Q2 2022 Rexford Industrial Realty Inc Earnings Call
Greetings and welcome to the Rexford Industrial Realty, Inc. Second 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. Please note. This conference is being recorded I would now.
Now I'll turn the conference over to your host David Lanzer, a general counsel you may begin.
We thank you for joining us for Rexford Industrials second 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 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 of 1995.
Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today for more information about these risk factors. We encourage you to review our 10-K and other SEC filings Rexford industrial assumes no obligation to update any forward looking statements in the future.
Sure.
In addition, certain financial information presented on this call represents non-GAAP financial measures our earnings release and supplemental package.
Present, GAAP reconciliations and an explanation of why such non-GAAP financial measures are useful to investors. Today's conference call is hosted by Rexford Industrials co Chief Executive officers, Michael Frankel, and Howard Schwimmer, together with Chief Financial Officer, Laura Clark.
They will make some prepared remarks, and then we will open the call for your questions now I will turn the call over to Michael.
Thank you David and thank you everyone for joining our Rexford industrials second 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 performance and guidance.
As we head into the second half of the year, we continued to see strong levels of tenant demand and positive market rent growth within infill Southern California.
Our portfolio continues to perform at essentially full occupancy with our same property pool average occupancy over 99%.
Demand continues to exceed supply with overall market vacancy tracking at well below 1%.
We expect the supply demand imbalance within our infill markets to persist into the foreseeable future due to an extreme lack of available space or developable land within infill Southern California.
<unk> performance continues to differentiate itself are.
Our team grew episodes per share by 26% compared to the prior year quarter.
This brings our prior five year episodes per share growth to over 15% on a CAGR basis substantially exceeding the ethical per share growth of any other industrial REIT in the nation.
<unk> outperformance is a reflection of our entrepreneurial business model focused on creating value by increasing the quality and functionality of industrial property throughout infill southern California, the nation's highest demand and lowest vacancy industrial market.
With over 1 billion square feet of industrial property built prior to 1980 within a nearly 2 billion square foot regional infill market. We are favorably positioned with proprietary access to an exceptionally deep well of value creation opportunities.
Our team is executing upon our substantial range of internal and external growth strategies to unlock tremendous value.
Leasing spreads for the quarter were at 483% on a GAAP basis, and 62% on a cash basis, representing an acceleration over the first quarter.
On the external growth front year to date, our team acquired over $1 $6 billion of irreplaceable assets with strong embedded value creation opportunities.
And compared to the prior year quarter. We grew net operating income by 43% and grew core S. S. Though by a full 55%.
As we look forward retro remains well positioned to continue to grow our cash flow and value.
From an internal growth perspective, the mark to market on rental rates for our entire portfolio is estimated at 60% on a cash basis.
70% on a net effective basis.
Over the next 24 months, we project approximately $172 million equal to 43% of annualized cash NOI growth embedded within our current portfolio, assuming no further acquisitions and based upon today's market rents.
The components of our internal NOI growth included.
$73 million in incremental NOI as we roll in place rents to higher market rates and as we ratchet up our annual contractual rent steps.
$45 million of incremental NOI, as our redevelopment and repositioning projects stabilize.
And $54 million of incremental NOI contributed from recent acquisitions.
Within our embedded NOI growth, we are projecting annual same property cash NOI growth of approximately 8% to 10% over the next two years.
In addition, with regard to external growth. We currently have over $500 million of new acquisitions under contract or accepted offers.
The fuel this growth and to ensure we are well positioned to capitalize upon emerging opportunities in today's dynamic market. We continue to maintain an exceptionally strong low leverage balance sheet closing the quarter at 13, 5% net debt to enterprise value.
With that we'd like to thank our entire rexford team for your extraordinary talent dedication and entrepreneurial approach to growing our great company.
As demonstrated through prior cycles, we believe our unique team as the primary determinant of our success and our ability to differentiate Rex where its favorable performance through all phases of the economic cycle now I'm very pleased to turn the call over to Howard.
Thank you Michael and thank you everyone for joining us today.
Richard finished the first half of 2022 with yet another quarter of exceptional results, reflecting the high quality of our portfolio and the ongoing strength of our southern California infill markets.
Rexford internal portfolio metrics market rents for comparable space continued to accelerate increasing by 49% over the prior year, which continues to mitigate the impacts of higher construction costs.
According to CBRE quarter ends vacancy remained at near record low levels at 0.8%.
Was essentially flat compared to prior quarter across our infill markets, which would differentiate it with essentially no land availability and therefore are virtually no opportunity to increase net supply.
As a result with robust tenant demand, we see vacancy rates in our markets continuing our historical lows positioning us well to capture strong rent spreads for this foreseeable future.
The consolidated portfolio weighted average mark to market for our remaining $2 6 million square feet of 2022 lease explorations.
Now estimated at 73% on a net effective basis and 60% on a cash basis.
Regarding external growth in.
In the second quarter, we completed 18 acquisitions of prime infill properties totaling nearly $600 million, representing one 4 million square feet of buildings on 85 acres of land, including 15 acres for near term redevelopment.
Approximately 72% of our acquisitions were value add investments.
Over half of all of our investments were either initially vacant or at least at substantially below market rents.
In aggregate, our second quarter acquisitions generate an initial unlevered yield of 2.5% growing to an estimated 5.1% unlevered stabilized yield on total costs.
Subsequent to quarter end, we added an additional five properties totaling $587 million of investment.
Year to date, we have acquired 40 properties containing $4 3 million square feet.
<unk> over $1 $6 billion with an initial yield of two 9% and a projected stabilized yield of four 6%.
Over 80% of our acquisitions were acquired through off market or lightly marketed transactions sourced through our proprietary research driven processes and deep market relationships. These acquisitions are projected to contribute $38 million of NOI in 2022, increasing to approximately 60 million.
In 2023 and expected to grow further over time.
Looking towards the future. We currently have over $500 million of new investments under LOI or contract, which are subject to customary closing conditions and.
In addition, we have an extensive originations pipeline beyond these transactions.
Further the team is executing on a broad range of accretive internal growth initiatives.
For our value add and redevelopment projects underway or expected to start over the next 18 months, we have approximately $450 million of projected incremental investment, bringing total investment to an estimated $1 billion.
These projects are projected to deliver an aggregate return on total investment of about six 7% representing over $950 million in estimated incremental value creation.
And with that I'm pleased to now turn the call over to Laura.
Thank you Howard.
For discussing our second quarter results I would like to highlight our ESG report that was published during the quarter.
Which details our progress and commitment to further accelerating our value at ESG impact.
At Rockford, creating economic community and environmental value is foundational to our business model as we reinvest legacy properties and reinvigorate community.
Now turning to our performance.
Same property NOI growth for the quarter.
<unk>, 7% on a GAAP basis, and 10, 1% on a cash basis.
Our results outperformed protection led by continued strength in the overall operating environment.
Average same property occupancy was 99, 1% in the quarter up 100 basis points.
The prior year.
Year to date, we have achieved record meetings back at 78% and 60% on a GAAP and cash basis, respectively.
Additionally, annual embedded rent steps in our executed leases continue to increase the second quarter average steps up four 3%.
Our high quality tenant base continues to perform exceptionally well as demonstrated by zero bad debt recorded through the first half of the year.
This robust performance combined with our internal and external value creation drove core <unk> per share growth of 26% over prior year supporting ninth.
Yeah.
Our fortress like balance sheet strong liquidity position and favorable access to capital continues to position <unk> to opportunistically execute on our strategy and drive substantial long term value creation for our shareholders.
At quarter end that got to EBITA for the sector low three eight times and below our target range of four to four and a half time.
We completed an active quarter in the capital markets.
So 12 million shares of common stock through the ATM.
On a forward basis for $751 million.
At the end of the quicker we settle the forward equity associated with ATM counts, which occurred in the first half of the year issuing 6 million shares of common stock for net proceeds of $419 million.
Also we recast our unsecured revolving credit facility.
Creasing, the $5 billion to $1 billion, while attaining more favorable terms, including reduced borrowing rates and sustainability linked pricing targets.
We also added a $300 million term loan expiring expiring in 2007 with proceeds used to repay a $150 million term loan expiring in 2025 and to reduce borrowings under our revolving credit facility.
Finally, subsequent to quarter end, we closed on a new $400 million term loan facility.
Expiring in 'twenty 'twenty four with two one year extension options.
It's pretty used to fund acquisition activity and reduced borrowings under our revolver.
After incorporating our transaction and financing activities closed subsequent to quarter at we currently have $1.2 billion of liquidity, which includes 22 million of cash 552 million of foreign equity remaining for settlement and $650 million available under our revolving credit facility.
Now turning to our full year guidance.
We are increasing our core <unk> guidance range to $1 87 to $1 90 per share from our previous range of $1 84 to $1 88.
Our revised guidance range represents 15% year over year earnings growth at the midpoint.
As a reminder, our guidance does not include acquisition disposition related balance sheet activities that have not closed.
We have provided a roll forward detailing the drivers of our revised guidance range and our supplemental package a few highlights include.
Same property NOI growth on a cash basis has been increased to eight five to.
9%.
150 basis points at the midpoint.
When normalized for Covid related retaining cash same property NOI growth is projected to be nine nine and a half.
Matt.
Same property NOI growth on a GAAP basis is now projected to be 5.75% to 6.25% up 150 basis points up at that point.
Assumptions driving same property growth include average occupancy at 98, 5% to 98.75% up 12 five basis points at the midpoint.
Cash leasing spreads of approximately 55% and GAAP leasing spreads of approximately 65%.
Our projection for bad debt as a percent of revenue is now 10 basis points for the full year as compared to 25 basis points in the prior guidance.
And by the strength of our kind of thing.
Same property expense growth is projected to be lower than prior expectation, which represents a 35 basis point contribution to our increased same property NOI guidance.
Incremental NOI related to acquisitions closed in the second quarter and subsequent to quarter end is projected to be approximately $20 million in 2022.
Finally, net interest expense is projected to be in the range of $51 million to $52 million driven by an increase in debt related to acquisition funding.
This concludes our prepared remarks, and we now welcome your questions operator.
At this time, we will be conducting a question and answer session. If you would 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.
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And one moment, please while we poll for questions.
Our first question comes from the line of Jamie Feldman with Bank of America. Please proceed with your question.
Great. Thank you. Thanks for taking my call. So I guess I'm kind of Big picture here, if you think about prior cycles and downturns with you now.
Forecast for recession here, you know where do you think the risks are to your occupancy or to your credit the credit in the portfolio.
And as you are you know put it you have a nice acquisition pipeline still I mean, what gives you comfort putting money to work at the prices today, when we may see future changes in price discovery.
Hey, Jamie it's Michael Thanks, so much.
Thanks for joining us Jamie it's Michael Laura maybe I'll, just give a brief context on kind of how we see the market and the occupancy you can dive into the tenant credit in the aggregate and we can then talk about the ability to put money to work in this environment.
And Jamie obviously, great questions I think the first part of the question was comparing today's environment.
The potential in a lot of concern in the economy as compared to prior cycles and I think with the most recent downturn, obviously would take us back to the great financial crisis, and I think theres a lot of great tremendous takeaways from that experience as they may or may not relate to what we see today or what may bring what the market may bring a in the near term.
And <unk> and just briefly the you know the the market today first of all in the Great financial crisis, which was a true.
A true shock to demand.
In the first quarter of 2009 order flows for many tenants actually stopped we had never seen that before.
And what was interesting in terms of the infill southern California market was that it performed in a manner that was very counterintuitive, we never saw a supply problem in infill Southern California, you know going into the great financial crisis, a vacancy was 2% to 4% the worst it ever got was three to five 5% throughout infill Southern California. So we just never even.
During the worst of times, we never had a supply problem.
And you didn't have to go far to see a substantial supply problem in the big box markets. The situation was very different even in the east Eastern inland Empire, where vacancy doubled tripled or worse during the great financial crisis.
And then we ask ourselves what how's the market prepared today as compared to that the market today is very different than the market was that the market. Today is it is it so much.
<unk> in terms of preparedness or positioning.
And by so many metrics number one going into the great financial crisis as I mentioned my market vacancy was around 2% to 4% call. It on average 3% today, we're at 8% throughout infill Southern California, 8% vacancy.
If you were to drill down into the vacancy and look at the things that are baked into compete with rexford, probably less than half of our stated market vacancy even begins to compete with Rex where its portfolio on a locational or functional basis. So we're in an environment today, where tenants literally have no options and that is that is very different than a 3% vacant market. Although 3% is an extremely strong market.
Tenants could could find options in terms of other space.
It might take a while but they could find them and then the other big difference today as compared to going into the great financial crisis is the deep and and and and diversity of demand. We have segments of demand that did not even exist going into the great financial crisis.
Any of them driven by E Commerce, New business models, I electric vehicle industry space exploration we're.
We're looking at it as a transformation of the three PL business that is embracing technology like never before and reinventing their businesses driving substantial incremental demand we.
We have you know food delivery.
Same day delivery you know.
So many factors driving demand today that did not exist going into the great financial crisis, or even five years ago frankly to the degree that exists today, so very very different market backdrop today, Laura you want to talk a little bit about tenant credit.
Yeah absolutely.
Thanks for joining us today.
The strength of our tenant base is and then demonstrate it through cycles and and really yeah. There is some pretty significant economic disruption and some things, we could've never ever anticipated such as when our tenants where given the unilateral right to not pay rent at startup housing in our markets but.
But we saw essentially no impact sorry collections as our tenants continue to pay rent. Yeah. These spaces are critical to their ongoing business needs. So yeah and couple that with the fact that you know we've we've been able to increase the credit quality of our tenant base and I'd say that credit quality of our client base is stronger than ever.
We've been we've been able to do that in many ways clearly given the strength of demand over the prior few years, coupled with the extreme lack of supply we've had the opportunity to be very selective and the tenants that we're putting in our spaces.
For example, when you've got multiple competing offers on the space when you get to select the highest and best use for our tenants. It's got to go out on a growing business and strong credit Arthur during Covid, we took the opportunity to further called a portfolio of underperforming tenants, we replace those tenants with higher quality tenants that were paying.
So and then I think finally, our low levels of bad debt and are a great indication of the strength of our kind of based on the increase and the increased quality of our tenant base.
If you look at bad debt as a percentage of revenue over the trailing 12 months.
Euro and were protecting 10 basis points for the full year of 2022 that compares to 40 to 50 basis points are pre COVID-19.
So yeah in summary, our tenant base has proven resilient through disruption and given the strong market dynamics. Today, you know, we thought were really well positioned for what may be ahead.
And then Jim I think you.
Are they Oh, yes, I was just on your on the other part of your question of whether we should buy it today or wait.
You know I think you're you're asking you know, what's happening with cap rates and demand for assets.
And we've seen you know moderate adjustments.
And cap rates, but you know really it's it's the mark to market. That's a that's driving the opportunities out there for us in terms of being able to find opportunities that others in the market don't have access to and being able to stabilize those are very accretive yields.
And you know, where we're finding more and more of those opportunities we've reset some of the inbound yields that we're.
We're seeking.
And we're finding sellers that are happy to adjust some of their thinking as well in terms of what we're looking at and buying and you know of course Elliott on Michael provided a reference to the last recession.
During that recession, everyone thought there was going to be a lot of product for sale are incredibly discounted prices and people waited and that never really materialized. There was a few things here and there, but the industrial market. It really didn't turn it into a wholesale buying opportunity. So.
You know, there's there's still great opportunities in our market and demand is strong and you know I don't really expect to see much of a shift in terms of the values here unless we see a dramatic change in our demand vacancy and rent growth.
And Jamie maybe I'll, just add a little bit of additional color.
What's interesting is because that's a common question you know.
The cost of capitals gone up a little bit there's uncertainty in the market threat the threat of inflation and other things and the question is are we comfortable to continue investing in this environment and what's a bit ironic about the question is actually we're seeing you know marginally better yielding opportunities today.
Inclusive of a slightly marginally higher cost of capital.
You know, there's always pressure on yields right last year or six months ago. The question was my goodness. The markets are so competitive cost of capital is so low for everybody. You know cap rates are so low how can you buy and create value.
And arguably we had more pressure on yields and margins last year because of the intense competition and low cost of capital for just about any player than we do currently in the market. Despite a marginally higher cost of capital and I think really it goes to the retro business model. You know, we we do a tremendous amount of extra work as you know in our originations and research.
And identify a tremendous volume of investment opportunities that allows us to be extremely selective during all phases of the capital markets or economic cycle, and I think you're seeing that really really pay off.
And we can talk more about that but I wanted to add that a little bit of color.
Yeah.
So thanks for all the color very helpful.
You know how do you compare the change in your cost of capital from pre pandemic to now versus where yields have moved and just I guess, maybe you could take a step back you know how do you think about your required IRR is today versus where you were.
Well, we can talk Laura can talk a little bit about cost of capital of minute, which we plan to still be at attractive levels on a historical relative basis, frankly and or Irr's today.
On opportunities that we're looking at are probably actually slightly better than ours that we were looking at call. It 12 months ago.
So on a relative basis, we've seen an improvement there.
You know, we don't we don't disclose our cost of capital, but I can tell you that when we underwrite.
At every point in the cycle, we underwrite not based on spot cost of debt or equity, but we underwrite more or less what we perceive to be a steady state cost of capital.
And which would actually be higher than even what we see today on a steady state basis historical basis.
And we also the other piece to the underwriting that drives IRR is as your market rental rate assumptions and your exit cap rates exit cap rate being the number one driver of performance generally speaking our biggest impact and Rex was also maybe different than some institutional buyers in that respect and that our exit cap rates are typically anywhere from 75 to 100 and.
50 basis points higher on the exit cap rate as compared to our inbound or market cap rates.
And our market market rent assumptions also very conservative driving those ultimate Irr's you know, we don't underwrite anything close to what the market has experience and by the way have a really interesting example.
No.
Very I'm very.
Current example, you know the whole Boulevard property in the West that we bought just a couple of months ago, we underwrote to a three 9% yield with you know I think we.
We're protecting $1 35, and rent and it looks like and this is not a done deal yet, but we have you know a lot of interest tenants circling.
And we expect that we we hope that you know there is a strong potential we think we're talking about $1 70, triple net rent, which will drive just under a 5% cap rate. So you know that that's a property we under wrote very.
Very recently, so you can kind of see the conservatism that goes into the underwriting of the company.
Yeah, and I'll, just okay, great Oh, sorry.
Okay, Jamie I'll, just add to that.
All of our cost of capital has increased over the prior quarter.
Our cost of equity and debt continues to be very attractive and in fact this morning, we executed a five year swap fixing our a $300 million term loan at a very attractive all in rate of three 7% and so you know we continue to source accretive acquisitions and that's demonstrated by the positive contribution that we saw.
Acquisitions, our increased guidance range.
But we're going to continue to be very selective on how do we have in the past we're going to evaluate opportunities that are going to drive cash flow growth through our value creation platform that are going to generate about market yellow, which really ensure that we're going to be able to grow so an NAV through all points in the cycle.
Okay, great. Thank you I'm sure are will have it will continue to have this conversation for a long time I appreciate it.
We have we have no Jamie thank you so much.
Yeah.
Yeah.
Our next question comes from the line of Craig Mailman with Citi. Please proceed with your question.
Hey, everyone, maybe picking up a little bit on the cost of capital here. You know you guys ran through your updated liquidity of about 1 billion too.
If I look at what you guys have under contract plus the remaining spend on.
The ongoing re Devon future reserve.
Have about $340 million gap, there, so I'm kind of curious with being able to swap debt at three seven we have your applied cap rate sort of in the mid threes.
What's your view on on debt or equity as the best source of funds here.
Yeah, Hey, Craig Thanks for joining us today, Anna and welcome. So when we think about yeah. When we think about debt versus equity and we're going to continue to take a very opportunistic approach to capital raises that actually have an attack.
Low leverage balance sheet allows us to do that and to be able to take advantage of attractive sources.
And we we were able to.
Close on $700 million, that's very attractive term loans over the past quarter and subsequent to quarter end, so, but but what are really took our focus continues to be on maintaining a low leverage investment grade balance sheet, and we're targeting net debt to EBITDA and afford a four and a half times area. So that's that's the.
The number one focus is maintaining that low leverage balance sheet, which allows us to continue to be opportunistic.
And I'll just add to that and thank you again for joining us today I'll just add to that another source of capital is would be recycling capital through dispositions, which we continue to look at it in the opposite opportunistic basis that having been said, though when we have a 60% gap, 60% cash and 70% GAAP mark to market across the entire portfolio you know generally speaking.
We're able to drive tremendous accretion by not selling an asset and re tenant ing it and by the way with these leasing spreads you know we are sourcing a tremendous amount of incremental capital literally every quarter you know through the leasing activity that in turn is funding an increasing percentage of a lot of our capital requirements. So.
We're seeing that is also another very favorable source of capital internally.
No.
Glad you brought up the spreads because that was my next question here you guys kind of sequentially, you're up 500 basis points of the portfolio Mark to market on a cash basis I mean as you guys look at what market rents are doing in your your socal markets, where could that mark to market trend by the end of this year.
Do you think.
Well, it's kind of you know, we don't really prognosticate in that way to be honest, but I think we've probably seen Howard lorber feel free to comment, but we've probably seen upwards of 20% plus or minus market rent growth year to date I think we disclose we saw about 48 or 49% year over year.
Market rent growth. So maybe that gives some indication of where things are trending.
No.
Correct.
Sure.
No market rent growth is still strong out there.
We're we're conservatively projecting that it's not going to obviously grow at the same pace its been lately.
And.
The brokerage community bills that are there's still plenty of rent growth, but albeit maybe a little bit slower pace.
But however, when you look at what's happening on the ground as Michael described a minute ago and an example of one asset.
We're still outperforming the re forecast market rents would have been in the portfolio every day.
So we may surprise ourselves to the upside.
It's Michael Bilerman, just a quick question and we're also very happy to Craig's on the call, but maybe just stepping back just thinking about issuing equity you'd obviously, there's the current cost on them.
Your current earnings, but given the significant mark to market in your portfolio.
How do you think about it more of a sort of longer term like a five year basis of issuing that equity today and diluting investors.
Buying something that yes has upside in it.
However, your current portfolio has got such robustness and so how do you balance issuing that equity today, knowing that you're giving up some of the future growth by selling that equity, which has that 60% mark to market.
Well I think you said the right word you know Michael Thanks, So much for joining so you said the right word I think in balance and we and we do try to strike that balance because don't forget it's all the acquisition activity in the recent years that has provided this incredible internal growth opportunity that we see and are capitalizing today.
And so you know, where we're frankly not buying assets that don't that aren't don't position the company to deliver that kind of accretion going forward and so you know we just tried to strike that balance and I think I think it's an important question.
I guess would you and Michael about Yeah go ahead I.
I was just going to add one comment on top of Michael If you look at.
One $6 billion of product, we bought so far this year the mark to market in terms of the below market rents in place there for those assets was about 25%.
Right, but that's much less than the 60 on the current right so buying assets with 20% mark to market and arguably you're banking on market landscape and to grow given the low vacancy in your markets, but arguably yourself the equity in the in the portfolio, that's up 60 and that trade obviously on if we look at your five or.
Or your tenant our model I don't know if it goes out that far, but arguably you're diluting that more getting.
And today that's all.
Yeah.
Your you've been very very heavy on the equity and so I just want to better understand that balance that you're going for so that you continue to produce shareholder returns.
I think those are important questions and I think that that statement is probably you know partially indicative of our business and if we were only relying on mark to market is to run our business maybe that analysis could hold some water, but we have so many other things that drive accretion you know we have the value add repositioning that drive yields that are substantially in excess of what just rolling to mark.
My heel you know so it's it's it's really a combination of these things and.
And you know and and again, we try to balance it yep.
And in terms of the near term impacts and and and and and longer term impact and by the way on a not that not that this is a driving metric.
But on a GAAP basis.
You know the activity as it is accretive earlier than you might expect frankly, so and again not that that's a driving indicator.
Alright, thanks for taking all the questions.
Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks, good morning out there.
Laura starting with you you guys are out to a great start on same store NOI. This year cash at 10, 9% year to date, but to hit your mid point on guidance for the year. There continues to be a meaningful slowdown in part in the remainder of the year and as I think occupancy comps get a little bit tougher can you just talk about how we should think about the cadence of ours.
You can see from here and whether there are any large chunky known move outs that you guys have visibility on in the second half.
Yeah, Hey, Blaine thanks, so much and thanks for joining us today.
Yeah as you mentioned you know our occupancy.
It's projected to to decelerate in the second half I think important to note, though that today, where we are sitting at very full occupancy levels at the end of the second quarter. We were at 90 820 <unk>.
9% occupancy and market fundamentals continue to be very strong and in fact, we increased our occupancy guidance. This quarter, it's up 12 basis points on average for the full year, but when you think about the second half of the year. There's a few factors that are that are driving that one as we do have visibility until about half.
The decline is driven by four units that we had previously protected today.
So this isn't you know this is not outside of our expectations that we had at the beginning of the year importantly, though those projected leasing spreads on those four units. It's about 80%. So obviously presents a significant opportunity for us to drive value creation, but it comes with some downtime and some near term occupancy impact.
I'd say the second the second impact driving occupancy for the second half of the year.
Is that 40% of our expirations are in December alone. So as we have more certainty as to you know the renewals on those units well out their forecast Accordingly, and then I think lastly, you know about it into our guidance is the fact that there does continue to be uncertainty in the overall.
Economic environment. So yeah, we felt we've embedded a prudent assumption for occupancy in the second half of year.
Great. That's very helpful color switching over to Michael or Howard you know you guys have consistently highlighted how fragmented the ownership of warehouses is in your market and the low level of institutional ownership do you think anything has changed during the pandemic are coming out of it with the volatility in the market that we're seeing this year that would make the.
Private owners more or less willing to sell their industrial buildings or even other properties that could be converted into industrial.
Well, we certainly had great success in convincing private owners to sell their real estate you know in the past couple of years.
Yeah.
I'd say the largest catalyst in some of our transactions has been just the aging.
<unk> ownership in the generational shift that are the next generation.
That's the kind of prices we've seen in growth has been there.
They're very interested in selling.
As far as you know any any changes.
You know I think I think you know a lot of people were talking to you today.
We're even more interested in selling it seems it seems that the most people enjoyed the ride up in industrial values and thought those value increases would would never slow down and now that they are seeing a bit of a change afoot in terms of the future growth in those values moderating a bit.
We're getting more and more calls from exactly those those type of sellers that are continue to have interest.
We have a lot of discussions still about upright tripe type transactions Ah. So you know that the market seems to still be feeding into our business model in terms of the hard work we do.
Establishing those relationships and cultivating you know the data that we track in the markets.
And Blayne just adds Michael Thank you so much for joining today.
It is a very interesting time for us with respect to that fragmented ownership base that you describe because.
You know, where they're not getting younger and they're increasingly aging out at this point in time, and and and that group is sort of marching increasingly into the rexford.
So and I I can recall a conversation with the seller very on a very recent purchase.
And we have been pursuing the property I think for over a decade.
And I said I asked him I said you know we know these people for a long time why now why did you finally decide to sell and the answer was well we have a lot of different needs. Among our family who are now all partners. In this thing I think they had like 15 different owners now.
Just two family and deaths in the family again airs stepping up.
He said at this valuation we could actually replace the investment into income generating investments and securities that generate adequate level of cash flow to support the family several generations of the family.
And so to Howard's point, the valuation has played a great role and Catalyzing. Some more of these opportunities and in combination with this aging increasingly aging out.
Owner population.
And there's a there's a palpable fear in the market now that they're going to Miss out.
So we're in and then brokers or a cap of capitalizing on that as well. So it's a very interesting time for us with respect to that ownership base.
And that's very helpful.
Yeah, good as I mentioned in my prepared remarks, yeah that that ownership base is among that 1 billion square feet in infill Southern California is built before 1980 that is just replete with value creation opportunities. So that's really the sweet spot in terms of value creation opportunity in the market for us.
Yeah.
Thanks, that's great color last one for me can you guys talk a little bit about the project construction delays that you referred to you in the guidance roll forwards are those delays, mostly attributable to supply chain disruption and delays in procuring the raw materials or are there. Other problem next related to you know zoning entitlement.
Labor other reasons.
I think it's a little of all.
No.
You know you look at what's happening out there cities are taking substantially longer to process entitlements and permits.
You know that that extra time as the construction cost escalation because contractors.
Contractors are escalating their costs.
Now it seems like.
Holding prices for five days and then they keep moving them up.
So it really just adds up you know you've got unions that are showing up.
<unk> talked to a lot of the planning commission meetings all of a sudden.
You've got a lot of moratoriums that youre working through occasionally in some of these markets. So it's really coming from a lot of different directions.
But we're you know we're doing a really good job of mitigating some of those risks we've built in a lot of that escalation.
Into our go forward projections. So I think we've taken a very conservative approach in terms of those Escalations will continue we've adjusted some of our timing as well in terms of you know.
What we see as some of the obstacles going forward.
And we're I think we're doing with our team is doing a great job in terms of buying out some of those are long.
Meantime, our materials and building components on the new construction interestingly, though on our repositioning projects were not experiencing any degree of those type of cost increases with delays.
A lot of a lot of those projects are more simple it doesn't take planning Commission approvals.
And frankly, that's that's the bigger opportunity in the marketplace here as we've described they're bidding.
Really literally no land available so there's limited opportunity to develop but as Michael just pointed out there's a huge opportunity in that it's a product that AR has repositioning and and mark to market type of opportunities in the existing supply.
Yeah.
Yeah, Blayne one great. Thank you.
Hey, Blaine one thing I'll add to that.
In terms as well first of all a shout out to our development.
Traction team I think they are just doing an amazing job really working diligent to really you know rescuing delays wherever possible.
So we've got a phenomenal team in place there, but in terms of the in terms of the one cent of erosion that we saw in our guidance.
I think it's important to point out that that's related to delays and timing.
Not related to not related at all to lease rates, we continue to see market rent growth than our portfolio and growth within our rental rates that you know at this point, helping us overcome some of these construction cost increases and we're seeing yields continue to be at around six 7% consistent with prior quarter.
On our repositioning and development.
Great. Thanks, everyone.
Yeah.
Our next question comes from the line of Conor So risky with Bamberg. Please proceed with your question.
Hi, there thanks for having me on the call are two quick ones from me and apologies. If this was missed in your answers previously but.
On the retention rate down sequentially from last quarter, and then seeing the footnote on page 22 of the supplemental I'm wondering how much of that Delta is attributable to adding the other repositioning segment to the calculation.
And then how much of it was just background, maybe an unforeseen move out or something of that nature.
Okay got it thanks, so much for joining us today, I'm actually our retention calculation excludes Ah.
Oh repositioning so that that wasn't a driver really the driver of lower retention over the prior quarter.
Due to expected move outs in that no unexpected move outs in there as we continue to drive leasing spreads I think one really good example, we had we had 76000 square foot kind of Vaca <unk>, we executed a new lease with a new tenant at a 143 per cent gasoline spread and an 88.
Cash leasing spreads.
That that impacted our retention rate, but we only had two weeks of downtime. So really no impact in occupancy, but impacted that retention rate is as we as reported so just if you excluded that one deal from our 66% retention that would get you to about 73% retention for the quarter.
Which is inline with what we've been seeing over the prior prior several quarters.
Got it Okay, and then just kind of one more follow up from an earlier question you know understanding that would be.
Supply dynamics are.
Seasonally favorable in your market, but we haven't seen much abatement in terms of fuel or labor costs as it pertains to <unk>.
It just takes provider for example, so.
Is there any sense that at some point these budgets get squeeze such that they wouldn't be able to afford.
A 70% re leasing spread or.
Or were there or is that still trending very much in the right direction from your point of view well.
Well Conor don't forget that you know things like drayage cost and fuel cost transportation cost too.
Two things one those are much bigger percentage of the typical economics for a distribution oriented tenant than their renters.
So by securing these locations that are closer to the both the end points of distribution and the ports, they're actually able to find efficiencies on the much larger expense base, which is the transportation oriented expenses. So the answer is can they contain absorb strong rental rate growth, we're not seeing any indications that they cannot we continue to see.
The very favorable price elasticity in terms of our ability to raise rent and I think also if you want to delve into the <unk>.
The three P L market you.
You know that that market is X as I mentioned earlier is experiencing a pretty interesting transformation where.
Where you had a lot of old line three pls that historically, maybe we're in a very low margin business because they are basically arbitraging the cost of their rack space with what they can charge for that rack space that was sort of a commodity.
Today, those businesses look very different theyre embracing technology moving up the value chain, providing end to end solutions in some cases, ranging from raw materials to production to shipping to.
Delivery, whether its one item to a consumer or a million items to it to a business and providing unbelievable transparency throughout that supply chain and because they are delivering.
Level of value add services, theyre, becoming much more profitable businesses and that's increasing their ability to pay more rent frankly, so that transformation is very very helpful to us.
Somewhat technology, driven so we're not we're not really seeing any indications.
Where do we see as a potential reduction in their ability to pay rent due to these increasing rents.
Yeah, and one thing I'll add to that is I think that rent steps and these annual embedded rent steps that tenants are signing are a good indication of how they're thinking about their future business growth and projections and we continue to see you know the ability to push those rents up higher we've you know average annual rent step sign for leases in the quarter.
0.3%, that's up from four 2% in the prior quarter and I believe that that number has continued to tick up every quarter.
For the last for the last separately for the last several quarters. So you know where where we're continuing to be able to push on those escalations and increases and I think it's a good indication of how.
How tenants are viewing their longer term business Oh, Laura correct me, if I'm wrong, but I think that the June average rent steps, which would be at the end of the quarter, where a full 4.5% on average so again, a pretty nice acceleration or even over the quarterly average.
Yeah.
Yeah.
Got it okay. That's helpful color I'll leave it there. Thank you.
Thank you.
Our next question comes from the line of Vince to Bone with Green Street. Please proceed with your question.
Hi, good morning.
Could you provide some additional color on the merge west transaction, specifically around when the pricing was locked on that acquisition and just curious to see if you think that pricing is reflective of the current market today for new construction and <unk>.
<unk>.
Sure.
It's nice to have you join us.
Yeah that was it incredibly interesting transactions, we actually looked at the going back several months.
And initially when it was actively placed on the market they were targeting about a 3% stabilized return.
And we didn't even hanging around the hoop, we literally just said no. Thank you. This does not work for for us.
And so I forgot about the deal.
And later on they you know they had some buyers I guess they had a buyer tied up in it and it fell apart.
And as things progress.
They had another seller are a bit of a higher yield.
And the sellers are apparently we're having a little concern over other people's ability to get the transactions done at those returns and and so the brokers literally.
Called us in an off market a phone call came to Rexford and said you know we've done a lot of transactions with you. We know you can perform we're really looking for performance as opposed to the highest price at this point and so we were able to step into a transaction that.
Really the price was agreed on you know less than 45 days ago.
And.
There there were some moving pieces on it though which is I think why we're able to achieve the 4% projected stabilized return there was obviously a little bit of vacancy in the project with it being 71% occupied there was a a few things the sellers still have to finish up our.
In terms of some construction work and some off site work and so we established some hold backs and.
Oh, Yeah, you know and and a few other things. So we were actually able to work with their needs and provide the solution that was needed.
Oh, Yeah, we we believe we actually achieved a transaction that's going to stabilize.
Yeah.
At a 4% return is probably a bit higher than that project would transact that still today in the marketplace yet.
The last bit of that leasing was completed and some of them and that was a little bit of remaining construction of work was done as well.
And so you know, but it's interesting literally we closed that transaction.
And just days before there was another transaction in the inland Empire West on a 100 and 111000 square foot building not not the same quality. This was a 30 foot clear building.
We bought at $445 a foot this other deal I'm, referring to close to $525, a foot, which was only about a 2.85% cap rate and it had a five year lease in place.
So when.
When you look at that that data point compared to what we bought at our our transaction is still very very attractive.
That's all really helpful color. Thank you for that one more just for me switching gears, a little bit you mentioned year to date.
Rent growth in your market has been a portfolio rather has been plus or minus 20% is that been pretty consistent across your submarkets or are there any that jump out as being a little better or worse than that you know portfolio average.
Yeah, well the inland Empire West has really been performing incredibly well.
And in our E west rates were up 16, 5% quarter over quarter.
And year over year, that's although almost 110%.
But all in all all the markets are performing pretty well.
Orange County.
<unk> has been Oh.
I think there are about 5% quarter over.
Quarter over quarter.
And Oh really I think the lowest.
Increases we've seen you know probably been more around some of the a L. A L. A markets, but you know still still strong rent growth and when you really dive into the stats just in our own portfolio that you know all of these markets are performing.
Very well in terms of the Rockwell, but but but the standout honestly it was in inland Empire West.
Got it thank you.
Yeah.
Our next question comes from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question.
Yeah. Good morning, everybody. Thanks for all the details so far just one follow up for me and it's around that tenant credit issues that you guys started with early on I think with Jamie great details from the global financial crisis as Michael So thanks for all that you guys have just really obviously sophisticated system.
All the acquisitions that you can do and all the people you want to target do you have something similar on the credit side, you guys feel as strong about your credit profiling and as they kind of investors can you give us a sense of kind of how we should be thinking about the tenant credit profile notwithstanding the historical information and obviously the government stimuli.
Is that kind of went out and supported the last 12 months, but as you look forward is there a detailed system that you guys are comfortable with where you've been able to elevate credit or give us some kind of details around that.
Fairly vague, but any help would be great.
Oh, Oh, Oh, I don't have a bag, but yeah.
Go ahead go ahead, Howard I'll finish up Yeah, I was just going to add a couple of comments, let Laura jump in.
And this type of market environment, where you have sub 1% vacancy.
Credit is an extreme focus right. There's plenty of tenants that are willing to pay you whatever you want for a building.
So you know for the past year.
Years, we've had an extreme focus on tenant credit quality and so that that's an overriding factor has always been.
When compared to outperformance on rental rates.
And you know our T. Our team runs a very rigorous process.
In terms of credit and in fact, I can think of many examples where literally we had multiple offers on a space or a building.
And they've gone back to interested parties and gotten to the credit side of it out of the way before we would even tell somebody were going to consider them amongst one of the finalists competing on an individual space and so that's that's really the level, we take it to in terms of our seriousness about credit.
Continuing to improve the quality always of a credit in our portfolio.
And.
Dave I'll, just add a little bit and it's great great to hear your voice today, thanks for joining us.
If your question was how should investors think about our our tenant credit and if I if I try to separate myself from Rexford put myself in the investor's shoes and be objective and just look at the data.
For the last 20 years.
I think that the rexford tenant credit in the aggregate as the best credit you can find in the market period of any asset class not just industrial.
And far better than any other industrial REIT I mean, just very different if you look at the diversity of our cash flows.
By industry sector by function by type of tenant more diverse.
Than just about any other industrial Reits if.
If you look at the data that in terms of how they performed through cycles, you mentioned the pandemic and the fact that there was stimulus to its consumers and that that's no longer in place well don't forget that during the pandemic.
The authorities told our tenants they didn't have to pay rent.
And what do they do they all paid right I mean for all practical corporate for all practical purposes, they essentially all paid rent.
And why because they because they have to hold on to the space.
Yeah, we saw that during the great financial crisis, we saw that during the uncertain times of pandemic.
And at these locations and it's not just the most diverse source of cash flow by industry or a function of these businesses, but these are and I don't like this phrase because it's overused in my view, but these are truly mission critical locations for our tenants.
It would have a hard time or literally could not operate their businesses. If they didn't have these locations.
And so for a whole range of factors and and again the market is substantially better position today than it was going into the great financial crisis.
We believe that this is the best credit that you can that you can have period.
Yeah I appreciate the color on that I mean, that's helpful. I mean, I think that's the one thing that people will continue to focus on rents for right now with no new supply great growth great embedded mark to market. So you know if you're going to focus on something.
That's the big focus and so I appreciate you guys, given some extra time and thought to it.
No. It's a it's an important question and I remember when the pandemic first started there was some research papers out there that said Oh small tenants are going to get hit more than large tenants.
And there was really no data to back that up in fact, if you looked at the data through prior downturns, it's quite the contrary. These infill tenants performed substantially better than your big box tenants in the aggregate and and then we saw that during the pandemic.
Infill Southern California performed.
Incredibly well and we have the strongest market in the country by far and nobody can touch our leasing spreads episode growth et cetera. So clearly the data has has spoken and indicates that there is just nothing like this infill tenant base in the country.
Yeah.
I appreciate it thank you.
Thank you guys.
And just as a reminder, if anyone has any questions you May press star one on your telephone keypad to join the queue.
Next question comes from the line of Mike Mueller with Jpmorgan. Please proceed with your question.
Yeah, Hi, you answered most of other things, but just out of curiosity on the next 500 million or so of acquisitions that are in the works how how are the stabilized yield expectations on those compared to what.
Closed this past quarter.
Hi, Mike well, we really typically don't disclose anything until we've closed transactions, but two because some of them I think Michael's earlier comments. He mentioned that we are finding some better opportunities right now with.
Let's say increasing stabilized yields increase increasing in place yield so.
You know what the market the market is certainly playing toward us and our ability to capture some of these opportunities but we.
We are very very selective, though I'll say at this point and what we and what we buy.
We've probably because we've written more L O I's well I know, we've written more otherwise at this point than we did.
Same time last year.
And.
I think that are really a testament to our team.
You know, it's it's more about buying the right transactions and finding those opportunities going forward now that have those attractive yeltsin them.
And we're succeeding in doing so.
Got it Okay, My Mic of Florida, microflora, Thanks for joining us today and I'll just add to that I mean, I think I think we talked about earlier is the balance that we're really focused on the balance of what we buy and if you look at what we bought year to date over half of it is either vacant or really low yielding and so when we look forward.
It into you know into bringing a balance as you know accretive cash growing acquisitions and investment opportunities into the portfolio. Yeah. That's that's our focus.
Farha.
Got it okay. Thank you.
Okay.
Yeah.
And we have reached the end of the question and answer session and I will now turn the call back over to management for closing remarks.
Thank you and on behalf of the entire Rexford team, we want to thank everybody for joining us today for your focus on Rexford and we wish everybody a great summer and we look forward to reconnect thinking about three months.
Yeah.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
[music] alright can we hear each other.
Yep.
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