Q1 2022 Rexford Industrial Realty Inc Earnings Call
Greetings and welcome to the Rexford Industrial Realty first quarter 2022 earnings call. 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. As a reminder, this conference is being recorded I would now like to turn the call over to David Lanzer General Counsel. Thank you you may begin.
We thank you for joining us for Rexford Industrial's first quarter 2022 earnings conference call.
In addition to the press release distributed yesterday after market close we posted a supplemental package and investor presentation in 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 may contain forward looking statements as defined in the private Securities Litigation Reform Act.
95.
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.
Asian certain financial information presented on this call represents non-GAAP .
It's all 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, Laura Clark They will make some prepared remarks, and then we will open the call for your questions now.
Now I will turn the call over to Michael.
Thank you David and thank you everyone for joining our Rexford industrial first quarter 2022 earnings call. We hope you and your families are well.
I'll provide some brief remarks, followed by Howard who will discuss our transaction activity and then Laura will provide an update on our financial metrics and guidance.
As we start the new year, our exceptional first quarter performance demonstrates the extraordinary tenant demand that continues to strengthen even beyond last year's historic levels.
Rexford continues to differentiate itself as the nations fastest growing and strongest performing industrial REIT.
Our portfolio now comprises over 38 million square feet of industrial property, 100% located within southern California infill markets, the strongest industrial market in the nation and the fourth largest industrial market in the world.
Our portfolio was performing at essentially full occupancy, but the same property pool ending the quarter at over 99% occupancy.
We are seeing an exceptionally deep and diverse range of tenant demand across sectors demand substantially exceeds supply, but the overall market vacancy tracking at well below 1%.
We expect to continue to experience an incurable supply demand imbalance due to an extreme lack of developable land.
This inability to increase supply within infill Southern California is a key feature that we believe will differentiate our markets into the foreseeable future.
In addition to this exceptional market backdrop, our entrepreneurial business model continues to position us to drive accretive cash flow growth and value creation, well in excess of secular tailwind.
Our team is executing on a range of internal and external growth strategies that are unlocking tremendous value.
Leasing spreads for the quarter were at 471% on a GAAP basis, and 57% on a cash basis.
On the external growth front year to date, our team acquired $458 million of assets.
Predominantly through off market or lightly marketed transaction.
And compared to the prior year quarter. We grew net operating income by 41% and grew core F. F O by a full 58%.
As we look forward, we're very well positioned to continue to grow our cash flow and value.
From an internal growth perspective over the next 24 months, we project approximately $140 million or 33% of annualized NOI growth embedded within our in place portfolio.
Assuming no further acquisitions.
Which includes $31 million of incremental NOI as a redevelopment and repositioning projects stabilize.
$29 million of the incremental NOI from recent acquisitions and $82 million of incremental NOI contributed as we roll below market rents to higher market rates.
In fact, the mark to market on rental rates for our entire portfolio is now estimated at 55% on a cash basis.
63% on a net effective basis.
In addition, we have an extensive pipeline of additional investments currently comprising over $500 million of acquisitions under contract or accepted offers.
And we have an extensive originations pipeline beyond these transactions.
Fuel our growth we are favorably positioned with a low leverage best in class balance sheet closing the quarter at 10, 3% net debt to enterprise value.
As a reflection of the company's strong performance, our first quarter dividend represented up 31% increase compared to last year.
And with that we'd like to thank our entire rexford team.
Your extraordinary dedication passion and entrepreneurial approach to growing our great company.
And now I'm very pleased to turn the call over to Howard.
Thank you Michael and thank you everyone for joining us today.
Rexford began the year with outstanding results, reflecting the high quality of our portfolio and the incredibly strong fundamentals of the southern California infill markets.
Based on the restaurants internal portfolio metrics market rents for comparable space continue to accelerate.
Creasing by 62% over the prior year.
According to CBRE quarter end vacancy decreased <unk>, 7% across our infill markets due.
Due to the ongoing lack of availability within our supply constrained infill markets and ongoing strong tenant demand, we see our markets continuing to perform at below 1% vacancy.
<unk> us well to capture strong rent spreads in the coming quarters.
Holiday that portfolio weighted average mark to market for our remaining $4 1 million square feet. A 2022 lease expirations is now estimated at 67% on a net effective basis and 58% on a cash basis.
Regarding external growth in the first quarter, we completed 14 acquisitions totaling $458 million, representing 1.5 million square feet of buildings on the 82 acres of land, including 13 acres for near term redevelopment.
Approximately 50% of acquisitions were value add investments.
In aggregate, our first quarter acquisitions generate an initial unlevered yield of three 2% growing to an estimated 4.7% unlevered stabilized yield on total costs.
Year to date over 85% of our acquisitions were acquired through off market or lightly marketed transactions sourced through our proprietary research driven processes and deep market relationships looking towards the future. We currently have over $500 million of new investments under LOI or contract.
Subject to customary closing conditions.
During the first quarter with stabilized 811000 square foot redevelopment property at a 6.6% unlevered stabilized yield on total cost representing substantial value creation. As this is the stabilized yield is about double the market deal for similar quality assets in today's market.
Although increasing construction costs are top of mind, we continue to see rent growth well in excess of inflationary impacts.
The team is executing on a broad range of accretive internal growth initiatives, we have approximately $415 million of projected total incremental investment for value add and redevelopment projects underway or expected to start over the next two years. These projects are projected to deliver an aggregate return.
On a total investment of about 6.7% representing over $1 billion and estimated incremental value creation.
And with that I'm pleased to now turn the call over to Laura.
Thank you Howard.
First quarter results were exceptional with same property NOI growth at 8% on a GAAP basis, and 11, 7% on a cash basis equal to 12.3% when normalized for Covid related repayment.
This strong performance was driven by continued occupancy gains and record leasing stats.
Average same property occupancy was 99, 2% in the first quarter corner.
150 basis points year over year, ending the quarter at 99, 3% and leasing spreads executed over the prior four quarters averaged 46% on a GAAP basis, and 32% on a cash basis.
Additionally, annual embedded rent steps are executed new and renewal leases increased to four 2% on average compared to three 9% in the prior quarter.
This strong embedded internal growth combined with our accretive external growth enabled us to grow our core <unk> per share by 30% over the prior year to 48 cents per share.
Moving to our balance sheet and capital markets activity at the end of the first quarter net debt to EBITDA was a sector low three seven times below our four to four and a half times target.
We continue to execute our strategy to maintain a low leverage investment grade balance sheet that opportunistically positioned us to execute on strategic capital markets transactions through all points in the cycle.
During the first quarter, we sold five 7 million shares of common stock through the ATM on a forward basis.
The average price of $71 32 per share.
At the end of the quarter, we settled forward sale agreements associated with this quarter and last quarter. Its ATM belt issuing 4.4 million shares of common stock for net proceeds of $306 million.
At quarter end, our liquidity was approximately $856 million, including $49 million of cash 232 million remaining for settlement from our first quarter ATM sales and 575 million of availability on our revolving credit facility.
Now turning to our full year guidance.
We are increasing our core <unk> guidance range to $1 84 to $2 88 per share from our previous range of one dollar Sydney seven $2 81 a.
Our revised guidance represents 13% year over year earnings growth at the midpoint.
As a reminder, our guidance does not include acquisitions dispositions or related balance sheet activities that have not closed.
We have provided a roll forward for detailing the drivers of our revised guidance range and our supplemental package a few highlights and cleared.
Same property NOI growth on a cash basis has been increased to $6, 75% to 7.75% up 75 basis points at the net client.
When normalized for Covid related to repayments cash same property NOI growth is projected to be seven to 5% to 8.25%.
Same property NOI growth on a GAAP basis is now projected to be 4% to 5% also increased 75 basis points at the midpoint.
Assumptions driving same property growth include average occupancy at 98.25% to 98.75% an increase of 25 basis points at the midpoint.
Cash leasing spreads of approximately 50% and GAAP leasing spreads of approximately 60%.
Our projection for bad debt as a percent of revenue is now 25 basis points for the full year as compared to 35 basis points in the prior guidance driven by the strength of our Kennedy.
Finally, I'll note that our overall same property expense growth is in line with our prior projections.
The incremental NOI from the $288 million of acquisitions closed after we initiated guidance is projected to be approximately $11 million in 2022.
This guidance also includes approximately $5 million of incremental NOI from our repositioning and redevelopment properties.
And prior year acquisition, driven by higher occupancy levels and increasing rental rates.
Lastly, G&A expenses are now projected to be $59 million to $60 million and net interest expense is projected to be in the range of $39 million to $40 million.
This completes our prepared remarks, and we now welcome your questions operator.
Thank you we will now be conducting a question and answer session. He would like to ask a question. Please press star one on your telephone keypad.
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Yeah.
Okay.
Yeah.
Our first questions come from the line of Manny Korchman with Citi. Please proceed with your questions.
Hey, everyone just given the massive amount of rental rate growth how are the tenants in the market dealing what sort of debt that inflationary pressure.
And specifically, maybe the tenants that have a locations and in your Submarkets that are national and so maybe they can't push pricing as much as they kind of is it just that real.
Real estate becomes a bigger piece of the cost puzzle.
Hey, Manny it's Michael Thank you so much for joining us today.
You know again, just a reminder, that the vast majority of our tenants.
Demand from those tenants is driven by regional consumption and we have the largest zone of consumption in the country here.
And so even your larger national tenants are or haven't had an increasing need to push their warehousing capability in closer to the end points of distribution.
So just take an example target targets fundamentally changed their business model actually over the last 510 years.
By opening actually small footprint stores in and among the population centers, they're diametrically opposed to their previous big box business.
Business strategy.
And to deliver on that and to support that network of small footprint stores as well as their ecommerce activity. You know there really force to establish a greater presence with smaller warehouses throughout infill southern California. So you know, whether it's a smaller business or legacy business or large national business operating in infill Southern California.
The key the key driver is that in order to execute on their business model in order to have a business they need to have these spaces.
And are we are we can walk through a range of industry sectors, new and emerging businesses and industries that they're all experiencing the same the same set of circumstances. They can execute on their business. So they don't have the space in infill Southern California, and frankly, you know companies that could afford to move out of the region did so you know.
Many years ago, because this has been the most expensive operating environment for decades.
And with regard to your question about what are they doing about it these increasing rental rates. There. They are absorbing them. Yeah. They just don't have a lot of options, we're seeing a level of tenant demand and intensity that we've never seen before and as I mentioned in my prepared remarks, even well beyond what we saw last year and those historic levels.
And yeah, we can talk about this literally you know for for for a long time today.
I think what it really differentiates today is the deep diversity of demand that we're seeing and there are incremental drivers I mean, California now has a mandate to increase housing stock they own.
Over 20%, it's going to take over 20 years to achieve that so now we have no demand from the building trades, which used to be more cyclical.
With a 20 year trajectory and we're seeing the impacts are already so.
It's a unique time here for us and really you know remember we have a market that cannot increase supply.
We will actually continue to lose supply on average year over year.
So maybe one more one more comment on that because in Howard nice to nice to hear your voice. The tenants are the ones setting the rents right now in the market.
All our space generally we put out there as unpriced, we get a multitude of offers and the tenants are literally competing with each other.
And their pricing their space. So it's really to you know to Michael's point you know these these spaces are central to their businesses and they're determining how badly they want them and pricing them in terms of what works for them to take the space.
Thank you Claude and then Howard or have you want in terms of the acquisition pipeline is there any change in mix or asset type or.
Component versus what you've been buying over the last few quarters.
Well, it's it's going to vary quarter to quarter. This past quarter about half of what we purchased was value add type transactions.
We had.
13 acres for near term redevelopment, but you know quarter to quarter. It at various and you know, we're we're pretty pleased with the quality and the volume of opportunity that we're still seeing in the marketplace.
Manny it's Michael again, I'd like to come back to your original question because I realize we have some really interesting data when you ask about how are the national tenants are responding.
To the dramatic increase in rental rates in infill Southern California, and it's interesting if you compare our larger tenants.
She is more comparable to the other industrial Reits that own across the nation, who have national portfolios. Their tenant base is typically larger than Rex was on average in terms of their space sizes.
And if you look at a more comparable metric in our leasing spreads that would compete more directly compare it to the national reach national industrial rates for instance.
Our spaces over 25000 square feet in size, which will tend to be more of your national tenants as compared to our smaller spaces, our leasing spreads for the quarter were a full 91%.
And so you know that that's the releasing spreads it's more comparable to the leasing spreads easily here for instance from the National Industrial leads and I think it's an indication to your question that you know the national reach there they're adjusting they they don't have an option.
The reason that the larger spaces are experiencing a higher <unk>.
<unk> spread in our portfolio simply because they don't roll as often larger spaces tend to have longer term leases.
And so they have more time to build up that mark to market and so we're seeing that reflected in their higher leasing spread.
Thanks Al.
Thank you. Our next question is coming from the line of Jamie Feldman with Bank of America. Please proceed with your questions.
Great. Thank you.
Here, we hear talk about buyers kind of rethinking maybe pricing.
Or you know in the debt markets, you know cost of capital. It's certainly backed up with higher rates. How are you thinking about you know the change in your required returns I know you'd mentioned your unlevered yields going in and you're you're stabilized.
How is your firm thinking about whats changed here and how and what kind of returns you want on your investments.
Yes.
Hey, Jamie its Laura.
Great to hear you today.
I had some feedback here.
Okay.
Yeah.
Alright, Hey, Jamie its Laura do you hear me now.
Yep sounds good okay, great sorry about that in terms of in terms of how we're thinking about like looking at capital raises and how we're thinking about our cost of capital moving forward, Yeah, I think youre going to see us continue to take a very opportunistic approach to capital raises and and how we deploy capital.
On our balance sheet, certainly allows us to take advantage of them at all attractive capital sources, including debt and equity to fund all of our investment activity I think it's important to note that we don't focus on our cost of capital at a point in time, we take a much longer term approach and view because we built.
This enabled us to do that we can execute a plan across all plants in the capital cycle because of the value creation opportunities that we can back into our portfolio repositioning and redevelopment.
Below market rent opportunities.
So when you think about how we invest we really invest in a basket of goods.
That achieve a range of yields are that overall increase our earnings growth in SSO. So as an example, if you look at the projected yield for our recent acquisitions and are in process and pipeline repositioning and redevelopment investments.
If you look at what's going to stabilize in 2020 . Two for example, the projected stabilized yield on that basket of goods is five 8%. If we look ahead and we look at the stabilization occurring over the next five years those are projected to yield a five 9% in the year, how much they've stabilized so I think even in this.
Base, an increase in interest rates and inflation given these above market yields that really positions us to drive substantial N E and F L accretion over time.
And Jamie.
Jamie I would just maybe add to that somewhere in your question I think is.
Yes interest in what's happening with interest rates are affecting cap rates.
And then maybe you just pointed out that because of the rent growth that you've seen in our portfolio and the market itself.
There's less sensitivity to cap rates and interest rates for our investments that had a shorter duration lease explorations.
We are starting to hear.
About some of the longer term lease product.
Not not that we've seen a change in those cap rates, yet, but perhaps maybe there's less buyers showing up to bid on them.
Because some of them are interest rate sensitive. So if you know the first place we will see something in the market is going to be on the longer term leased properties without a an opportunity to reset to market.
Well, I think frankly, and Hey, Hey, Jamie it's Michael Thanks, again for joining US today I think what we've seen in prior cycles. You know we've been doing this a very long time, and we've kind of seen seen this movie before in many respects.
And what we've seen during the expansion phase of the cycle that people chase the risk curve down and they go to secondary tertiary markets and they drive those cap rates down disproportionately low in secondary tertiary markets markets that are not as fundamentally strong over the long term as southern California.
And when the cycle starts to come back around you know due to inflationary pressures interest rates recession, whatever it might be we see those tertiary market secondary market cap rates sort of start to circle vaporized you know they start to go up fairly dramatically, whereas in infill southern California in those prior cycles that those inflection points, where the market stabilizes.
You know, we don't see the same cap rate impacts in infill southern California, simply because supply demand here trumps.
These pressures over time, and that's what we continue to see today, except that today supply demand dramatically trumps. These factors even more so than in prior cycles from our experience.
Yeah.
Thank you for that color.
You know we've seen the number of ships are waiting outside of the port of L. A decline.
Meaningfully I'm just curious you know what has changed in terms of the demand profile or what tenants are saying or are needing.
As it seems like supply chains are starting to get a little bit better I know, there's obviously a lot of races that they get worse, but.
You know what do you think we can expect if we do actually start to see supply chain improve.
I think if we start to see supply chain improve we'll start to see our tenants businesses functioning more efficiently frankly and.
And I think the short answer to your first question is we've seen no no impact other than increasing demand.
Consistent with a decrease in the in the backlog that supports them vessels waiting to dock are down from about 60.
<unk> 48 in March, but theres still above 2021 levels and frankly import volumes are up 17% versus February up 29% year to date in the first quarter was the best quarter for the port system in southern California ever on record.
And so really it's more about fundamental underlying demand and people talk about increasing safety stock and all that sort of thing, but don't forget we have a market that's already performing at full occupancy.
Our markets are well below 1% vacancy if you were to drill down into that those vacant buildings to determine of the vacant buildings, which are how many actually compete with rexford and a locational or functional basis, and you're probably looking at less than half of the state of the vacancy actually even competes with us.
And so we really you know what it means in terms of.
Reduced congestion of the ports is really enabling our tenants to operate more efficiently.
You know to replenish their inventories.
To service the backlog of orders, but we see no letup in tenant demand, we see our tenants actually just increasing demand because they can run their businesses the way they have plans for it.
Okay. Thank you.
Yeah.
Thank you. Our next question. This comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks, Good morning out there Laura that you guys are obviously off to a great start on on same store NOI. This year with cash at 11, 7% this quarter, but to hit your mid point on guidance for the year Theres a meaningful slowdown implied in the remainder of your remainder of the year can you just talk about the cadence of same store NOI that we should expect.
They're a big drop off in any specific quarter and is then is the deceleration all due to expense growth as we've talked about earlier or are there other drivers behind that slowdown.
Yeah Blayne. Thanks, so much for your questions today, the actual the deceleration in same property grants that were progressing through the rest of the year is actually I myself tie to the cadence of our occupancy assumption. So as you mentioned are our cash same property growth in the first quarter was 11, 7%.
And our guidance for cash same property growth at the midpoint is 7.25% so that does imply some deceleration.
When you and and it really has to do with the cadence of our occupancy assumption on packaged 'twenty time line.
Look at 2020 , one our average occupancy increased 130 basis points from Q1 to Q4, So 97, 7% in the first quarter and grew to over 99% in the fourth quarter, what's happening in 'twenty to 'twenty. Two is the opposite right. So I'm trying 22, our average occupancy.
And the reverse so average occupancy is starting up now at levels today at 99, 2% and assumes roughly 120 basis point decline from Q1 to Q4. So that's really what's impacting the year over year comps and the primary impact to that type of deceleration.
Great. That's helpful and just to follow up on that are there any specific kind of large move outs that you guys are anticipating that's going to drive that occupancy lower or is it you know lower retention as you guys push on rates or anything specific you can point us to there.
Yeah, I believe that that's a great question. So yeah. We're currently sitting in occupancy as I mentioned at 99, two firsthand the mid point of our average occupancy for the year.
First that I will note that that did increase 25 basis points over our prior guidance, but I'd say that the drivers of our assumptions are really twofold. One as you know given our very high occupancy levels and although market fundamentals continue to be very strong we really feel like our forecast it's pretty not at this time.
Really driven by the timing of our exploration. So our expirations are heavily back end weighted 70% of our expirations occur in the second half of the year I'm actually 40% of those are in the fourth quarter. So I think you know.
When we think about you know when we think about occupancy today as you know as we start.
We start getting more visibility into those spaces will continue to update our assumptions, but it's just it's just pretty early in the year for those back end weighted exploration I think the second impact is really around the visibility that we have as the Kaplan capitalizing on some expiring leases.
It certainly gives us the opportunity to drive substantial value creation, because we are able to roll those to higher market rents. So we have about 300000 square feet of spaces.
Where we're projecting our leasing spreads are up about 90%.
And so you know that's going to drive substantial value creation, but it does come with a little near term impact to occupancy in the form of downtime downtime.
Great. That's that's really helpful and switching to Michael or Howard can you guys talk about your expectation for the trajectory of Mark to market as we move throughout the year. Obviously, you've got you know older lower rents that will be expiring in coming out of that are in place rent bucket each quarter, but you know market rent growth.
There's been very strong so so how do you think about those two dynamics balancing each other out in and influencing the overall portfolio mark to market as we progress throughout the year.
Well, we'll continue to mark the portfolio to market every quarter right. So we saw a tremendous increase in the mark to market just from Q4 into Q1 here.
And you know the reality is there's no space in the market as Michael mentioned earlier, so theres a tremendous pressure for market rent growth to continue.
You know, it's really interesting if you looked at the end of the quarter.
We we literally only had 340000 square feet of vacant space in our portfolio.
So you know we don't have much to even lease on the new side. So it's really more about the renewals that we're doing with tenants.
And.
You know tenants tenants are very conscientious of retaining their space, so they're they're calling us all the time.
Wanting to renew early and we've been we've been holding them off a bit or if they have explorations at the latter part of the year or some are calling it about next year. So there's there's just still tremendous pressure out there. So it feels like we're set up quite well, but she continued strong market rent growth in our portfolio and it probably.
And the entire marketplace as well.
And Blaine it's Michael Thanks, So much again for joining today I think a great leading indicator also are the rent bumps that were contractually structuring into almost all of our leases.
And we've seen a nice acceleration there as well.
For example, Q1 rent spreads were 442% on.
On average for the quarter, we actually had our first 6% contractual rent spread.
During the quarter and those are annual rent spreads I'm, sorry annual rent bumps that occur every year throughout the lease terms. So I think that's a great leading indicator Oh, maybe where things are going in the near term.
Very helpful. Thanks, everyone.
Yeah.
Thank you our next questions come from the line of Congress diversity with Baron Burke. Please proceed with your questions.
Hi, everybody. Thanks for having me on the call really just one question for me curious on the inland Empire I think it was noted in the last call that it acts as somewhat of an overflow valve for L. A proper.
Noticing that the vacancy rate is exceedingly low at the moment or are we at the point, where virtually any development project in that market is pre leased before completion.
And if that's the case have you guys done any work to maybe identify what the next overflow valve it looks like and whether or not you'd be willing to enter a new county.
Oh, Hi, Hunter tower, well, we're focused in the inland Empire West, we really really don't the buyer operate in the inland Empire East, which really is that overflow velvet speaking out because there's a you know an almost unlimited land just in continuing to head East you know you can build all of it.
Arizona, if you needed to.
But in the inland Empire West Yeah, I mean, the the vacancy was astounding there. According to CBRE stats the vacancy in that market have 0.1%. So essentially the market is beyond full capacity right.
Quick question on Italy that had.
The highest year over year rent growth on their status as well as you know almost 82%. So you know the inland Empire is now.
Real infill market in terms of the western inland Empire.
And yeah, any anytime literally we even have a space that is vacating.
We'll have we'll have tenants and brokers coming to US ahead of time, where we're we're able to actually even match.
Our acquisitions now in that market, where we are buying.
Bacon building well pre leased the building during the escrow with we've had a couple of instances at doing that recently so it's it's the tightest of the tight markets, but look everything some are 1% or really all of the infill markets are performing exceptionally well. So really you know just in terms of a.
It really felt going further east has really always the option.
Got it thanks for that and then just a point of clarification and I apologize if I missed this before given given the rising rate backdrop, I mean, and the $500 million under LOI or contract. It does it change your calculus at all on how you fund. These acquisitions, specifically speaking I'm wondering if you see to use more.
Equity and the debt to equity weight.
Yeah.
Hey, Connor.
No. It doesn't it doesn't change our approach and as I mentioned before you know we're not as focused on our cost of capital at a point in time when you look at the stabilized yields in which we're investing on our recent acquisitions in process and pipeline repositioning and Redevelopments you have Cushing you know 585, 9%.
And even in the face of increasing rates and inflation, yeah, where we're very well positioned given our above market yields.
Okay noted I'll leave it there thank you.
Thank you.
Thank you. Our next question is come from the line of Mike Mueller with Jpmorgan. Please proceed with your questions.
Yeah, Hi, I guess for the 450 or so million in acquisitions in the first quarter I think the comment was about half our value add.
Does that mean about half of that pipeline is ultimately going to end up in your repositioning or.
Or the redevelopment pages in there or is it a little bit more you know wait for a tenant to roll kind of marked it out I mean, how how should we think about that end and I guess to get to that incremental stabilized 4.7% yield is there a significant incremental capital commitments are tied to that and just kind of what's what's an overall ballpark.
Ballpark timing to get there.
Hi, Mike tower or respond to a few of those points and maybe Laura can talk about the capital.
Value add it doesn't necessarily mean that we're going to have vacant product day, one and push it onto the repositioning page.
There were three.
There were there were I think it was like two or three sites for 13 acres better near term for redevelopment, but some of those actually I had some income and are in place all of them, but those those will show up on the repo page.
You know in the next year, but it takes time with a lot of these two are weighed out somebody explorations and you know it may take 18 months or so to two years or so.
But the nice part is that we're achieving great cash flow in the interim well three three of our transactions were what we refer to as covered land sites, where it might take a bit longer to actually get to redevelop and those came in with the inbound yields are in the low to mid four cap range. So.
Very strong cash flows are to hold the hold and have plenty of time for the planning and the timeline of those developments.
So yes, no it's not all going to show up on the repositioning page in the next six.
Six months or so.
And Mike It's Howard I mean, it's it's Michael Thank you so much for joining us today.
Often confuse ourselves with each other.
You know each other that well.
No I know with towers thinking before you think that and vice versa, but I think it's really interesting as you're seeing the rexford business model you know truly.
Truly executing on all cylinders.
Because you know we talk about the the yields for the acquisitions that were buying but equally important if you look at the repositioning projects that we're starting this year.
We have a total spend oh.
Almost $700 million of total spend represented by the 22 starts.
And they're solving to a $6 seven unlevered a weighted average stabilized yield.
And you know that's.
Arguably more than double the market cap rates that we could turn around and sell those assets for in today's market.
You know a tremendous amount of value creation.
Embedded in the activity throughout the portfolio.
Yeah.
Got it.
Yeah.
I'll add one more thing to that in terms of you asked the question around an average stabilized year tends to be in that kind of a four to five year area.
For the.
Question.
Okay.
That was it thank you.
Thank you our next questions come from the line of Dave Rodgers with Baird. Please proceed with your questions.
Yeah. Good morning out there Michael Howard wanted to ask two questions. One on the acquisition pipeline and recent closings of acquisition you know in the last couple of quarters, we talked about O P units versus cash so maybe talk about the seller mix. It looks like it's been my bulk of cash. Although you did do one unique transaction this quarter. It seems like but maybe is that just a function of seller mixes.
Is that just a function of price say, let's let's take our money as a seller and go but maybe some more color on kind of how that's playing out in the discussion.
Sure Hi, Hi, David toward you know the the upgrade is an important part of our acquisition program. We are working with sellers that have owned assets in our markets for many years, they understand our market and they're extraordinarily comfortable to invest in rexford.
Contributing there also tends to be a into our operating partnership through upgrade.
And so that's you know most most of the conversations we have you know clothes as upgrades many of them start as an upgrade and turned into cash acquisitions.
And you know they vary obviously from quarter to quarter. You know it was a smaller amount in this past quarter. There was a lot of conversations happening with people that are very interested in and up rich and frankly as we look ahead.
Even some of the conversations with our you know from a federal level trying to eliminate the 10 31, you know that that really just plays right into more upright type activity and and also many many people today a lot of times people sell because.
They're tired of operating a property its management intensive it's going to need a lot of capital and so they will tend to sell them to do a 10 31.
The markets are so tight that it's very difficult to even find exchange property. So we find a lot of people even if they're looking for in a pretty I'd rather have a 10 31, they're asking us to build in some flexibility that we might allow them to do an upgrade in the 11th hour. If the 10 31 doesn't even work out.
So it's it's it's a growing component of our acquisitions the market in terms of you know the aging owners is really feeding into that and that's a huge opportunity for us going forward.
David It's Michael I'll, just add a little bit to that because we're really seeing the direct addressable market opportunity from an external growth perspective, increasing pretty dramatically both in volume and quality for Rex right now it doesn't mean that our acquisition volume goes up literally every single year.
But it means that the direct addressable market opportunity overall is increasing substantially and quality and and the reason for that are really multi driven by multiple factors and number one you know how it briefly mentioned you know.
The aging out of this legacy ownership, we have over 1 billion square feet in infill southern California, almost half the market built before 1980.
And predominantly owned by longtime private owners.
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And frankly, just due to the passage of time you know we're in the middle of an historical shipped these assets from one generation to the next and if you were to drill down and Peel back. The layers is what what are the core drivers of the transaction activity, which is kind of getting to your question. The single greatest core driver of transaction activity, one way or another is this transition.
The historical transition of assets from one generation to the next.
And today, given where values are you know they can actually replace the cash flow that they're receiving from that from the properties in a pretty favorable way by monetizing the value of the assets and redeploying their their cash flow either into rexford thrown up REIT or otherwise.
And so it's a unique time and you combine that with the fact that we're simply deeper in the markets than we've ever been our team is better equipped.
And I grew up here our families grew up here so that our roots go very very deep.
And then you look at the track record of Brexit you know, there's just absolutely no reason that.
That is that a private sell it today wouldn't consider that free.
So it is really a very fortunate I would say and and benefiting from all of those factors.
I appreciate the color on that my my second question, maybe is slightly more obscure, but around real estate taxes in California, you've obviously bought a lot in the last couple of years and it probably takes some time before those those tax bill will start to come in to the tenants. I mean is there any slippage in that where you guys are facing kind of more.
Taxes until you can reinstitute your version of the leaf does that happen or are the leases institutionalized enough, where that's a tenant burden and you're just not really seeing that I guess I'm. Just wondering if that's something we should think about building in is as you get reassessed here in the coming years on a short term basis.
I'd say the most leases on purpose, we buy are very standardized in southern California. There's a lease that's called the EIA are standard industrial is that was was developed and modified over many decades here and you find that most all of these unsophisticated landlords.
Michael was mentioning use at least and whether it's a net lease or a gross lease. They all provide for increases in property taxes to be passed through to tenants and occasionally you know tenant might've negotiated.
For tax tax a stop in terms of the sale.
Creases, but we're building that into our underwriting and so but that's very rare that's very rare that we're stumble across that.
Yeah, and I'll just offer nine days that we have not seen an impact.
And from a recovery rate perspective, and collection kind of collections.
Taxes.
Got it that's helpful. And then last Laura for you on the same store expenses, you had mentioned last quarter that they would be elevated this year and you added some personnel around should we expect kind of sequentially for that to continue to increase or was that kind of all loaded in the first quarter.
Yeah. Good question, Thanks, Dave our full year guidance as we talked about last quarter included a negative 110 basis point impact from expenses net of recovery and there has been no change in that guidance.
Guidance I'm just as a reminder, that impact was was related to a couple of things one was related to occupancy assumptions for the full year and the second was related to an increase in non recoverable expenses related to operating them really overhead costs. So when you look at you know our Q1 expense impact matter.
So it's actually 150 basis points.
So so lower than what we're assuming for the full year and so that would imply higher expenses are high right run rate there for that for the rest of the quarters.
And that actually is in line with our inspection.
Expectation and what's driving that it's really the decline and recoveries that's directly tied to our occupancy assumption. So obviously as your occupancy decline Ah that would impact your recoveries of that and what happened last year. When he talked about I talked about this earlier on the call as last year.
We were seeing an increase in occupancy through the year and an increase in recovery rates.
So the opposite is happening this year that we're having kind of the reverse impact there. So so that that will accelerate the expense and packs are through the rest of the year, but again, our our guidance there's no change to our overall guidance and everything from an expense standpoint, it's tracking in line.
With our expectations, Yeah, I think it's important to note that even with this increase in expenses and the impact we're having.
So projecting very strong same property growth at 725% at the midpoint and and <unk> growth.
13% at the midpoint from an earnings perspective.
Very helpful. Thank you.
Mhm.
Thank you our next questions come from the line of Chris Lucas with capital One Securities. Please proceed with your questions.
Hey, good morning, everybody just a couple of quick ones if I could just.
Just on the renewal.
Lease term.
Links a little shorter than it has been is that really mix related or was there something more fundamental as it relates to the strategy behind why that slipped a bit shorter than it's been for this kind of several quarters.
It's it's really just circumstantial there to two leases that were short term renewals and if you net those out it goes back to our normal about just over four years.
Okay. Thanks for that Michael and then.
Just as it relates to sort of the impact I think might be touched on this I guess it was supposed to be here a little bit more as market rents have moved higher and really accelerate it how that's impacted sort of you were.
You know your opportunity set and maybe if you could touch on that as it relates to sort of the existing portfolio and the redevelopment opportunity with that changed at all but don't have a store.
Based on that.
This significant move in work at home.
I think there's two embedded questions. There one is sort of like you know external growth and then the other is really the internal growth and and yes externally it isn't contributing to a you know.
Expanding the opportunity set without question and on the internal front. It's true you know every really in real time, but on a more formal basis every month and every quarter, we look inward at our portfolio and we try to determine based on market realities at that point in time meeting rental rates.
Construction costs tenant demand all the rest.
What additional opportunities do we have in our portfolio, where it now makes sense given the acceleration in rental rates to reposition a property that may not have quite pencil quite as well you know even as recently as one or two years ago and so we do believe that.
The growth of the market in terms of value and rental rates. It is continuing to unlock.
A very exciting opportunity internally for us as well.
Hey, Chris.
Of course.
One more kind of is this the set of sellers that Michael mentioned earlier, the aging property owners. When they you know operate their properties. They tend to focus more on occupancy as opposed to pushing rents. So the spread between in place rents on those type of assets and the mark to market.
Is enormous.
Other unusual to see us buying something and reporting you know there's a 60% are.
Below market rent in place so.
To Michael's comment that opportunity set is growing is that gap widening so there's a huge opportunity for us to buy assets like that and even do some value add work to the buildings to further unlock incremental value.
Well beyond just the.
The rental rates that are in place in the market even today for the quality of the correct. Yeah. So the current state.
Okay. Thank you for that and then just last question for me as it relates to sort of the development redevelopment.
Scale.
It does have a sort of a percentage of enterprise value or some metrics that we're using to sort of.
You know maintain a risk profile that you're comfortable with is there. Some max amount that you guys are sort of internally marked as the the limit as to how much redevelopment development you're willing to put.
In play.
Now we are cognizant of our.
Managing risk in that respect.
And one of the reasons that Howard and I built this business around industrial you know value creation industrial property assets is.
Is it the incremental capital required now these are relatively simple structures, it's not like building an office building or multifamily structure even retail.
You know we are concrete tilt up walls and a roof structure and typically we are building to a very low percentage of office build out an end to end its and its generic finish you know not high finish.
And and that's really the beauty of the business model you know, it's really nominal incremental capital spending.
Now to drive the repossession activity.
So I think you'll continue to see that would be relatively nominal relative to the enterprise value of the company.
As we continue to grow the company.
Into the future.
Thank you I appreciate your time this afternoon.
Thank you there are no further questions at this time I would now like to turn the call back over to Michael Frankel for any closing comments.
Well, we just wanted to thank everybody for joining us today and your interest and support of the company and we look forward to reconnecting in about three months, we hope everybody stays well and healthy and we're certainly hoping for peace across the world. Thank you so much.
This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.