the quarter and I guess, what you're seeing here into the fourth quarter can you talk about the mix or the breadth of the tenant demand that you're seeing I think national numbers of quoted 40% from E commerce and up to four.
Up to 40% from Amazon in the first half of the year are you guys seeing something similar and can you give us more color on the on the breadth of the tenants you're talking to.
Hello, Hi, Hi, David It's hard you know in the prepared remarks, we mentioned that demands coming not just from ecommerce as you know there's a lot of demand just from traditional tenants that have been in the marketplace. So that clearly is pent up demand because they weren't in the market in the second quarter, but.
The business some businesses are doing great and they're growing and expanding or some of them.
Oh for obvious reasons might be ticking, a little bit more space to have a bit more inventory on hand, no really I love I think can be spoken to with just even the port activity.
If you think about it you know the courts.
Oh, we're down well I think the look the little over 11% for the first half the year and with all the activity in August there.
Down only about sub little over 7% in August were record record breaking up periods for imports for both the reports that I've never been more input.
Import volume in the history of those court, so a lot of product coming in southern California, and that's creating incremental demand, whether it's E commerce commerce or even traditional retailers they need a place to put the product a and so no.
And as demands I think pretty.
Diversified and then you know then you talk about you know Amazon So forth mean, Amazon has been one of the largest takers of space in all of our Submarkets are and you know certainly contributed to helping the market maintained the exceptionally low vacancy rate we hope so.
So it's it's exciting than ours as far as our E. Commerce demand. This was one of our highest quarters as well I think Oh, we had over 50% of our leasing that's occurred nearly synta had.
Some ecommerce relationship which is up pretty significantly from what you've seen in the past quarters, which seemed to average more in the 30, 35% range. So ecommerce is clearly a driver, but it's not just you know an Amazon its companies we've all ever heard of before in every business you can think of that.
Knows now that bringing their sales online is more than a revenue generator its an insurance policy.
Hey, Dave its Michael I think its a really great question, and just adding a little bit of color to Howard's comments, another way to think about demand in our markets in our portfolio because when you look at just how low vacancy our markets are hovering a little over 2% on average.
I realize that these are very deep markets and so that two plus percent vacancy in the market the product that actually competes with us is probably half of the actual vacancy out there maybe even less because again, we're our mandate is to acquire the best locations and if they're not the most functional most submarkets when when we buy them, we proactively make it so.
So you know in terms of product that actually competes with the rexford portfolio, you're probably looking at half or less than half of the market vacancy out.
Vacancy out there and I think it's reflective in our portfolio by the way I think our occupancy numbers are materially higher vacancy numbers are about half of what the submarkets are where we operate.
And so you know you layer in the dynamics of Howard's talking about and you know the portfolio and the business is exceptionally well well positioned from a demand perspective were way above what we have considered structural occupancy.
Great. Thanks for all the color here, though.
That's really helpful. Yeah.
And then I wanted to follow up Laura on the security deposits you guys have applied in the last quarter or so are you collecting those are those part of the deferrals that come back in this year is that something that we should also be looking at in those numbers.
Yeah, I think that that's when we look at that deferral of base rent that we're reporting that says it and that does not include the replenishment of the security deposits that that number that you know 80 close to 90% number that I just talked about him and the last question the that Weve collected in October as Joe.
The deferral of base rent.
Okay. That's helpful. Thank you.
The next question comes from the line of Mike Muller with JP Morgan. Please proceed with your question.
Yes, hi, thank you.
Dick you mentioned opportunistic dispositions and I'm curious, how you're thinking about dispositions today versus equity issuance, given where the stock is trading and then I guess what are the characteristics of those disposition candidates.
Hi, Mike its Howard Oh, I'm sure visiting with us today.
Yeah, you know as far as dispositions or thought process on them hasn't really changed much you know from quarter to quarter or even year to year and we're always looking deep in the portfolio.
And looking for dispositions that either can outperform a cap rate values, where we might sell to some owner users, which was an example of during the quarter or more management intensive properties are requiring more capital in the near term that we don't feel that will be a peter or incremental return on.
We know so we sold some multi multi tenant product as well.
And we took advantage of.
A new capital coming into the market frankly that is hungry for industrial assets less sophisticated and ER cuz significantly outperformed on an exit one multi tenant building.
That we sold in San Diego [noise].
And Oh, the dispositions will continue to be a part of how we operate and we as you know we do have some others in mind or shortly.
Certainly provide more information on those as well so we transact.
You know, Mike just adding again to that its Michael you know when you look at the portfolio and particularly we look out to the expirations for instance, next year yeah. The portfolio from expirations perspective is about 16%.
In place leases, there being below market and in the aggregate that the portfolio is probably pet over 10% Mark to market. So you know there's a lot of value creation to be had throughout the portfolio, but so we're going to be opportunistic as probably is probably the right way to clarify, but I think we're really focused Moreover on value creation.
Got it so is maybe the way to think about dispositions are going to be what they're going to be given the situation and any excess equity requirement that you would be to fund whatever investments you make would come from traditional equity issuance as opposed to that we like dispo cap rates more than the stock price.
Today.
I think that's a fair statement.
Got it okay that was it thank you.
Thanks, Mike.
As a reminder, if you'd like to ask a question to you May Press star one from your telephone keypad.
Our next question comes from the line of Eric Frankel with Green Street Advisors. Please proceed with your question.
Hi, Thank you for taking my question first I get powered for you until you got to give you that would be pretty a pretty good. This quarter can you just clarify that difference in releasing spreads between new and renewal leases were where the where they are where the new building the new leases on rehab buildings or rehab stages.
The new leasing was onto some some of it obviously was on sort of the repositioning we've mentioned that we've stabilized for us.
Repositioning projects in the quarter, where we achieved about a lot of it is little north of 5.8% return on total cost.
And others were just the space, obviously that the that had been vacant.
No. What's what's interesting is I think just a testament to the demand or in the marketplace. We had a few lease terminations in the quarter, which for the most part were driven by us trying to get to the space.
We had we had one that was a one of our larger.
Exploration, so that was going to occur towards the end of the at the end of the year for 200000 foot building, where we were able to talk the tenant into <unk> relinquishing about a 100000 feet a in the tenant in hand to take that we had another one that was a 135000 foot building expiring next year that were.
Able to do the same thing and bring a tenant toe into that space. So you know a lot of the new lease and by the way those are incredibly strong rent spreads as well.
Rent spreads as well.
So a lot you know a lot of the new leasing is Ah you know being created by.
Oh ourselves in terms of trying to get to the value in that space, you've heard us talk in the past about.
Trying to get a.
Good because some of these tenants even some of the ones that were paying us rent get them out of the spaces, because the market's Uh huh.
A strong that we could replace them quickly and produce those high leasing spreads a lot of that now being done without any substantive capital work Oh in terms of the value add side as well.
Interesting that's a good color I appreciate that just to obviously I haven't gotten close on it you have to just the gateway deal I'm, obviously, it's a it was a pretty big purchase even for you guys.
And I just want to clarify did I didn't quite get it I didn't quite hear your comments well earlier in the call but on did you guys say you pick your receipt and achieve a 4% yield on that deal and when would that exactly occur.
There's there's a lot of no role right now in the <unk> and the leases on on that product Oh, there's 105000 foot lease that expires.
This this year in the next couple of months and then there's another [noise] 77 that expires.
Yes, I think mid <unk> or mid <unk> around may next year.
And so if you if you look at the product there was about 20 in aggregate about 21%.
Below market rents and that's based on some of our more conservative underwriting and it's interesting to think about because if you. If you look at the some of the projections CB area recently put out with a 41% projected brand growth over the next five years that averages about.
I think on a compounded basis, a little over 7% per year.
We quit we obviously didn't underwrite anything near that puts a gateway product you know really isn't the bull's eye of the highest and best product in the marketplace right. Now you know if it has probably about a 50% excess stock her door count.
Compared to the typical buildings in the market.
Is 32 foot clear first Bay, it's got its first sprinklers, it's got container parking and the location is just right in the Bulls eye.
For E Commerce last mile cuts cuts delivery. So you know, we're we're really optimistic that that product is going to outperform a lot of lot of the class a product that we bought over the past few years is substantially outperformed or rent projections, just because there's a dearth of the product in the market.
Yes half half of <unk>.
The greater Los Angeles market was built before 1980, and so you can imagine when you look at a market like southern California today, there just isn't enough space to supply the demand that's out there in fact, even construction.
This construction pipeline, then greater L.A. is down probably 30% quarter over quarter. So there's there's a shortage of space and they'll continue to bid. So gateway you know we're real excited about it we think it's it's got all the elements of a problem the type of product that Oh. It at the end of the day will perform very very strongly and potentially.
You know outperformed even our own direct.
Yeah, I know they look like a very good buildings that do it no doubt about that like we appreciate all that color and final question and I think one of your peers alluded to this on their earnings call yesterday, but I guess the the cat is fully out of the bag in terms of industrials fundamentals and its attractiveness as a as a then there's definitely class.
And so I think your market listen your disposition opportunities, but do you foresee any issues. Obviously you guys canvass the market. So thoroughly any issues in terms of just increased competitiveness in identifying investment opportunities going forward versus say six months ago.
Hi, Eric it's Michael Thanks for joining us today, and you know our market has been competitive or arguably hyper competitive for a very long time and yeah, there and.
And it's it's we see new capital coming to our market.
Frankly consistently you know for many years so.
So I wouldn't say, there's necessarily an increase in demand from investors I think its people the knowledge that industrial is a great asset class.
And I think whats amazing frankly about our market is that infill southern California is probably only about 7% owned by all industrial reads all public seats has a vast majority of.
The vast majority of our market as mom and pop.
You know probably upwards of 70% of our market as mom and pop out and then those mom and Pops that are not real estate professionals.
And so despite the heightened interest in the asset class arguably you know.
It's still a highly fragmented market and what I find the sounding isn't the vast majority of our transactions were not competing with institutional capital.
You know I think we heard my noted about 77% of our transactions. It's your with your off market and lightly marketed transactions that we catalyze through our research and our broker efforts in house and so its really just that we create a fundamentally different playing field by creating this information advantage through our through our proprietary.
Sorry originations capability.
And that and frankly, when we started this company a you know a couple of decades ago, we started with the fundamental premise that it wouldn't be a very exciting business. If we're relying on third parties, namely brokers to bring us our growth opportunities because they are highly competitive and so we've created a machine at rexford CAPL by and large generating our.
And investment opportunities and that and that that translates directly into better economics, better cash flow growth and better return on equity.
I appreciate that color. Thanks, guys appreciate it.
Next question comes from the line of Chris Lucas with capital One Securities. Please proceed with your question.
Uh huh.
Good afternoon from me and good morning for you guys I'm just a couple of follow up questions just Howard great New leasing quarter I guess just curious on the.
Hi segments that you guys sort of grew up in terms of the disclosure is there a segment that.
Has the most opportunity to push rents in that right now or is it very specific to the asset.
Well I think if you look at the market and the low vacancy throughout you know, there's just a shortage of space Oh, you know what you shouldn't even think about it's just smaller type kinda spaces, we on.
The cost to replicate those makes it impossible to deliver any of that product. So it's if you look back for quite a few decades and you know for instance, greater L.A., which is half the market there hasn't been any of that product delivered so there's there's a shortage of that product.
You know, we've we've seen you know leasing spreads pretty evenly distributed throughout.
Throughout and that's you know quarter to quarter I don't I don't think there's anything dramatically different.
This quarter versus others I mean, we should point to you know some of the larger leases that a though we did have some you know some large large spreads do but there's you know a whole bunch of small leases that you know are about where they are worthy of even speaking to that have very strong spreads as well.
So it's.
I think if you look at our portfolio, though.
The smaller spaces today, you know don't don't make up or as much as the larger in terms of this it'd be are they contributed probably.
Almost half the portfolio now it'd be our comes from space is about 50000 feet.
And.
I think it's oh in the 9% range isn't even some of the smallest spaces. So.
Yeah.
Yeah, I think from from if you look at some of the assets. We've been buying you don't also see us buying a lot of you know some of these small small product type spaces and its like you know the majority of what we've been selling it quarter to quarter has been taking advantage.
Taking advantage of the strong market.
Selling some of those more management intensive a multitenant parks as well so.
Over time, you know I think our percentage of baby are derived through some of the larger tenants is you'll see a increasing as well.
Okay, Great and then I guess just in terms of.
Good time process the tenants take to make decisions about leasing is that has that been changing at all this year and I don't.
I don't know how much you know it might occur but impacted it I don't know whether or not that's recovering at this point can you give us a sense of.
Worsening from tenants in terms of their responsiveness.
Well certainly a.
People slowed that process, that's cool that hit during the second quarter. Oh, you know, we certainly saw leasing pulled back because people didn't know how to react but you know oh.
Obviously in the in the third quarter and even toward the latter part of the second quarter leasing really rebound rebounded and.
It's really not slowing down or is not showing any signs of slowing down.
You know I think what what you saw though from a.
Our leasing in this past quarter was.
First of all our highest quarter ever in terms of new leasing you know I think that was about 45% higher than new leasing that occurred this quarter and our prior peak amount of new leasing. So what that's telling US is that people are focusing on vacant space or for obvious reasons, you know concerning the pandemic and.
Those decisions are happening a lot quicker when they're looking at vacant space No Princeton's, we had almost half of the move outs of utter rather I'm, sorry, almost half of the new leasing this quarter.
It was really from three move outs, a where we had almost a little over 450000 square feet and I think there was about 34 days of downtime on those and are they were released during the during the quarter. So that's you know that's obviously testament to the market, but in terms of leasing decisions you know we've always seen.
Leasing you know really it really depends on the size of the space and so most of the product in our portfolio. The leasing is fairly quick somebody's out in the market they need space they want to sign a lease and they move in right away and that's really I think what you saw in the new leasing.
So this this quarter was really Oh, I think solidifying the the thought process of demonstrating [noise].
Oh, thanks for the color Howard that's going on right now.
Thank you.
Thank you at this time I will turn to flip it to management for closing remarks.
Hi, This is Mike on behalf of the entire Rexford industrial team want to thank everybody for joining US today, We hope you and your families remain safe and healthy and we look forward to reconnecting our next quarter. Thank you.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.