Q3 2022 Rexford Industrial Realty Inc Earnings Call
[music].
Greetings and welcome to the Rexford Industrial Realty, Inc. Third quarter 2022 earnings Conference 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.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. Eric Chang Senior Vice President of Investor Relations and capital markets. Thank you you may begin.
We thank you for joining Rexford Industrials third 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 1995.
Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today.
For more information about these risk factors, we encourage you to review our 10-K and other SEC filings.
Rexford industrial assumes no obligation to update any forward looking statements in the future.
In addition, certain financial information presented on this call represents non-GAAP financial measures our earnings release and supplemental package present, GAAP reconciliation and an explanation on 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.
Make some prepared remarks, and then we will open the call for your questions now I turn over the call to Mike.
Thank you Eric and thank you all for joining our Rexford industrial third quarter 2022 earnings call, we hope you're well.
Following my remarks, Howard will discuss our transaction activity and then Laura will provide an update on our financial performance and guidance.
I'd like to begin by acknowledging the rexford team.
From an operational perspective, our team contributed towards enabling one of our strongest quarterly and year to date performance is on record.
Compared to the prior year quarter.
Court at that though by 45% and increased <unk> per share by 16%.
Year to date, we increased core at that though by 52% and grew <unk> per share by over 23%.
<unk> a sustained level of sector leading performance.
Our infill southern California, industrial markets continued to demonstrate strong fundamentals with historically high market occupancy at 99%.
The ongoing supply demand imbalance within our infill markets is expected to persist into the foreseeable future due to a dearth of developable land and diminishing supply over time.
The extraordinary pace of market rent growth moderated during the third quarter, but remains strong and well above historical levels.
Our portfolio continues to operate at or near full occupancy.
And our leasing metrics demonstrate a robust landlords market.
Our team drove extraordinary leasing spreads at 89% on a GAAP basis, and 63% on a cash basis, reflecting an acceleration over the prior quarter.
Leasing volume also accelerated to 1.7 million square feet of activity for the quarter.
Our contractual annual rent increases for leases executed during the quarter increased to 4.4% on average.
Irrespective of our team's extraordinary results today's broader economic indicators and geopolitics underscore the importance of our thoughtful approach to operations and investment.
Looking forward Rexroad remains well positioned to continue to deliver substantial NOI growth.
We project embedded incremental cash NOI growth of 40% equal to $170 million within our in place portfolio over the next 24 months based on today's market rents and assuming no further acquisitions.
$77 million of this embedded incremental NOI growth derives from rolling expiring leases to higher market rents and through our contractual annual rent steps.
$47 million of projected incremental NOI comes from acquisitions closed since the beginning of the third quarter.
And an additional $46 million of incremental embedded NOI growth derives from our redevelopment and repositioning repositioning projects over the next two years.
With regard to external growth Rexroad remains well positioned with our low leverage fortress like balance sheet that enables us to opportunistically capitalize upon accretive investment opportunities that may result from market shifts or uncertainty.
Our strong position also emanates from our exclusive focus on infill southern California tenant base.
Our infill locations have proven through cycles to be critical to the operations of our tenants across an exceptionally diverse array of industries.
Serving our regional economy that ranks as one of the largest in the world.
Our tenants are also operating within our infill market with exceedingly scarce available space.
These factors contribute to what we believe to be the strongest most stable and most dynamic industrial tenant base in the nation.
Finally, the extraordinary quality of our entrepreneurial rexford team represents our greatest differentiator executing together on a unique business model driven by value creation within infill southern California, the nation's highest barrier lowest vacancy and most highly sought after industrial market for men's.
Thanks to the entire retro team for your continued passion and pursuit of excellence and with that I'm happy to turn the call over to Howard.
Thank you Michael and thank you everyone for joining us today.
I also applaud and thank our teams for their high performance.
The sustained strength of the southern California infill markets as evidenced by continued historically low vacancy levels and strong rent growth.
According to CBRE quarter as vacancy across our infill markets was 1%.
Based on <unk> internal portfolio metrics market rents for comparable space continued to increase and are up by 39% over the prior year.
The weighted average mark to market for our entire portfolio is now estimated at 72% on a net effective basis and 62% on a cash basis.
Regarding the acquisitions market, we have seen some moderation in industrial transaction volume.
Ever transactions in our markets continued to achieve record pricing levels. Despite rising interest rates and some modest expansion in market cap rates marketed quality assets continue to see multiple offers with some recent closings and accepted offers still occurring at cap rates as low as 3% a reflection of.
Our markets longterm differentiated fundamentals and performance.
At Rexford, we continued to leverage our proprietary market access by selectively focusing on the highest quality most accretive investment opportunities.
During the quarter, we completed $977 million of investments.
100 per cent located with within Prime infill Southern California industrial markets.
Subsequent to quarter end, we also closed on a vacant $22 million approximately 60000 square foot class a building in the city of industry, where we projected unlevered stabilized yield on total cost of 5%.
This brings our year to date activity to $2 $1 billion of investments that in aggregate are projected to generate a four 7% unlevered stabilized yield on total cost.
In addition, we currently have a pipeline of over $250 million of transactions under contract or accepted offer which are subject to customary closing conditions.
These prospective investments are projected to generate an aggregate stabilized unlevered yield on total investment.
5.5%.
Moving to repositioning and redevelopment activity, we have $1 billion of repositioning and redevelopment projects in process or projected to start within the next 24 months. These.
These investments are expected to generate an aggregate six 7% unlevered yield on total cost.
During the quarter with stable as to repositioning projects 106000 square foot building in the La mid County, Submarket, where we achieved a stabilized unlevered return on total cost of nine 3%.
And 824000 square foot building in Orange County, where we achieved a stabilized unlevered return on total cost of 14, 4%.
Both projects were stabilized ahead of schedule and at about 100 basis points higher yield than projected as recently as last quarter.
Our thoughtful capital allocation, combining $2 1 billion of year to date acquisitions, plus a $1 billion of near term repositioning and Redevelopments.
Is projected to generate a 5.4% unlevered stabilized yield on total investment.
This aggregate return reflects an approximate 175 basis point premium over current market yields for fully stabilized assets leased up today's market rents.
Now I'm pleased to hand, the call over to Laura to discuss our financial results.
Thank you Howard.
Our rexford team produced another quarter of outstanding results with third quarter exceeding expectation.
Property NOI growth for the quarter was a strong seven 2% on a GAAP basis, and nine 7% on a cash basis, driven by our extraordinary leasing spread.
We continue to operate at near full occupancy with average same property occupancy at 98, 6% in the quarter and in line with our guidance expectation.
Record leasing spreads continue to contribute to our outperformance with year to date leasing spreads of 61% on a cash basis and 82% on a GAAP basis.
Annual embedded rent steps in our executed leases have Britain seven consecutive quarters to four 4% in the third quarter, reflecting our dynamic leasing environment and the strength of our tenant base.
Bad debt in the quarter and year to date is essentially zero, highlighting the strong credit and stability of our papers.
This solid operating performance combined with internal and external growth initiatives drove core <unk> per share growth of 16% over prior year to 50 cents.
Our sector, leading growth is the result of Rockford disciplined capital allocation strategy.
The foundation of our highly selective investment process and extremely conservative underwriting assumption is our focus on investments that are accretive to cash flow and generate long term growth. While also maintaining our unwavering commitment to a fortress balance sheet.
During the quarter, we received rating upgrades to triple B, plus from S&P and be double H two from me.
Recognition of the strength of our capital allocation and balance sheet strategy.
As of September 30th that debt to EBITDA was a sector low four one times and within our long term target range of four to four and a half time.
Now turning to capital markets activity.
During the third quarter, we sold five 1 million shares of common stock through the ATM on a forward basis.
$335 million at an average price of $65.43 per share.
At quarter end, we settled an 11 5 million shares of common stock associated with prior and current quarter ATM sale for a total of $697 million in net proceeds.
In July we closed on a new $400 million term loan expiring in 2024 with two one year extension option.
And we executed five swap transactions relate to try 300 million dollar five year term loan that closed.
Hey.
These swaps fixed the interest rate at an effect of three 7%.
As of September 30th we had $1 $2 billion of total liquidity, including $37 million of cash on hand $189 million of forward equity proceeds remaining for settlement and full availability on our $1 billion revolving credit facility.
Finally, I'll provide an update of our full year guidance.
We are increasing our 2022 core <unk> guidance range to $1 93 to $1 95 per share from our previous range of $1 87 to $1 90, a revised guidance range represents 18% year over year earnings credits at that point.
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 detailing the drivers of our revised guidance range and our supplemental package.
A few highlights include.
Same property NOI growth has been increased to $9 seven 5% to 10% on a cash basis.
7% to 7.25% on a GAAP basis, both up approximately 115 basis points at the midpoint.
Assumptions driving same property growth include full year cash leasing spreads of approximately 60%.
And GAAP leasing spreads of approximately 80%.
Our projection for bad debt as a percent of revenue is now zero for the full year.
Same property extent expense growth is projected to be lower than our prior expectations contributing to a 15 basis point improvement to same property NOI guidance.
Looking forward into 2023, we're exceptionally well positioned for superior internal NOI growth the mark to market on our 2023 expiring leases is approximately 65% on a cash basis and 80% on a net effective basis.
Annual embedded rent steps throughout throughout our entire portfolio, our three 2% and growing.
We have nearly $200 million of repositioning and redevelopment project.
That are projected to stabilize in 2023. These projects are expected to generate an aggregate unlevered stabilized yield of seven 1% and 2022 year to date acquisitions are expected to contribute approximately 80 million of NOI in 2023, representing.
Approximately $35 million of incremental NOI when compared to 2022.
We look forward to providing detailed 2023 guidance with our fourth quarter earnings report.
This concludes our prepared remarks, and we now welcome your questions operator.
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Our first question is coming from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thank you and good morning out there.
Was hoping you could talk a little bit about the types of tenants that are creating the most demand across your portfolio today and maybe you can touch on tenant size and industry and then also if you're noticing any differences in demand by sub market.
Hi, Blaine its Michael Thank you so much for joining us today and it's a great question you know the tenant base.
In terms of the incremental demand as is.
Amazingly diverse today, it's it's coming from from consumer.
Similar products are health care electric vehicle industry, there's still ecommerce driven businesses that are represent significant demand for instance in the prepared food delivery area.
You know we see aerospace.
You know, it's it's really an incredibly diverse array of tenants. So I think that's one of the one of the true attributes and and and and long term characteristics of the market.
Yeah, I guess related to that and on the other side of the coin are you are you seeing an outsized impact from higher rates and labor costs on any particular tenant profile in your portfolio and I guess, how do you think those tenants when they're in a recession.
I think.
I mean, we can talk a lot about the tenant base, we're not really seeing.
Any direct impacts from increased cost in terms of the tenant's.
The fundamental need for the space.
For the lease rates that they're paying for the space as you can see from our leasing spreads and contractual rental bumps that we're walking in their continued the tenant base continues to demonstrate pretty substantial price elasticity in terms of their ability to pay more rent.
And I think what's interesting as you know we were concerned about where the market could go given.
Sort of a dark clouds on the horizon, the general economy naturally.
And when we think about what we experienced during the great financial crisis for instance, it was somewhat surprising is somewhat counterintuitive in that our tenants fared far more strongly than we anticipated for instance into the early 2009.
And I think what we learned then was that these locations are truly essential to the operations of these tenants.
So their businesses may become tougher due to higher interest rates inflation, lower demand et cetera, but generally speaking they believe that they still will have a business as they emerge through the cycle and they also understand that.
Their business requires these locations.
And so they they are just incredibly sticky tenants and we've seen that through cycles, we saw that again through the pandemic.
When you know the local and state governments gave their tenancy ability to not pay rent and the result was they all paid rent essentially because.
Because they didn't want to lose control of their space because they would've lost their options to renew that they had not paid their rent.
So I think through cycles that we can go back to the 2000 and cycle et cetera.
I think through cycles. The tenant base that has demonstrated a level of resilience that is truly exceptional and differentiate the marketplace.
Thanks, Michael that's that's very helpful color just switching gears for my last question.
You all were very acquisitive again this quarter, despite that rising cost of capital that we're seeing across the board, but we did notice that the amount of investments under contract at this point, we're a little lower this quarter at $250 million versus 500 million. When you reported second quarter results. So I'm wondering if that's a sign of you guys being a little bit more conservative with that.
<unk> in the future and I guess, what signals in the market might make you guys pulled back.
Yeah.
Hey, Blaine, it's Laura Thanks for joining us today I think it's really important to think about how we make the cost of capital just decisions. We've taken extremely selective approach to capital deployment and so when we evaluate opportunities and our cost of capital were selectively focus on opportunities that that drive cash flow growth.
And I'm on an accretive basis and long term growth.
Yeah, we take a long term view of our cost of capital and I think it's really important to look back and think about how Rockford successfully executed on our business model at points in the cycle, where we were experiencing a much higher cost of capital than we sit today and during those times, we grew expert on an accretive basis and ask.
Even in the face of little to no market rent growth, which by the way is what our business model is built upon has the ability to create value.
And not relying on market right on market rent growth really through our proprietary acquisition approach.
Awesome lightly marketed transactions and through our repositioning and redevelopment expertise.
We think about capital allocation, we take a holistic approach to how we invest capital and then I agree that if you look at our 2022 investments and that includes acquisitions as well as our repositioning and redevelopment.
Those are projected to generate a 5.4% stabilized yield which is well in excess of market yields today I think it's also important to consider the assumptions behind our stabilized yields.
When you look at these stabilized yield. These are initial stabilized yield. So when you think about that the long term returns will far exceed these initial stabilized yield and that's driven by the the annual growth that's embedded in those leases and you know today this quarter the annual embedded the average annual about it.
Rents on our leases and score 0.4%.
So that's contributing to the stabilized yields continuing to grow considerably in the future and I think secondly, our underwriting assumptions continue to be a conservative relative to market fundamentals.
And that also will contribute to to further I'll say surprised about those initial stabilized yield but you know as you said I mean, we remain cognizant of our cost of capital and you can see that within the yield targets as you mentioned the $250 million.
And you know, where we're projecting about 215 million projected yields of five 5%.
And that compares to our yellow the year to date yield of four 7%. So we are we are extremely focused on accretive capital allocation that drive shareholder value over the long term.
Very helpful. Laura and thank you all.
Thank you. Our next question is coming from Camille Banal with Bank of America. Please proceed with your question.
Hi, Hi, everyone. Thank you for taking my question.
I see a majority of the leased space the space leased to the counting of L. A who is one of your top tenants will be expiring next year is there any early read on this lease and what's the mark to market opportunity here given the AVR is nearly $27 per square foot.
Like Neil This is Howard nice to hear your voice.
That was a recent acquisition that we bought that we actually are have planned for redevelopment.
And you know Theres, a high probability that the county of renewing that space. They have they do have an option, but the exercise period has has not come into play yet so frankly, where we're getting prepared in terms of how we would execute on the redevelopment and if they do renew.
You know that that would be perfectly fine and very accretive outcome as well.
Thank you for the color.
And my next question is it looks like.
Do you have the redevelopment projects that were supposed to start this quarter were pushed out.
'twenty 'twenty three starts were slightly down that's one project is falling into the next year is this a reflection of the macro backdrop or were there any other factors driving the decision to the delayed restarts.
So familiar it's Howard again.
No I think I think one of our greatest challenges is working through the permitting and entitlement with with the cities and municipalities.
And you know we push them as hard as we can.
We're not looking at you know a risk can we actually move forward on these projects, it's just more about.
Waiting for them to process a lot of these cities are still aren't back in their offices people work remotely and it's it's just added months and months of delays are to getting to getting these permits and frankly, we just have trouble projecting that accurately upfront and so that's why you've seen things get pushed a bit here and there.
Okay. Thank you for taking my question.
Thank you. Our next question comes from Dave Rodgers with Baird. Please proceed with your question.
Yes, good morning out there I wanted to ask you about one of the comments you made in your prepared remarks about moderation in rent growth I think is what I had heard in the third quarter, obviously, recognizing trees don't grow to the sky forever, but I'm curious, what's driving that just given some of your broader macro comments about how strong things still are you getting pushback from tenants of thinner.
Tenant group is there something driving just kind of the the pushback on the consistent rent growth.
Hey, thanks for so much for joining us today, Dave it's great to hear your voice, it's Michael Yeah, I don't think I think what we're seeing is.
Continued strength in the tenant's I think we never expected the extreme rent growth that we're experiencing period over period.
Up until very recently to continue frankly, it's just was not sustainable.
So it's hard to say that you know I think that obviously there are concerns of the general economy.
But we continue to see a lot of activity on our spaces.
It's probably not quite you know if you want to say what is the one driver of a slight moderation probably we're not seeing the same extreme frenzied level of tenants literally outbidding. Each other you know on most opportunities for us for a significant sized space. So it's it's still a lot of tenant activity.
Well above historical levels of demand in terms of pricing and end and the low downtime et cetera, and velocity, but I think it's just a little bit of a reversion out of that extreme frenzied pace that we saw earlier in the year.
Yeah, and I'll add to that Dave I mean, we've seen year to date market rent growth within our portfolio of 24%, which is yeah. So.
So extremely strong.
Rent growth and I think that also when you look at the annual contractual rent bumps that were executing on our new on our leases at four 4% and that number has continued to increase actually increased for the past seven consecutive quarters.
At 4.4% compares to three 6% last year. So we do continue to have pricing power in the market and and then because of the strong demand.
Thanks for that and then Laura maybe a follow up on your answer to the earlier question about just your development yields or I'm, sorry, your acquisition stabilized yields 505 versus $4 seven year to date.
In the near term do you all anticipate maybe taking on more risk in terms of just buying more rollover risk more vacancy in the portfolio with that longer term view of kind of getting those margins or yields but do you have to do that by taking a little bit more risk here in the near term or do you not think that's necessary.
And maybe to help you on that one Laura.
And Oh, sorry, yeah.
Yeah. So so Dave you know, we're highly focused on the right opportunities in the marketplace. We're very focused on physical value and sometimes we don't mind, taking a little bit lower yield if we're going to stabilize an asset at a substantially higher yield.
That's highly accretive.
But you know that that said, we're we're very aware of our cost of capital.
And I think the yields that you see in the pipeline right now are you a little more indicative to how we're thinking about our how we approach the market as we go forward.
And I'll just add to that.
Go ahead, Laura I'm, sorry, sorry, Michael Yeah, Dave I'll, just add to that I mean, I think I think that where we're certainly not taking on more risky deals.
I think it's really a function of how the rest of our business model was built and it started upon creating value over.
Over and above market yields through our proprietary acquisition approach and our repositioning and redevelopments. So our stabilized yield represent healthy spreads over current market yield Cos and really this is what differentiates that Brexit strategy and as you know we like to call that Rexford Alpha and it's really that ability to generate that.
Market yields and that's been reflected and you know we've been doing not historically and it's interesting. If you go back and you look at over the past five years I think our earnings growth per.
For sure it's a great indication of that Rexford Alpha.
Which takes into account the cost of funding over the past five years, our SSO care has been 15% annually and that compares to 9% for the peer group and I think even more indicative of the Rexford Alpha is that three year episodes per share CAGR and that reflects a period of time that obviously the entire <unk>.
Zero market has been performing exceedingly well and over the past three years, our earnings growth CAGR has been 22%.
Compared to the peer average of 12% and so I think that represents a continued expansion of that Rex for alpha and our ability to create create outsized value. So I think the fact that five five is a function of you know our ability to create outsized yeah generate outsize return above those market yields and search.
Not a function of us taking on more risk.
Thanks, everyone.
Okay.
Thank you. Our next question is coming from Craig Mailman with Citi. Please proceed with your question.
Hey, everyone appreciate taking the question.
What sort of a follow up you don't want to beat a dead horse here, but just wanted to follow up on the cap rate discussion the transaction market discussion earlier.
Earlier in the call the prepared remarks you.
You guys made the commentary that that you.
Valuations are not really moving or at least in the spot market, but you're getting 80 basis points improvement on stabilized yields.
So a couple of kind of follow up questions to that number one.
Relative.
Relative to our.
But going in cap rates versus your initial stabilized you know kind of what's the delta on that and has that you know whats the general time frame of that.
I'm, just trying to get a sense of how much initial.
As opposed to loosen that I may be give us kind of the rising cost of capital for for you and your peer group.
Hi, Craig it's Howard.
Yeah, so cut.
Cap rates, obviously have moderated and extended.
In the marketplace.
You know before directly answering your question I'm, just going to point out that you know what we've seen through prior cycles is the increase in cap rates doesn't necessarily follow a lockstep to interest rate movements occur southern California, just because of all the fundamentals you're well aware of it tends to perform a lot differently than markets that are not.
[laughter] constraints.
And as far as you know going in cap rates et cetera, It's really deal specific and it would really depend on the upside or the value creation opportunity that we're able to generate in a property right. So and what are the what I mean as you know if we're buying something and we have limited value.
Accretion obviously the cap rate, we're gonna required at this point in the cycle, there's going to be substantially higher than let's say a near term.
Repositioning that moves us up to some of the yields you've seen us achieving recently, which you know you look at the current repositioning redevelopment portfolio, having a six 7% a stabilized the aggregate yield you know well you know what well buy a vacant property you know as you know or we'll buy something with a lower yield.
Typically.
You know if we'd looked at recent transactions that that timeline to stabilize as you know.
Plus or minus in the three year time frame.
So.
Maybe another way to ask it is all of them are blended fly over the half China.
From a 2023 assets all with that.
Or b is it dilutive.
Dilutive neutral accretive to your cost of capital is and how should we think about that.
Hey, Craig it's Laura Thanks for joining US today, Yeah, correct I think I think what's really important to go back to what I was talking about earlier in terms of how we consider aggregate capital allocation and so we think we certainly are thinking about about how you know how we're allocating capital.
Across across it you know across our entire portfolio. So it's not just our acquisition, but also across our repositioning and redevelopments and how those are going to contribute to.
Two our accretion on our ability to add value. So when we think about you know when we think about kind of the bucket in which we're investing we are looking at we are certainly looking at the fact that we want to invest in opportunities that are organized drive accretive cash flow birth. So that's that's our focus and and and as we look at you know what opportune.
It is as we look at bringing opportunities into the portfolio. We are very focused on making sure that we're driving that accretion.
So I guess, maybe another way to ask it.
As you guys are underwriting.
We are this year or late last year kind of what was required return that you are underwriting to given their cost of capital versus you know today with your cost of equity at 100 or so.
So sports across the bed up.
How does that flow through to the underwriting model public required with Covid expected.
Because ultimately accomplish there just won't publish their IRR right. So it just kind of trying to understand the relationship between how you guys think about your work, which is how do you guys think about.
The required return hurdles of acquisitions, but also the developments to report.
Right.
We're not on how you think about as you guys build all the forward equity that's placed multiple examples where the stock is today, how you fund incremental capital deployment.
And so how does the acquisition side.
Heading into 'twenty.
Debt related expenses and equity is also becoming more expensive.
Yeah, I mean, Greg I think it goes back to just how selective we are and we're going to continue to be selective even more selective and you're seeing that in our reposition in our in our current pipeline.
You know, we announced a pipeline of over 250 million, it's still significant but but but on a relative basis significantly significantly less in the pipeline like you know earlier this year and that's not because there's not opportunities available. There's certainly opportunities available you know as we talked about in terms of the market, but we've chosen to.
Very focused on making sure we're bringing them as opportunities that are accretive to cash flow and N. A D and so when you think about you know we required return hurdles. We've certainly moved a is up and you can you not in our 5.5% you know aggregate stabilized yields that we're underwriting to with them.
Within that basket of acquisition.
I think that's the I think what's really important though is that we're going to continue to be selective in how we allocate capital and how we fund that and obviously, how we fund and how we find those opportunities.
So it would be safe to say that we should not expect a similar level of acquisitions and 23 to 22.
So we don't we don't give acquisition guidance into we don't give out for an acquisition got into apparently aren't going to give it into 'twenty two 'twenty three but that being said I mean, it's there is it's really going to be a function of the opportunities that if we have the opportunity to bring in acquisitions that are driving cash flow accretion and then and we.
Can find those on our neck on an accretive basis based on our long term cost of capital and that's something that could be really attractive to us. So it all depends on the opportunity set in front of us and we're going to continue to be selective.
Great. Thank you.
Thank you. Our next question is coming from Mike Mueller with JP Morgan. Please proceed with your question.
Yeah, Hi, I guess in the present in your presentation and comments you talked about private market cap rates still being seemingly in the mid threes and I guess the question is is that mid threes on rents that are substantially below market rents that are generally at market and just asking because just trying to compare that.
To that 5% stabilized yield expectation on a go forward pool.
Oh, Hi, Mike its Howard nice to hear your voice.
Yeah, those those yields that I was mentioning.
But they did have some.
Mark to market are in them.
But interestingly they did have term left on them also so it you know.
We looked at it more as a testament to the strength of our market.
And you know really people, perhaps looking through this current cycle I'm you know, we we've mentioned countless times about hello markets a bit different than others in that we don't have any land, it's nearly impossible to expand the supply base and in most all of the infill markets here.
And today, you look around and we just have you know.
The roof of available quality space.
And so you know people still expect stronger rent growth in southern California, which has been proven through cycles.
They're willing to take a lower yield no no I'm.
I'm going to say most of those buyers are institutional theyre not.
As impacted by the changes in industry and interest rates in the near term.
But and soon as prior comments, we've mentioned that really where you've seen some some increase in cap rates is really more of a stabilized fully stabilized asset that does not have that rent growth. So you know if you were to look comparatively you you would see a bit of a stronger.
Movement in.
In those deals that did not have the ability to re stabilize at a higher return.
Yeah.
Got it okay. So basically implied in that mid threes as rents are or are not at market and there is some upside in there.
Yeah, and but but we are still seeing you know stabilize deals that I'm describing at market rates.
Still occurring you know some some four or you know or around that 4% number.
Got it okay.
That was it thank you.
Thank you our nice question.
Our next question is coming from Chris Lucas with capital One Securities. Please proceed with your question.
Hey, good morning out there.
Just two quick ones I guess Howard.
When I think about.
Oh.
Yes.
Oh this is the question.
As it relates to the conversations you're having with your sort of target audience of potential sellers, what's that what's the how does that conversation shifted at all to say over the last 90 120 days given the change in the macro expectations.
Yes, it's interesting.
Values have been increasing dramatically because of the outsized rent growth, but values still have some room theoretically to grow because we still have strong rent growth and all that.
<unk> growth, we saw at market rents over the past quarter still really looks like its you know 10% annualized rent growth.
But you know the conversations yeah of course, there they're a bit different you know where somebody was shooting for the moon and want to sell their assets are at a yield that had a lot to do with you know very low interest rates those conversations are quite a bit different.
But you know there's.
They're still able to have a conversation and we are able to transact at a number that most people still never dreamed their industrial assets or even even worth you know rents obviously have moved substantially over the past couple of years and you know even with moderated rent growth.
And in the work that we do with those assets, where we're able to actually create value and that's not reliant on market rent growth, where we're still able to buy some.
You know some of these opportunities that number's etsy sellers like it was quite favorable so a lot of people are continuing to engage in those conversations.
Hey, Chris It's Michael Thank you again for joining us I'd like just to add to that a little bit to give you a flavor for what we're hearing from sellers right now in particular over the last couple of months, because we have seen kind of an increase or a shift in opportunities where sellers are coming either back to rexford.
Or they're coming to Rexford for example, where they might have been running a sale process and their chosen buyer and the buyers just not not performing.
And we've had a few instances like that where they actually come back to Rexford and we were able to reenter those those processes. So they're only going to record that go into other buyers in the market.
And we're able to capture those had substantially better pricing than where we even had been in some of those processes previously that we elected not to pursue because the pricing had gotten away from us.
And we're seeing instances, where buyers are coming to rexford you know on that.
Off market are very lightly marketed basis, because they know that we are able to close we're reliable we have a tremendous brand and level of penetration in the market that is second to none.
And its affording us the opportunity to capture a very exciting transactions in without any without incurring any incremental extra risk to Laura as earlier point.
And drive those higher yields that you're seeing coming through the pipeline.
Great. Thank you for that and I guess, just maybe a follow up as it relates to maybe more specific opportunity or are you seeing people willing to come to market now based on the higher rates.
They have a refinancing issue coming up do you have any.
So you know we're in the case of a deal that didn't go through because the buyer wants you can or would you say is that is that becoming a more prominent component of sort of the opportunity for you guys or is that not really changed at all.
That's certainly one of the sort of market dynamics that we pursue aggressively at a point like this at this point in the cycle.
And as you know our researched originations that drives all that off market activity is constantly looking for catalysts in the market that could be leading an owner can potentially need or want to sell or for more favorable opportunities for rexford work with where the buyer competition is not able to perform as well. So that is certainly a driver of incremental opportunity today.
Okay and last question for me just relates to sort of lease structure.
Maybe expense growth exposure.
Or can.
Can you maybe just give me a reminder, as to sort of the.
Breakdown in your lease structure between Triple net and then are you know some some modified gross industrial gross kind of what's what is the what's the spread there.
Between between the different lease structures and sort of how should we be thinking about expense growth going forward I think Laura mentioned earlier.
Less than expected, but just curious as to sort of what your expectations on expense growth all at this point.
Yeah, Hey, Chris Thanks for the question Yeah. As you mentioned our expense growth guidance has continued to come in as we started the beginning of the year or expenses included about 110 basis point impact to increased expenses net of recoveries last quarter that declined to seven.
Five basis point impact in this quarter, it's declined to about 60 basis points for the full year, so really about half of our original projection the drivers of that lower expense growth really driven by a couple of areas. One is around lower property tax expenses and the city of the industry our property tax bond was.
Repay them and eliminate them and say she had associated attacks immediately.
And then we also have had lower non recoverable expenses and that's associated with overhead allocation that drove that improvement that increase in overhead allocation. As a reminder, I was related to the timing of hiring and increased labor costs. This year, but as we continue to realize economies of scale.
Been able to decrease that protected growth I'm really as a result of our team's focus on operating efficiencies and innovation.
In terms of your question around leasing structure about 75% of our leases are triple net Oh, and then with the remaining.
20% or so with the remaining 20% off so that our modified gross and a pretty minimal gross leases about 5%.
Great. Thank you for that accretion mhm.
Thank you as a reminder, ladies and gentlemen, if you would like to ask a question at this time. Please press star one on your telephone keypad.
Our next question is coming from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.
Great. Thanks for taking my call. So Blaine and I were discussing this earlier than what we'd love to get your thoughts on it now.
Now that Prologis had do cause has merged.
You know what do you think the impact is on the competitive landscape.
Overall for U S industrial and then I guess, even more importantly, you know in your markets I know, you're playing a little bit of a different sandbox, but what do you think the big picture is with.
With those two companies combined and does it actually open up investment opportunities do with disposition.
Hey, Jamie Great to hear your voice and thank you again, so much for joining us today I mean, it's it's certainly changed the landscape of them you know Rexford now it's become the second largest industrial REIT in the country.
And so it's been an exciting growth path for us since we took the company public in 2013, and frankly, we rarely competed against either for largest or Duke on our acquisition activity are exceedingly rare and I think this will probably further diminish.
Robert is that we do compete directly head to head against them.
So it's it's from an acquisitions perspective, it's probably you know nominally improvement for us, but not terribly material.
Okay, great. Thank you.
Thank you. It appears we have no additional questions at this time, so I'd like to turn the floor back over to management for any additional closing remarks.
We just like to thank everybody for joining us.
We wish you well and we look forward to reconnecting in about three months.
Thank you ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.
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