Q3 2021 Rexford Industrial Realty Inc Earnings Call
[music].
Greetings and welcome to the Rexford Industrial Realty, Inc. Third quarter 2021 earnings conference call at.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host David Lanzer General Counsel you may begin.
We thank you for joining us for Rexford Industrial's third quarter 2021 earnings conference call.
And to the press release distributed yesterday after market close we posted a supplemental package and then updated investor presentation in the Investor Relations section on our website at Www Dot.
Certain 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.
Rex discussed today.
For more information about these risk factors, we encourage you to review our 10-K and other SEC filings Western industrial assumes no obligation to update any forward looking statements in the future.
In addition, certain financial information presented on the call represents non-GAAP financial measures.
Those are earnings release, and supplemental package present GAAP reconciliations.
And then 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, Laura Clark.
They will make some prepared remarks, and then we will open the call for questions now I will turn the call over to Michael.
Thank you, David and welcome everyone to Rexford Industrials third quarter 2021 earnings call.
I'll provide a few brief remarks, followed by Howard who will discuss our trends.
Clark Chilean market activity and Laura will then provide an update on our balance sheet and related metrics.
Rexford continues to perform at extraordinary levels and as our teams quarterly results have raised the bar once again.
I'd like to begin this call by thanking our entire Rexford squad for your outsized performance.
We are humbled by your dedication your entrepreneurial approach to creating value and buy your market leading execution you are truly excellent and we are grateful to have the opportunity to work with every one of you.
Our team's accomplishments include over $880 million of acquisitions during the quarter.
Zach bringing year to date investments to over $1.3 billion.
Most importantly, these investments deliver substantial value creation with an aggregate projected stabilized unlevered yield that is about 50% higher than the stabilized yields associated with marketed transactions today for similar.
<unk> product.
Our team drove releasing spreads of 54% on a GAAP basis, and 39% on a cash basis.
Entrepreneurial efforts by our team are continuing to drive portfolio rent and cash flow growth that substantially exceed market rent growth.
We grew consolidated NOI.
Quality of 39% and core <unk> by 47% compared to the prior year quarter.
We also increased <unk> per share by over 30% year over year.
Our market, leading cash flow growth has been achieved while maintaining a best in class low leverage balance sheet with leverage at $12 seven.
I buy something of total enterprise value.
<unk> is the third largest and fastest growing publicly traded industrial REIT in America and has delivered consistent outperformance.
Our same property cash NOI growth, which has averaged 9% over five years.
Our <unk> per share growth, which has averaged 13.
7% over five years, and our dividend growth, which has averaged 12% over the prior five years have all substantially exceeded the average of all other industrial rates in the nation.
Our team's performance continues to be supported by strong market conditions.
Tenant demand and market rent growth continue.
Unprecedented levels and all signs point towards continued strength.
In fact, a range of market dynamics indicate that we are still in the early stages of several long term trends driving market rent and value growth into the future.
The pandemic driven expansion in e-commerce.
When you're asking with shifts in the supply chain driving warehouse demand and prime infill locations is well documented.
However, a range of additional factors are driving long term demand growth in our markets. For example, some of the nation's largest legacy bricks and mortar retailers and manufacturers.
Our fundamentally adjusting their business models to survive and thrive in an e-commerce omni channel retail landscape requiring.
Requiring a substantial increase in local last mile warehouse space.
Also seeing the emergence of substantial new businesses, leveraging e-commerce and new technology.
Driving extensive new demand for warehouse space within infill Southern California.
Further we are seeing the benefits, resulting from our exclusive focus on infill southern California, the nation's highest demand and most highly valued first and last mile logistics market.
Within our infill markets.
The extreme scarcity of available product.
Inability to increase supply to resolve the long term supply demand imbalance sets the stage for the current acceleration in market rent growth.
We also continued to see substantial price elasticity in terms of our tenants' ability to pay increasing.
Creasing right.
Particularly as ret typically represents a very small share of our customers' economics.
As we look forward, we see an expansive opportunity to capitalize upon our internal and external growth strategies.
From an internal growth perspective, we currently project.
<unk> $94 million equal to about 27% of them.
Embedded NOI growth from our in place portfolio over the next 18 to 24 months.
Assuming no further acquisitions.
In addition, our external growth opportunity continues to grow and quality and volume.
Driven.
Even by our year over year cumulative impacts of our ongoing research and investment lead generation as we deepen our market penetration and build upon our information advantage over time.
With a mere 1.9% market share within our 2 billion square foot market.
We.
We have a substantial growth opportunity before us.
Most importantly.
With over 1 billion square feet of legacy product built prior to 1980.
We benefit from the nearly limitless pallet of value creation opportunities available to us by leveraging our proprietary access to the infill southern California.
California industrial market.
And by capitalizing upon our expertise to increase product functionality.
Quality and cash flow.
Consequently, we believe the company is very well positioned to continue to drive strong cash flow growth and value creation for shareholders.
And with that I'm very pleased to turn the call over to Howard.
Thank you Michael and thank you to everyone for joining us today.
According to CBRE, our target markets, which exclude the inland Empire East ended the quarter at one 2% vacancy representing historically high demand.
Rental.
Rent growth continues at elevated levels and based on our internal portfolio metrics market rents within our portfolio increased by 24% over the prior year.
This significant increase from recent quarters reflects an acceleration in demand and a lack of availability within our supply constrained.
Rental markets, which positions positions us well to capture strong rent spreads into the foreseeable future.
Our consolidated portfolio weighted average mark to market for cash rents is now estimated at 27%.
In the third quarter Rexford realized strong leasing performance achieving record leasing.
The insights.
In the quarter, we signed over one 8 million square feet of leases, realizing cash and GAAP rent spreads on new leases of about 28% and 42%, respectively, and about 44% and 61% respectively on renewal leases.
Year to date.
Including transactions closed since quarter end, we have completed 34 acquisitions for an aggregate purchase price of $1 $3 billion.
85% of these transactions were acquired through off market or lightly marketed acquisitions sourced through our proprietary research driven processes.
<unk> spread in the third quarter, we completed 13 acquisitions totaling $880 million, which included $2 1 million square feet of buildings, plus a 110 acres of income producing low coverage industrial outdoor storage sites and 9.8 acres of land for near term redevelopment.
But all these investments are producing a four 4% initial yield and are projected to generate an aggregate five 9% stabilized unlevered yield on total investment.
After quarter end, we completed two acquisitions for 33, and a half million dollars, including a 62000 square foot building.
Until then a four acre land site for near term development.
On the disposition front, we sold a 72000 square foot property for $18 $6 million in the North San Diego Submarket, achieving a 16, 6% Unlevered IRR.
The proceeds were used to tax efficiently fund.
Some portion of our acquisition activity.
Moving forward, we expect to continue to sell assets opportunistically to unlock value and recycle capital.
Looking ahead, we currently have over $300 million of new investments under LOI or contract.
These transactions are subject to.
<unk> primary due diligence with no guarantee of closing we will keep you apprised as transactions are consummated.
Turning to repositioning and redevelopment activities.
During the quarter, we stabilized four properties at an aggregate stabilized yield on total investment of six 3%.
These properties.
Accustomed prized a total of 605000 square feet and represent an aggregate investment of $145 million a few highlights include.
The redevelopment of Lawrence and 90000 square foot newly constructed four tenant building in the Ventura County Submarket.
We achieved a six 4% initial unlevered stabilized yield on total cost and growing through average annual contractual rent increases of three 9%.
The repositioning of two buildings at Rancho Pacifica, comprising 488000 square feet in the South Bay Submarket.
Where where we achieved a six 3% unlevered stabilized yield on total cost, bringing the projected unlevered yield on the entire $1 1 million square foot property.
Just under 6%.
And the repositioning of Reis Avenue, a four and a half acre industrial site converted to a paved container storage.
Flooding in the South Bay, Submarket, where we achieved a six 2% initial unlevered stabilized yield on total costs growing through annual 3% rent increases.
We currently have over two and a half million square feet of current and planned value add and redevelopment projects across our portfolio.
With a projected total investment of $629 million, which are detailed in our supplemental and are estimated to deliver an aggregate return on total investment of 6.5%.
These projects represent substantial value creation, when compared to the mid 3% cap rates in today's market.
For social stabilized assets.
And with that I'm pleased to now turn the call over to Laura.
Thank you Howard.
Third quarter same property NOI growth was a strong nine 7% on a GAAP basis, and 13, 3% on a cash basis well ahead of expectations.
Sexual Greg, what's driven a year to date leasing spreads at 45% and 30% on a GAAP and cash basis, respectively.
On top of these strong leasing spreads the contractual annual rent steps, we are embedding into our executed leases continues to increase.
And the third quarter.
This is 70% of our executed leases had rent steps over 3% and averaged three 6%.
Also contributing to our outperformance in the quarter as our same property occupancy that is a protein 99% gain.
Same property occupancy finished the quarter at 98 eight.
With average occupancy at 98, 6% up 80 basis points over the prior year.
That's the foundation of these strong results is our exceptionally stable diverse tenant base as demonstrated by our continued low levels of bad debt.
As a percent of revenue third quarter bad.
Personnel was a positive 10 basis points, driven by a lower number of watchlist tenants and recoveries of prior reserve.
Year to date bad debt as a percent of revenue in the nominal 15 basis points.
These strong results collectively enabled us to grow core <unk> per share.
That by 30% over the prior year to 43 cents per share in the quarter.
Turning now to balance sheet and financing activities, we had an active quarter on the capital markets front, driven by the significant level of transaction volume.
We continue to focus on maintaining a disciplined well.
Our balance sheet proven through all phases of the capital cycle.
As of September 30th net debt to EBITDA was three eight times below our target leverage of four to four and a half times.
Third quarter activity included.
$400 million 10 year unsecured green bond issuance.
Leverage 0.15% coupons.
We were excited to execute our first green bond issuance further demonstrating our commitment to accelerating our positive impacts to the environment, our communities tenants employees and shareholders.
We repaid a $225 million term loan.
Choosing twenty-three and redeemed our 5.8, 75% $90 million series a preferred stock.
In regards to common equity activity.
We issued a total of $13 7 million shares of common equity in the third quarter for total net proceeds of approximately seven.
$283 million through a number of transactions, including the including the following.
The issuance of $3 4 million shares through the ATM program for net proceeds of $206 million.
We settled all forward equity issued prior to the quarter issuing.
102 million shares of common equity for net proceeds of approximately $395 million and finally in late September we successfully priced a public offering of nine 6 million shares of common stock.
Of the total offering at three 1 million shares were issued on a.
A regular way basis for net proceeds of 182 million.
We have six 5 million shares or approximately $380 million of forward equity remaining for settlement.
At quarter end, our liquidity was $1 1 billion, including $60 million of cash.
70, aforementioned $380 million of forward equity proceeds remaining for settlement and full availability on our $700 million credit facility.
We also have approximately $300 million available under our ATM program and no debt maturities until 2023.
No.
Turning to guidance given our strong performance to date in a robust market fundamentals, we are increasing our full year projected core <unk> guidance range to $1 $62 61 per share from our previous range of $1 48 to a dollar for <unk> 51 per share.
The revised mid point of our range represents 22% year over year earnings growth per share.
As a reminder, our guidance does not include acquisitions disposition or balance sheet activities that have not yet closed.
We have provided a roll forward detailing the drivers of our increased guidance.
In our supplemental package.
A few highlights include.
Same property NOI growth on a GAAP basis has been increased to $8, two 5% to 875% up 225 basis points at the midpoint.
And on a cash basis has been increased to 11, 5% to 12%.
Also up 225 basis points at the midpoint.
Excluding the impacts of nominal COVID-19 related deferrals 2021 cash same property NOI growth is projected to be a strong 10 to 10, 5%.
Average occupancy in our same property pool is up 25 basis points.
At the midpoint to 98% 98, 5%.
Consolidated bad debt as a percent of revenue is now projected to be 20 basis points for the full year below historical averages.
Further improved from our projection last quarter of 70 basis points.
Finally, our third.
And subsequent to quarter end transaction volume of $914 million is expected to contribute approximately $15 million of NOI or 10 cents per share in 2021.
Year to date, we have closed on over $1 $3 billion of acquisitions looking.
Forward into 2022 we expect our year to date acquisitions to contribute over $36 million of incremental NOI when compared to 2021.
We will provide further details as well as our full 2022 guidance with our fourth quarter earnings release.
This completes our prepared remarks and we.
Third walk up to your questions operator.
At this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It.
It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Okay.
Our first question is from Emmanuel Korchman from Citigroup. Please proceed with your question.
Hey, good morning, and thank you.
Maybe just one for Howard you talked about rental rate growth of your portfolio, that's outstripping the market.
Could you give us some more details on what's driving that is it just a matter of mix is it age location. The fact that you've put some capital into these assets and so they're now a more highly renovated than sort of the marketers or something.
Else. Thank you.
Primarily nice to hear your voice.
Well, there's a lot going on.
And last question I think are really you need to start it.
These low vacancy rates that we have in the marketplace. There's just a dearth.
Of any space, let alone quality.
Space. So there's there's really just at all on flight on the tenant side. These days to get occupancy on anything that's available.
And in fact, I think one thing, we'll probably start talking more about as off market leasing that's starting to occur where we have brokers approaching us.
Boeing.
We might have an exploration trying trying to wedges are weighing in on some of the leasing.
But you know the the rental rate growth in the market you know we mentioned on the call that our our market growth.
24%.
It's pretty astounding I mean, oh are our growth when we measure compared.
Some of the other data that's up from the brokerage firms. It's fairly similar similar are our highest rent growth.
We experienced was a it was in the inland Empire West where.
Where we had.
52% growth year over year.
And our next highest growth market was the San Gabriel Valley.
And what's you know what's interesting really when you look at those markets San Gabriel Valley for instance has 0.2% vacancy today.
Mid counties has 2.2% vacancy so.
It's just really a perfect storm situation I think in terms of being able to drive these strong rents.
And a lot of the pushes on the tenant part a and you know all obviously on the on our side to pushing the rents but people really just have to have space that are doing whatever they can to secure buildings.
Matt It's Michael hang on.
Manny I was going to add to that because I think you're kind of asking how do we differentiate what why is it.
That's a market rent growth is exceeding why is it rather than our portfolio rent growth is exceeding what we're seeing in the market overall.
And I think there it really goes to the restaurant business mall model fundamentally and that could be that you know when we buy assets, we're targeting the best locations in the market and these are very large and deep market as you know and further if theyre.
Not the most functional in the Submarket when we acquire them at.
The opportunity in other words as soon as we can drive up the opportunity of our vacancy we proactively renovate and reposition to make them. The most functional in the sub market and so we're positioned to out compete.
Both from a location perspective and from a functionality perspective, many tier.
To your point.
And then I think the other key element, which is frankly, the most important element is the team at Rexford, if the entrepreneurial efforts of the team to simply out compete and to stay ahead of the market and today, we have such an information advantage relative to other owners in the market and leasing as well as the acquisitions in the.
We're doing well over two leases on every business day.
Our our access to most current information.
It was really unparalleled in the market and that equips our team.
To really outperform the way that they were seeing them do that.
Hey, Michael Howard, It's Michael Bilerman here with Manny.
And if I could just ask a second question just about you know now that the portfolio is so large and so concentrated in your market. How do you think about sort of alternate use value is given.
Given the upward trend supply constrained market.
And I recognize how good industrial is doing but in many cases.
Is there could be opportunities, where you could and you've obviously sold some assets in the past.
You know take.
Take advantage of potential pricing for alternate uses.
What's the process internally to uncover that and is there.
You know a land mine of potential value.
Within the portfolio and that's not being recognized for that initiative.
Hey, Michael Thanks for joining us today as well, it's Michael here.
It's a great question and as you know historically, how we've been doing this for a very long time and then there are entire submarkets that we used to own it that.
It had been converted to other uses.
And it made for a very good disposition disposition opportunities for expert.
And that will continue to unfold, but.
To be Frank I wouldn't consider it to be a very large or very material percentage of the portfolio, where you would go and I think that selectively yeah, you could there's some added value there certainly over time.
And the process internally.
We are I.
I mean it.
We have an extensive called asset management process, where we're looking at every asset in the portfolio. We're reevaluating the business plan for that asset.
We revisit it on a quarterly basis, many of the assets actually more and more frequently than that given the pace of.
Market rent growth, but more recently.
And so it's an extensive process of rexford.
And we're looking for those value creation opportunities, which from time to time to your point may include the disposition and Thats, where you see US also pruning the portfolio and taken advantage of some of those opportunities overtime.
Is there anyone who wanted to works that we should be cognizant.
Like I look at with PSP did right and selling everything that San Diego at one and a half cap you know an asset that the street valued at 70 500 million that they sold for over $300 million.
Cost of capital at a one 5% yield.
Are there opportunities like that where the street is just not capturing this other upside.
Other than your strong industrial business.
Electrical.
There are there are a lot of those opportunities there are a lot of those opportunities in our portfolio, but the.
The value today is really is to capture those rising industrial rents.
With the pandemic you've seen them.
A real big pullback, obviously in the office.
Syed and retail.
And hotel, which.
Really we're taking out a lot of industrial sites.
Housing for the most part.
Obviously still been functioning but construction costs.
Put a lid on what can be pay for some.
Planned sites to convert them to a housing.
But when you look at industrial land over the past year, you know our numbers tell us that land values for industrial sites have grown almost 80%.
Zero.
Our market yeah.
And and obviously you.
<unk> heard a lot about industrial rental growth.
And so those higher land values are still supporting those industrial values and so on.
At this moment in the cycle industrial is really working well and.
There's more opportunity in our portfolio to capture those higher yields with the.
Here, we have than there are for these alternative uses for the most part really today, but yeah as Michael mentioned, we do sell things that tend to outperform cap rate type typical sales and we've we have a history of doing that in the portfolio and I'm sure we'll be able to talk more about some of those.
That's before.
Great. Thanks for the time, the Heartbreak Arab brings up an interesting point related to the multifamily and the housing issue because you know right now, California has introduced a mandate to increase the housing stock by 20%.
And that's gonna put then theyre going to put incentives in place, they're looking at zoning and creating rezoning.
Timing of the need for additional housing.
And that'll probably drive another cycle frankly of opportunity.
Where are you gonna see more conversion.
Industrial locations that are already adjacent and surrounded by multifamily.
Much of which we own and you may see more of that going forward and that's probably that's going to take 20 years to.
Operating resolve that or more right and have had industrial stock goes down and the rest of it becomes more valuable so you get a twofer.
Thank you so much appreciate it.
Okay.
Our next question is from Jamie Feldman from Bank of America. Please proceed with your question.
<unk>.
Thank you.
So how are you.
You gave kind of the highlights on the NOI growth over the next 18 to 24 months, but you provided some really helpful. Slide last night. When your presentation can you just walk through it with a little bit more granularity on the moving pieces to get to that NOI growth Youre talking about.
Sure Matt.
Yeah, great great to hear from you Jamie go ahead Laura.
Yeah, Hey, Jamie Thanks, so much yeah. So the NOI growth that we're talking about it or 27% our projected NOI growth over the next 18 to 24 months and I think it's first it's really important to recognize that that growth is.
What's embedded in our current portfolio, but that doesn't assume any additional acquisitions or external growth. So at a starting point that that represents $94 million of NOI growth.
Over the next 18 to 24 months and that's comprised of about $35 million or call. It about.
35% of that growth is coming from our acquisition that we acquired so already are already acquired acquisitions not perspective, and the portfolio from Q3 and beginning of Q4.
Another 35% of that growth of about $35 million is related to leasing spreads.
So we did.
We did.
Announced on the call and it's included in the deck as well, but the mark to market on our portfolio with about 27% today.
And that is on by the way a cash basis.
And which is which is purely the cash and does not incorporate does not incorporate.
Corporate future rent bumps on this on this cash re leasing spreads.
And then the other component of that $94 million of growth is repositioning that are already in process and that we expect to complete over the next 18 to 24 months.
Okay, Great that's helpful.
And then.
And you talked about a lot of the capital you raised in the quarter can you just help us understand your thoughts on financing going forward. What do you have on the balance sheet to fund all the investments you've talked about and when do you think you might need capital again.
Yeah. So I think at the core we means we continue to be really focused on maintaining that.
Low leverage investment grade balance sheet, and you'll continue to see that the opportunistic.
And take an opportunistic approach to capital raises that as you've seen us do in the past I'm, taking advantage of capital sources debt in equity to fund acquisition opportunities and refinanced debt maturities and I'm looking forward, we don't have.
<unk> maturing until 'twenty two 'twenty three we sit in a really good position from a debt maturity perspective, we feel really well positioned given our current acquisition pipeline, which is about $300 million of acquisitions that we have under contract or LOI that we expect to close in the coming months, we have $60 million of cash.
Have any of them. We also have about $380 million and forward equity proceeds remaining for settlement. So we felt we feel good about our currently liquidity position.
Okay. Thank you and then finally, Michael you had mentioned.
You know customer economics being a big reason why you were able to keep pushing rent can you just provide a little.
On handle or on what you mean by the customer economics, and maybe where you know where warehouse rents fit into the total supply chain.
Of course, no. Thanks for the question and probably I think it's not just about customer economics, but we can start there.
And really what you're referring to is the fact that the.
Market rent associated.
With the for instance for distribution oriented company, if you compare rent even just to their transportation costs really good.
Transport transportation costs are a multiple of their typical rent.
And so rent is really a nominal element of the overall expense structure or overall.
The revenue as a percent of revenue or net income typically.
And what we're seeing also is that location can help resolve some of those other more costly items like transportation costs. So by locating in warehouses closer to the end user customer they can actually reduce some of the transportation costs at the end of the day. So it actually helps resolve some of their financial issues.
Overall, we can drive profitability.
But I think that the the the rent as a percentage of the economics is really.
One driver of demand and sort of the <unk>.
Tenant's ability to pay more rent.
And it really goes down to a number of facts.
One <unk>.
By and large these locations truly are.
Critical to our tenants in other words, if they didn't have the space in our portfolio within infill southern California, They would really be unable to run their business because they are disproportionately distribution and consumption driven.
They are distributing into the largest zone of population and consumption in the country by far in infill southern in southern.
Mission cornea.
And so they really don't have other options and despite this being an expensive operating environment in southern California, It's been that way for many many decades and so if tenants by March had the luxury of moving to a lower cost location outside of southern California.
Probably you know did that on average the 15th.
In California or more years ago.
And then it goes deeper into some of the dynamics that are occurring within our markets and within the customer base.
And we're seeing as a result of new technologies as a result of some of the.
Ancillary opportunities that are created through ecommerce youre seeing both legacy business.
Driving new demand.
And we're seeing new technologies, and new business models emerging that are driving new demand and.
And I'll just give a couple of quick examples.
Think about some of your legacy largest retailers in America, you know a target for example.
They have fundamentally altered their business model.
They didn't want to be the next years and.
Is it actually went from owning only operating out of only large big box.
Super centers.
Now they opened and operate small scale 20000 square foot, even smaller stores in urban and in smaller towns.
Standard to service that they have to put in place what they call sortation centers, which are small warehouses.
So within the infill markets with service some of those smaller footprint stores and you know those are those are registered warehouses and you know that's the man that did not exist.
Even five or seven years ago.
And then you've got you know manufacturers, who had to adjust their business model and I recall that the stores that happened to me you're now having to repair.
Our garbage disposal at my house, and calling on a Sunday the manufacturer's number on the machine.
And theyre offering to sell me directly through ecommerce on their web site at a 50% discount compared to what I can buy their same garbage disposal and one of the large scale retailers.
So and then we also see new business models.
Parenting.
And these are really exciting for retro because and in retro is really positioning ourselves to get in front of us new tenant demand.
When I can think of a few examples servicing some of the verticals consumer Staples daily necessities.
Or even seen companies that want to distribute parishes.
Zimmer frozen goods like ice cream.
It really can't be transported more than say you know 30 minutes.
And.
You know really substantial new demand for our portfolio.
And then you have new technology.
For instance, the electric vehicle market, that's been created over the last 10 years.
Aerospace and space technology, which is the focus here.
So for now.
So it's a really it's if you take a holistic look at the marketplace.
There's a set of really interesting and exciting long term drivers of demand.
And if all those sectors that I described them as examples those tenants weren't saying, Oh Gee rents just a small percentage of our economics, therefore, I can pay more.
And so I think they were saying in order to survive where in order to execute my fundamental business model I need this location and it's not so relevant what I need to pay for it. So that's kind of where we're at today.
Alright, Thank you for the thorough response.
David.
Right.
Our next question is from Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks, how are you guys have consistently highlighted how fragmented the ownership of warehouses is in your markets and the low level of institutional ownership.
Do you think anything has changed during the pandemic or coming out.
That would make the private the winter was more or less willing to sell their industrial buildings or even other property that could be converted into industrial.
[noise].
Hi, Blaine.
Thanks for the question.
You know things are not too different than they've always been right southern cause there's no secret.
Southern California has been the best performing market in the country for many years.
And we have a different set of capital that's now decided that they have to own industrial and why not do it here in southern California, we're truly from from our standpoint really just emphasizes how we started our company and the business model we.
We chose where we're really focused on creating these off market opportunities as you alluded to from these private individuals.
Surprisingly our system is actually performing better.
Even with this focus on value.
He is increasing and more capital chasing.
<unk> industrial transactions.
On average we've purchased about 70% of our transactions since IPO.
Being off market or lightly marketed today.
Oh, that's looking more like 85% in the more recent year and even the prior year.
So we're getting better at what we.
And surprisingly we still encounter people that are you know don't even use brokers and don't even look to a broker for advice one of our largest transactions we closed in the corner.
It was a 360000 square foot building in the inland Empire West.
And we bought that property.
Pretty it's probably.
You know, 40% discount to probably what it would have traded for them on the open market and the seller.
<unk> was able to transact confidently without a broker.
There was somebody in the real estate business and developer of long time owner.
And.
They were just in a disposition mode on a particular outside.
But you know our strategy is still as you know bring involving brokers in most all of what else. We do just to support owners and help them understand the markets.
No I mean look there's there's really.
The widely marketed transactions.
Where the opportunity is for the.
The the institutional type owners to penetrate into the marketplace.
And with with those type of acquisitions, we're starting to see cap rates trading and the three 5% range for quality product, that's marketed which based on the numbers you're hearing us quote today is almost a three.
So really a basis point differential of where we're stabilizing the assets on average we're buying especially.
Especially the value creation opportunities that we have in our portfolio.
Great. Thanks, that's really helpful and just sticking with the acquisition you got to have recently acquired several outdoor stores facility.
<unk> hundred per I think redevelopment once once the lease expires can you just talk about your appetite for more covered land plays or non traditional development opportunities and whats driving that is that just the scarcity of other deals on the market. It sounds like you guys are getting plenty of them.
It looks at deals or is it maybe you know better.
Pricing for those deals that might not be as straightforward.
Well, it's probably a little bit of everything you're mentioning.
During the quarter, we acquired three industrial outdoor storage sites about 180 acres.
And those came in at four 4% yield.
Yield.
<unk> and <unk>.
As we stabilize those over the next few years is that yield is going to grow to about five 8%. So those are attractive yields those are sites that are sure long term you might consider as a covered land play, but there's an even greater scarcity of outdoor storage type property.
In the southern California marketplace, and there's an extraordinarily high demand end user chasing those during the quarter one of our stabilization was a four and a half acre site in the South Bay, where we literally removed I think it was almost 100000 square feet of building from our side pre leased it too.
A company using it as a container storage yard and achieved I believe it was a six 2% a stabilized yield on total cost. So you know that that's a strong yield I mean, that's that's that's almost better than you can do on some of the buildings in the marketplace. So there's a place for those type of sites in our portfolio.
And then as far as covered land plays we consider that a little bit different than these outdoor storage sites.
During the quarter, we bought a quite properties about 70 acres are about $286 million worth.
And you know those are properties that we have a little bit longer view in terms.
So getting to the land in order to develop it on and you know them on average those land sites were fairly spread out through you know from San Diego Inland Empire.
So L a markets and on average those were about $94 a square foot that we paid on the land sites in those markets.
The infill markets in entirety today, if you look at the average.
Cost of land, that's about $125 a foot. So we bought those at about a 25% discount to overall, what what land values are and those came in.
At about it on a blended basis at four 8%.
Initial yield.
And then down the road of being able to stabilize our over.
Over a fixed at about a six 4% return. So those are fantastic opportunities, we're getting paid handsomely to wait.
Until we can redevelop the sites and so yes, we will continue to buy those as well as the outdoor store.
Storage sites in the marketplace.
And if I can't really quickly follow up on that in your remarks. You mentioned you currently have 300 million under LOI or contract can you just segment that out into two you know how much of that consists of currently functional industrial buildings, how much of it is more of a redevelopment play and how much.
You might put in that covered land play bucket.
Yeah.
Well I'd love to you know these these are transactions some of which are still in due diligence and so it's a bit early to be commenting upon what.
We might be buying in terms of the mix, but we're going to continue to report as we always do as we close those transactions.
And I give you full details are in our next quarterly update.
Okay fair enough. Thanks Howard.
Our next question is from Conor Seversky with Bahrenburg. Please proceed with your question.
Hi, all thanks for taking my questions.
Yeah, I just wanted to zero in on on page 13, where you.
This 27% GAAP from your existing rents to average market I appreciate that color first of all.
This might be a stretch here, but I'm wondering for the leases expiring in 2022 can we work under the assumption that these would be older leases signed when the market rents are lower than the current average.
Then below the 11 67 11 67 number quoted for your in place ABR.
Hi, Conor Yeah, I mean.
The in place leases, that's blended throughout the entire portfolio and if we were looking just to 2022.
Two.
The mark to market is actually a bit higher so it's closer to 30%.
Okay. Okay that helps and then in one of your answers before you had mentioned this 20% increase in in housing stock is that for California in general or L. A specific and then Ed you mentioned that they were planning to resume.
Zone industrial usage for that.
<unk> stock.
Yeah. So it is a California wide and where you are in major metropolitan areas, It's really helping to trying to address some of the housing and homeless issues as well.
You know driving that and its not so much that they're targeting.
Industrial areas to rezone them, but what they were looking at is doing zoning overlays or making adjustments to the zoning where you can enable some of it some further development and that's very much in process, we're starting to see it already.
Coming coming to vote.
And coming to play in different areas.
We're getting but it's really in the earliest stages. So its just hard to hard to know at this point you know how much of that will include areas that are you know including industrial.
The zone land, but if you take a look at the Intel market here in southern California, and in the areas, where we own and operate.
Amazing the density.
Multifamily and even single family homes.
And among these little industrial pockets, so you know.
Clearly that represents an opportunity.
Okay.
I might also just add to that.
Had conversations with multifamily developers and.
For the most part you don't see a lot of you know.
Affordable type housing being developed because of the cost.
In fact, we wish we would talk to someone about being really creative and trying to figure out how to put some housing on top of industrial and they said you know you give us your rooftop for free.
And we can put some housing on it so it's going to take some support from the government in eight different housing agencies differ.
Our possibility to deliver land and very very low cost or free to deliver some of the you know the vast need of housing that would have yourself.
Well when we expect to see a lot of the housing developed it's not it's not just a slam dunk to start skipping up all the industrial land to build housing on.
Is it the kind of housing we need here can readily be developed based on the current industrial land values. It's it's gonna have to be subsidized.
Okay. Thanks for that that's a that's an interesting dynamic for sure I'm just last one on the development pipeline I know this question has come up in the past, but are you seeing any continued pressure from labor shortages with the cost of labor and is this having any kind of real time impact on project timelines.
Yeah. It is.
I wouldn't say that the.
Labor or shortage of labor is really a delay in terms of project timelines. Its really just typical thing you know.
In Southern California, which is the entitlement process. It can it can be long and arduous.
And there are some surprises that you're here and there, but you know once once we're ready to build.
<unk>.
And execute on a project, we really haven't experienced any type of a delay related to labor.
Okay I appreciate the color. Thanks.
Our next question is from Michael Mueller with J P. Morgan. Please proceed with your question.
Yeah, Hi, I was just wondering if you can tighten.
Tightest together, you talked about market rents being up 24% year over year and the in place portfolio Mark to market, 27% I mean, it just if I think back to last year I don't recall, you talking about a mark to market that was barely positive. So I'm. Just wondering you know if you can just talk about that dynamic a little bit.
Maybe I'll just comment real quick and Laura you can fill in some of the detail if you like but.
I think the mark to market has been material for for many years to actually I think historically, maybe it was in the low teens.
You know if you go back 12345 years, it's probably been a low teens.
And and we're just seeing we're seeing an acceleration here due to the quality and location of our product in conjunction with the acceleration of my end market rents.
So it's not it's not too surprising and I think what's really interesting is that many.
Many of these re leasing spreads that you're seeing at Rex or the men and when we look at the Mark.
Mark to market in the portfolio you know those are rents that have already rolled within the west in many cases, you have two to three years.
And so if you look at the cumulative increase in rent for some of these tenants in the market. Yes. It's it's it's really somewhat impressive and I think the it's really important to look at the current market rent acceleration.
And more of a historical context.
Because the growth in rents over the long term it has really not been that substantial in the industrial market in southern California. In fact hour night 20 years ago 15 years ago. We talk consists consistently asked ourselves why aren't we seeing more.
Rent growth and this is going back 15 or more years.
And because we've had a supply demand imbalance for many decades and I think today, we're at a point, where you know the drum is so tight and end and.
The more sophisticated ownership like Rex shirt in the market can now sort of drive pricing and in Pakistan. It's really have almost no no alternatives if they.
If they were to lose control of their space and but frankly, if you look back 30, 40 years average market rent growth was around 3%, sometimes just under sometimes a little over but if you look at the longer term average around 3% and so we're playing a little bit of catch up to that and I think in the longer historical context. This rent acceleration really does make sense.
And frankly, if you look at on a global and historical basis. Other markets that are very urban and dense I'm. You know, it's it's not a these are not shocking our market rents.
They were saying that all indications are pointing the fact that we've got a long runway ahead.
So it's a really interesting time right now for us.
Got it yeah, one other thing.
Yeah, I've got to put that 27% mark to market into perspective last quarter that mark to market on our portfolio was 19% and the prior quarter before that so in the first quarter. It was closer to 12%. So we certainly seen.
Seen market rents accelerate we've seen an acceleration in our portfolio mark to market as well.
Got it Okay and one other question to you on the Q3 acquisitions I think you mentioned there was an in place yield of about four four.
What was the split between stabilized product.
And I think that was that's largely stabilized versus something that's a little bit more value add to kind of blend to that four four.
Well I think about 46% of what we bought we would consider value add but in this quarter a lot of it came in with income in place.
I don't have the exact breakdown in front of me, we can certainly get back to you on that question, but.
Yeah.
Obviously varies from quarter to quarter as well in terms of those value add percentages and.
In place income or you know a lot of times, we're buying vacant property, but.
Less Laura you have that we can get back to you on that.
I don't Yeah, I do I do how it hey, Mike that the value add.
They have a lower going on initial yield was about about a quarter so about 25%.
The three key acquisitions.
Got it okay that was it thank you.
Yeah.
Our next question is from Dave.
From Baird. Please proceed. Please proceed with your question.
Yes, good morning out there just one question left for me I wanted to talk about maybe where tenants when they do leave what's happening to them and I don't know if you talked about it before but it looked like rough numbers, you're on an annualized rate of about 2 million square feet of tenants that probably go somewhere else leave close.
You broke or whatever the case might be you've done excellent back filling that space or redeveloped, yet. So that's not the issue I guess is there anything instructive in these kind of tenant exits that are telling you kind of where they're going where our next location might be for you submarket et cetera, anything instructive out of that maybe that's for Michael I'm not sure.
Shop.
I think it's a great question actually.
And I don't know if there's really a story to be told there.
We are at the same time, we're seeing tremendous expansion within our portfolio from our tenants. So.
I I don't and Howard do you have any thoughts related to you know anecdotally.
Well yeah.
I mean, some of the moves are within our own portfolio at this point there.
We've got a very large portfolio and that actually has been a focus of the team lately is to expand tenants and relocate them within the portfolio.
Doing quite a few of those type transactions.
So.
Those aren't really reflected in the retention rate, though where we actually keep a tenant to move them into another vacancy.
And some of it is short term tenants.
154000 feet of move outs. This quarter were just temporary tenants we've put it into a couple of the recent.
And the <unk> acquisitions that we intend to take down for a period of time as we did the repositioning work. So you know I think really an answer to your question is don't don't necessarily look to the retention rates to tell the whole story on what's happening within within the portfolio.
Because a lot of it is.
<unk> really are choosing and we're always trying to create an income stream on any space that we have so today, we're actually having a lot more success with with filling short term tenancies. So those will be reflected in a lot of the move outs as well.
Yeah.
But put another way.
As far as tenants Youre, asking about you know a would've preferred to stay in that space. Yeah. It's uncertain, if they're able to find an alternative to the extent they didn't expand to another restaurant space.
Gotcha Alright, that's helpful. Thanks, guys.
Yeah.
As a reminder, if you'd like to ask a question.
A lot of please press star one on your telephone keypad.
Our next question is from Chris Lucas from capital One Securities. Please proceed with your question.
Good morning, everybody. Thanks for taking my questions.
I guess, maybe just to follow up on the.
On the question about the tenant move outs and sort.
Question on there I guess I'm curious as to from.
From the asset you are buying from us there aren't any change in sort of how that mix or reasons why people who've been selling relative to say 345 years ago.
No I would say you know the one catalyst we continually mentioned is this generational change in the ownership.
Where you have this huge aging population of either private owners or partnerships.
You know what the patriarchs of the families and the partnership just getting.
Getting to the point, where they're doing a state planning and we continue to buy assets from a lot of those those type of owners.
So you know for the most part.
You know that that is continuing to grow.
And the other side of it also as you know the value of industrial real estate today, a lot of people that we approach.
On a sale.
<unk> really had no idea of their assets are worth what products transacting for in the market today and so we're.
Creating that catalyst to convince somebody that they should be selling and taking advantage of this market right now so.
But you know for the most part.
Not a lot has changed on our end in terms of how we source. These are the data.
That we research does change quarter to quarter. These catalysts.
Or were there a little bit depending on what's happening in the market and whether there's a particular industry, that's a thriving or waning.
But the message that we that we deploy are you know really continue.
In the same manner.
And maybe I'll, just add to that a little bit.
Listen what Howard mentioned in terms of what we're pursuing opportunities with catalysts.
And it's really retrofits outbound you now our internal research and our outbound outreach directly to owners and the brokerage community.
And I think it's a function of the fact that we're deeper and better in the markets today than we were even a year ago let.
I think they have or 10 or 15 years ago.
And whether measured by the quality of our research our lead generation and the quality of our team and also rexford continues to grow and mature and so the value proposition for instance to an owner to do an upbeat with Rex for today. It is it's kind of an amazing value proposition for those owners I mean here. We are you know this.
One five.
It really demonstrated the power of the business model and these are one longtime owners, who really love and appreciate their infill industrial assets and they really don't want to dilute that interest into some national or global portfolio because as soon as they trade their infill southern California asset for our portfolio.
We have an interest in a portfolio that includes any assets outside of southern California, that's an immediate dilution and quality.
And future value appreciation.
So they're very keen on transaction with Rex or if it's a unique opportunity to.
These owners and that's why over the last few years, you've seen a pretty dramatic increase in the upgrade.
Activity.
Which also generally caters to some of these longtime owners that Howard mentioned that are experiencing this generational shift in ownership that is truly a historic proportions by the way.
So it's an exciting time for rexford, because not only are we becoming deeper and better in the markets and better at what we do but the market in many ways its flow.
It's flowing into into our into our arms in a sense you know the best part of the market and as I mentioned in my earlier remarks, you know that that that part of the market that was earliest developed that comprises you know there there's over 1 billion square feet of product they'll prior to 1980 that truly has just the most incredible a range of opportunities for us to go.
Go in and resolve functional obsolescence a.
To really drive a lot of improvement in the assets and the functionality and to drive cash flow and value creation. So that you know, it's it's just an exciting.
Time to market and that's what Howard and I know, we often say, although we really enjoy growing the company to where it is today.
We still feel.
We're barely out of the starting gate in terms of the opportunity that you need to do what we do and do it better into the future.
So let me ask just one other question then which is I mean is.
This is the picture of the outlook looks amazing.
Amazing right. So what do you worry about what other things on your.
No.
The Ceos that you sit back and think.
What is what are we worried about.
Well you know we can.
We however, we define this business we created this business together and when we created the business. We said, let's create the most bulletproof business model that we could possibly imagine.
And when we did that we thought of.
Of all the possible risk market risk.
All of these sorts of things you'd naturally think about and that's why you see the business model is focused as it is an infill southern California with an incredible ability to create value and that ability to create value is going to further distinguish the company during periods. When we don't see market rent growth the way, we do see it today across the across the across United States.
Because we have an ability to create value and to drive cash flow growth even during long periods of time, when there may be no market rent growth and that's where the physical yeah improvement an appreciation of the assets that we execute on.
And so I think the business model. We've created has tried to mitigate the things that we can't control like market risk, etc.
Or the economy.
The things that we can control is it personally I spend my my nights staying out thinking about and worry about and the number one thing we can control, which is also the single greatest determinant of the level of our execution, our success or failures going forward and that's our people and so we are obsessed about our people and the development of our.
People.
Did they feel respected.
That that retro is a place where they can flourish and grow like like no. Other enterprise and so that that is the single greatest focus frankly at this point in time for US for me how long do you have any thoughts.
No just doesn't agree with you I mean.
Right.
We can't tell you how much time, we spend with our people Chris in the focus.
Because that is the business, it's fantastic, we own 35 million feet of buildings in a market, but as Michael says without without a great team of people none of this would be possible.
Okay.
Okay. Thank you very much appreciate it.
We have reached the end of the question and answer session and I will now turn the call over to Michael Franco for closing remarks.
I'd just like to thank everybody for joining us today.
And we look forward to reconnecting with you in about three months and in the meantime.
In time, we wish everybody, a fantastic Halloween and holiday season, and wish you all well. Thank you so much.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
[music].
Yeah.
[music].
Yeah.
Okay.
[music].
Yes.
[music].