Q4 2022 Rexford Industrial Realty Inc Earnings Call
Greetings and welcome to Rexford Industrial Realty incorporated fourth quarter and full year 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Eric Chang Senior Vice President of Investor Relations and capital markets. Thank you you may begin.
We thank you for joining Rexford Industrials fourth 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 Dotcom and.
On today's call management's remarks, and answers to your questions may contain forward looking statements as defined by federal Securities laws.
Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results can differ.
More information about these risk factors. Please review, our 10-K and other SEC filings.
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.
The earnings release, and supplemental package present, GAAP reconciliations 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.
I will make some prepared remarks, and then we will open the call for your questions now I turn the call over to Michael.
Thank you Eric I'd like to welcome everyone to Rexford Industrials fourth quarter 2022 earnings call I will begin with a brief introduction.
We'll discuss our investment activity, followed by Laura who will discuss our financial results and guidance for 2023.
Our strong results reflect our unique position as the nation's largest pure play U S focused industrial REIT driven by our entrepreneurial approach to creating value within infill southern California.
For the full year of 2020 to Rexford of increased earnings or F. O per share by 20% enabled by a full 45, 3% core at.
This brings our average earnings per share growth over the prior three years to 22% substantially exceeding the earnings growth of all other industrial Reits, which averaged 13%.
We grew consolidated NOI by 40% compared to the prior year driven by strong internal growth lease up of our value add repositioning and accretive external growth.
We completed $5 1 million square feet of lease activity during the year, achieving leasing spreads at 81% on a GAAP basis, and 59% on a cash basis.
<unk> closed on a record $2.4 billion of investments for the full year, 90% of which were acquired through off market or lightly marketed transactions, thereby enabling substantially above market projected return on investment.
Although we face a higher level of potential economic uncertainty. This year, we continue to see strong tenant demand.
Our infill southern California markets are operating at well above structural full occupancy of about 1% market vacancy and with the highest year over year market rent growth of any major industrial market in the nation.
Infill Southern California continues to experience a virtually incurable supply demand imbalance due to an extreme scarcity of land and development constraints that prevent any material increase in new supply.
In Stark contrast, many other major industrial markets are experiencing increased new supply reaching record levels.
Looking forward Rexroad is exceptionally well positioned with embedded internal NOI growth of 43%.
Equally to an incremental $200 million of NOI contribution over the next 24 months, assuming no further acquisitions and assuming today's market rents without further growth.
This includes $78 million of incremental embedded NOI driven by the mark to market on our leases and our contractual annual rent steps plus $48 million of the incremental NOI from repositioning and redevelopment projects stabilizing over the next two years and $74 million of incremental N.
Oh I projected over the next 24 months from recent investments closed during the fourth quarter and year to date.
We continue to operate with a low leverage balance sheet at about 15% net debt to total enterprise value.
This achieves the dual outcomes associated with protecting our business during uncertain economic times, while also positioning the company to continue to capitalize upon highly accretive internal and external growth opportunities.
Thanks to the hard work of our Rexford team. We are pleased to announce an increase in our first quarter dividend to <unk> 38 per share, which represents a 21% increase over the prior year.
With this increase our five year dividend per share growth averaged 19%, which ranks among the highest in the REIT industry.
Above all else, we acknowledged at the primary determinant of our future success is the quality of our people and are deeply collaborative entrepreneurial team.
We think team Rex where we are.
The extraordinary work creativity and dedication they continue to differentiate our great business.
And now it is my pleasure to hand, the call over to Howard.
Thank you Michael I also wanted to acknowledge and thank our extra team for their excellent 2022 achievements.
Our stabilized portfolio is operating at historically low levels of vacancy and we continue to see a strong diversity of tenant demand.
By way of indication, we have current leasing activity on over 90% of our vacant space available for occupancy.
Based on our internal portfolio metrics market rents increased 25% in 2022, and the weighted average mark to market for our entire portfolio is now 73% on a net effective basis and 58% on a cash basis.
According to CBRE vacancy across our infill markets was one 1% at the end of the fourth quarter.
Two of our largest submarkets Orange County in South Bay, comprising nearly half a billion square feet, some vacancy to decline to 0.7%.
Any other submarkets, including La mid counties Commerce, Vernon, San Fernando Valley, and Ventura County, still have they can see below 1% base.
Based on these unique market dynamics and our current leasing activity. We believe there is potential for upwards of 15% market rent growth this year within our infill Southern California markets.
With regard to the investment market, we continue to see marketed transactions within our infill markets trading at cap rates in the mid 3% to low 4% range as buyers are still drawn to our markets consistent outsized rent growth and stability through economic cycles.
We continue to focus our acquisition efforts on highly selective off market opportunities that we originate through our proprietary data driven acquisition sourcing for.
For the full year, we completed $2 $4 billion of investments across 52 transactions totaling $5 9 million square feet and 31.5 acres of land for near term redevelopment, which.
Which in aggregate are projected to generate an unlevered stabilized yield of four 8% on total cost.
90% of these investments were sourced through off market or lightly marketed transactions.
With regard to the fourth quarter, we completed $358 million of acquisitions, which are projected to generate an unlevered stabilized yield of five 4% on total investment.
Subsequent to quarter end, we closed two stabilized transactions totaling $405 million, which are currently generating an aggregate five 1% initial unlevered yield growing through contractual rent increases of about 4% per annum. We currently have a pipeline with over $125 million.
So highly accretive transactions under contract or accepted offer which are subject to customary closing conditions.
These prospective investments are projected to generate an aggregate initial yield of 5% growing to a 6% stabilized unlevered yield on total cost were.
<unk> differentiated acquisition strategy continues to enable substantial growth opportunities with $405 million of investments closed year to date $125 million and our near term pipeline and 215 million square feet of off market opportunities with identified catalyst.
Correct through our proprietary origination methods.
With regard to our repositioning and redevelopment activity for the full year, we stabilized seven projects totaling $141 million and overall investment at an aggregate $8, 9% unlevered stabilized yield generating an estimated $175 million of value creation.
In addition, we have another $1 $1 billion of repositioning and redevelopment projects, representing three 3 million square feet in process or projected to start within the next 24 months. These.
These investments have a remaining incremental spend of $385 million and are expected to generate an aggregate unlevered yield on total cost of six 5%, representing an estimated $500 million of value creation, assuming today's market rents and no further rent growth.
Now I'm pleased to turn the call over to Laura to discuss our financial results.
Thank you Howard.
I want to first acknowledge our incredible team produced another remarkable quarter of results and an exceptional year, but exceeded expectations.
Same property NOI growth for the quarter was seven 3% on a GAAP basis, and 10, 7% on a cascade.
For the full year same property NOI growth was seven 4% on a GAAP basis, and 10, 5% on a cash basis.
Even by a record 2022 leasing spreads at 81% and 59% on a GAAP and cash basis, respectively.
Strong tenant demand for our high quality portfolio, coupled with low market vacancy resulted in average same property occupancy for the full year at 98.7% and 98% for the quarter at the high end of our guidance expectations.
Annual embedded rent steps in our fourth quarter executed leases continue to remain at record levels at four 4% compared to three 9% a year ago.
Bad debt as a percent of revenue was approximately 10 basis points positive for the full year driven by the exceptionally strong credit.
Tenant base and reversals of prior reserves.
Note that even if these reversals were excluded bad debt as a percentage of revenue would've been approximately 20 basis points well below the historical average of 50 basis points.
This solid operating performance combined with our accretive investments drove fourth quarter core <unk> per share growth of 9% over prior year and 20% for the full year.
As a result of this strong performance and continued commitment to delivering superior total shareholder return.
Our board declared a first quarter dividend <unk> 38 cents per share representing a 21% annualized increase over the prior year.
Turning to the balance sheet and capital markets. Our capital allocation strategy includes a highly selective investment process and fortress balance sheet that delivers accretive near and long term cash flow and the Navy correct.
Our low leverage balance sheet with net debt to EBITDA at three seven times provides tremendous flexibility and access to attractive sources of capital to fund accretive future internal and external growth opportunities.
In recognition of our balance sheet strength and the quality of our credits and 'twenty 'twenty. Two we were upgraded to triple B plus from S&P and Fitch and to beat up late two from me.
In the fourth quarter and subsequent to quarter end, we executed on a number of capital markets transactions to fund investment activity.
We sold a combined $12 5 million shares of common stock on a forward basis through the ATM in a public offering for total gross proceeds of approximately $700 million.
In addition, we had about 14 1 million shares of common stock associated with forward equity sale for a total of $813 million and that person.
We currently have total liquidity of $1 $1 billion comprised of 73 million of net forward Crazy its remaining for settlement $51 million of cash on hand, and full availability under our $1 billion revolver.
Moving to our 2023 outlook, our core <unk> guidance range is projected to be $2 eight to $2 12 per share representing a 7% increase at the midpoint over the prior year as.
As a reminder, our guidance does not include acquisitions dispositions or related balance sheet activities.
We have provided a roll forward of the Italian the dry drivers of our revised guidance range and our supplemental package. A few highlights include same property NOI growth is projected to be nine to 5% to 10.25% on a cascade and.
Seven five to eight 5% on a GAAP basis.
Points of our same property growth include full year cash leasing spreads of 55% to 60% in gasoline cracks of 70% to 75%.
Year end same property occupancy is expected to be 98%.
Line with year end 2022 occupancy.
Average same property occupancy for the for the year is projected to be 97, 5% to 98%.
And bad debt as a percent of revenue is projected to be 35 basis points.
Finally, our acquisitions completed in 2022 and year to date are projected to contribute approximately $73 million of incremental NOI.
This concludes our prepared remarks, and we now welcome your questions operator.
Thank you if he 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 May press star two if he would like to remove your question from the queue.
If a participant.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from.
Millman with Citigroup. Please proceed.
Hey, everyone.
Laura I noticed you know from the operating update to today you guys raised the mark to market assumption in the portfolio could you just give a sense of what you're seeing in the last 30 days that gives you comfort with that and you know also I noticed you gave the.
15% market rent growth assumption it seems like the first time you guys had put that out there maybe if there's differences in some of the Submarkets that you guys invest in a relative to that average.
Hey, Craig Thanks for your question I'm sure.
To you know to answer your question, Yes, we did project market rent growth of approximately 15% in 2023, and I think it's important to talk about some of the.
Factors that went around generating that forecast.
And part of that is the current activity that we're seeing in the market. So first really three factors went into that forecast first with the current activity in the market and within our portfolio and year to date is on pace to exceed our recent expectations.
We've seen a pickup in activity since the beginning of the year, we have activity on over 90% of our vacant spaces and while one month certainly doesn't represent a trend we saw a sequential market rent growth in January of about one and a half per site.
The second factor going into that forecast is really our ongoing tenant research and outreach we conducted a very as we can and we always do a deep dive into the regional tenant demand within infill Southern California, and we continue to see a very wide diversity of demand and then lastly in that forecast is we really take into it.
That's helpful. Maybe just on the mark to market commentary there.
Is that just a space by space buildup, that's giving you that with all the activity you guys have on on vacancy or is that an output of this 15%.
Yeah, we so we mark to market our portfolio, our quarterly and we do that from the bottom up I'm not state by state basis, we did that in our <unk> outlook that we we posted about 30 days ago, we had done a mark to market in order to get that as current as possible we did it.
The other mark to market of the portfolio over the you know about a week ago. So we wanted to be able to provide an update on what that market rent growths looked like within the portfolio over the last 30 days and we've you know we've certainly seen a strong resurgence of tenant demand and our forward outlook remains really strong and that's that one.
Per cent sequential growth that we saw and market rents over the last 30 days.
And then just turning to the the acquisition market I mean, it's a you guys are coming out of the gate strong with $405 million.
You know could you.
Guys are getting these at stabilized yields are on your basis of 5% and higher could you just talk about.
How are you guys continue to get these over the last couple of months and it seems like spot cap rates are kind of all over the place from a market perspective with the longer term leases seeing more pressure and maybe you know other shorter term deals I'm, probably not see as much pressure. So just any any viewpoints on that.
Helpful.
Sure Hi, Hi, Craig It's Howard.
Yeah deals seem to be all over the place in the market Oh, there's still plenty of capital chasing transactions.
And we're seeing that marketed transactions.
As I mentioned in prepared remarks are still trading in those low 4%, even sub 4% and in some instances.
But you know the secret sauce here expert is really the the research we do the relationships and our ability to transact.
And in an off market or lightly marketed manner, you know for the year, we transacted 90 per cent off market for the quarter, a 100% off market.
And.
And relationships do pay off and we're able to find situations.
Where there's a need by a seller.
And you know for instance that the transaction that we just mentioned at closing and.
The earnings disclosures.
A million feet in the inland Empire West, we actually had a relationship with that seller.
And they had a need to close quickly and because of that we were able to capitalize on those needs and we're able to achieve a 5% yield on a building that you typically see trading well below 5%.
Yeah.
And the you know the one.
Uh huh.
Kind of topic that we've been hearing more recently and I don't know I brought up to you guys. As you know when you look at issuing equity you guys did the last deal sub 4%, but given the mark to market in your portfolio. You know your your stabilized yield on your stock is probably in the mid to high fives right.
So you guys are putting that capital to work on your basis and stabilized yields in the mid fives, you know could could you talk to.
You know maybe what.
How are you guys look at your stabilized yield or average yield over the long term to put against that stabilized yield right because it's accretive on the SSO, but long term N V. You know how should we think about the stabilized yields that you guys give versus maybe an average yield over a seven to 10 year period, as we think about sort of any of that.
Accretion long term versus that stabilized yield before you issue equity.
Hey, Craig it's it's Laura I'll jump in here.
I think it's a great great question about kind of how we think about growth and when we think about you know our stabilized yields that we're acquiring that today. They represent a very healthy spread over current market yields and certainly that is what differentiates Rockford and in our strategy and.
And I think that you know when you think about our business model, it's about how we create value above market yields through our acquisition sourcing through our asset management, there will be some repositioning and redevelopment expertise and so you know when we think about investing you know we're investing in a basket of goods and so you know.
We're we're we're looking at you know a core plus and value add opportunities.
Seen us acquire some core assets as well as well as our repositioning and redevelopment and when you put those together.
Yeah, we're generating very significant cash flow growth and if you look over the last five years, our athletes out per share CAGR has been at 15% annually and that compares to the peer group is 10%. So you know our you know our business model allows us to generate that outsized cash flow growth and so when.
We think about.
When we think about investing in that you know internal or external growth are not mutually exclusive and you know both diversify our overall risk profile and contribute to accretive and all our NOI and NAV growth.
But is there is there a way to look beyond that five 5% versus your cost of capital.
That maybe is a better gauge of where you guys are putting that capital out longer term in terms of where you guys see the high single digit unlevered.
Hurdles is that you know a five and a half plus bumps over the life getting you know well in excess of that stabilized.
Yield that you guys have on your stock just any thoughts.
So I'll turn it back.
Yeah, that's a great question, Craig and I think a really good point. So when we called these stabilized yield. These stabilized yields are a point in time and the embedded rent steps with and our leases are pretty powerful and if you look at the embedded steps that we signed in the fourth quarter are within all of our executed leases. The average was 4.4.
<unk> for the full year 2022 the average rents that was four 3%. So when you look at the power and the compounding effect of that is of those and that it stops you know those stabilized yields grow considerably over time. So you know that you know five and a half you know six.
Stabilized yield is going to grow through those four four for 4.5% annualized rent steps.
Okay, great. Thank you.
Our next question is from John Kim with BMO capital markets. Please proceed.
Thank you I wanted to ask about your leasing spreads in the fourth quarter very healthy compared to.
Where it was historically, but just comparing over last couple of quarters. It did moderate a little bit and it seems like that's going to continue next year. So I was wondering if you could just comment on that dynamic.
Yeah.
Yeah.
Yeah John .
In terms of our leasing spreads may we continue to see extremely strong leasing spreads.
In the fourth quarter, our leasing spreads were impacted by one lease that had a fixed option renewal at a 6% increase so so that at least had an impact on fixed option had an impact on our leasing spreads of.
Of about 700 basis points. So you know if you were to look at you know look at leasing spreads without that lease you'd look at GAAP and cash leasing spreads that are really in line with what we've experienced for the full year.
Yeah.
Are there any leases like that in 2023, and when I look at your lease expiration schedule. It looks like the expiring rents are $14 is higher.
That it is in your overall portfolio.
Subsequent years.
So I was wondering if.
You can just discuss that if we could see potentially an acceleration of lease spreads in 'twenty four and 'twenty five.
Yeah in terms of our you know our mark to market for 2023, a 61% on a cash basis and 75% on a GAAP basis, you know our guidance incorporates cash leasing spreads of 55% to 60% and GAAP leasing spreads of 70% to 75%. So that would incorporate if we had you know if there were any of these.
We don't have a lot of fixed fixed options within our portfolio, but if if there were any of those anomalies on that guidance would incorporate that Jimmy when you look at the projected leasing spreads for 2020 three.
We ended the year with 59% cash leasing spreads and so our guidance is it's create is within you know within that with the 2023 guidance is within that range now as we look as we look for it in terms of into the Mark to market over the next call. It two years.
The Mark to market for 24, and 25 is really within the area you know the 60% area you know.
That we're experiencing in 2023 on a cash basis.
I appreciate the color. Thank you.
Thank you.
Our next question is from Nate Crossett with BNP Paribas. Please proceed.
Yeah.
And thanks for taking my question.
Maybe just the first one related to the funding question that was asked earlier historically.
Historically I don't think you guys have done a lot of dispose.
But clearly cap rates like this support for high pricing right now to sell into.
Would.
Do you guys ever considered doing more dispose as part of the funding calculus.
Or what would change it I guess.
Hi, Nate its Michael Thanks, so much for the question thanks for joining us today.
You know dispositions and recycling capital or part of the retro program and we have an ongoing you know.
Process, where we're constantly and continuously assessing the opportunity to recycle capital through dispositions, but you'll see is you'll see us doing that and it'll be on a selective basis. You know, we don't give guidance in terms of volumes, but it's certainly a part of the retro program.
Okay. That's helpful.
Maybe just a few on the production of a new acquisition I'm. Just curious if you could kind of speak to the level of interest in that you know maybe what would the number of bidders.
What was the wallets on the property what went to kind of mark to market.
In place rents there.
Yeah, Hi, it's Howard.
You know first of all this was a very unique opportunity for US yeah. It's not it's not often that we are able to be able to buy a quality building like this a cross dock.
Strong location and the inland Empire west at the yield that we're able to capture.
And it really it really had to do with a timing on the seller's part of an urgency to close for.
For some other capital needs that are that they had.
No as far as as far as the rent.
We believe there's some upside in the rent that was put in place. This was a sale leaseback.
So you know what the ramp is negotiated.
Closing so there there is some upside in that.
As far as the the tenant and it was a buyer pool there there were other buyers.
But timing and ability to perform where a priority.
For the seller. So no there there there were some other buyers that are perhaps we'll able to or willing to pay more but that's sort of as they may not have been there from from the eyes of the seller that we we have a relationship with.
The seller on this particular asset and.
The that that really came into play in terms of getting the seller comfortable in our ability to perform and perhaps our ability to to achieve better pricing than maybe others were awesome.
Okay. That's helpful. So it is this is this the top tenant for you guys now.
Just sticking with it yeah it.
There will be is it and is it a new top tenant or is it going to be additive to an already.
I'm, just trying to get a sense of concentrations.
Well it'll be you know the top tenants.
Our next reporting cycle.
Yeah, and it was and it's a new tenant it's not in our top tenant list today.
Okay that makes sense just maybe one last question on this is does this tend to have other potential sale leasebacks they could do with you.
They do have some other property in southern California, there are national tenants. They have other assets in other markets. We would of course, you know don't focus on those markets. So we'll pursue those but there's no. There's a possibility for that Theres also a possibility that we might be able to do some.
Some build to suit construction for them as they expand you know the the sale and the capital generated here just for their growth.
So they're in a growth mode, and we are discussing with some other opportunities.
Okay I'll leave it there thank you.
Our next question is from two meal Bono with Bank of America. Please proceed.
Hi, Laura I wanted to follow up on your earlier comments around the project goes bankrupt.
As that continues to be a key consideration in that seems to be underappreciated in our conversation.
Have you run any sensitivity analysis on this section.
For example, assuming a 15% is the base case, what do you see is the lowest level of rent growth you think we could see or the potential upside from that.
Yeah. Thanks for your question, we Havent, we havent actually.
We haven't put out a forecast in terms of a sensitive from a sensitivity perspective, so not something that we're including in the guidance today and important I mentioned that the rent growth forecast that we have today is not.
Included in our guidance metrics, so it's not our practice to embedded rent growth into guidance and so.
So how we don't include include perspective acquisitions in our guidance. So as market rent growth is realized we will adjust our guidance accordingly through the year.
That's very helpful and on guidance, just trying to get a better understanding of what's been factored into your occupancy outlook.
The impact from the timing of expiring lease management.
Could you update us on the typical downtime you're seeing within the portfolio and how that compares to the recent passing your expectations factored into guidance for this year.
Yeah. That's a great question. So our occupancy is projected to be flat year over year. So we're projecting in 2023 same property occupancy to be 98% at the end of this year and that compares to 98% at the end of 2022, but our average occupancy is projected to decline about 75 basis points at the end.
Midpoint compared to 2022, so what's impacting that average occupancy is our protection around downtime and downtime between the time between lease exploration and lease commencement or 2022 downtime was abnormally low or 'twenty 'twenty. Two downtime was 67 days and that was driven by.
And our proactive move outs, where we had a tenant in place and we were able to move out some one and then put a new tenant in with very little downtime in fact over 550000 square feet of new leasing had downtime of less than 15 days in 2022, So as we look into our 2020 three forecasts we're projecting.
In 90 days, so about three months of downtime to put that into perspective, that's really in line with the downtime that we've experienced in the prior two years, that's averaged about 90 days as well.
So you know and if you look back to pre COVID-19 levels with over four months. So you know 90 days in 2023, certainly continues to reflect the strength of demand within our market and the other thing is our explorations are skewed towards the later half of the year actually about a third of our expert.
During the fourth quarter, so as we get more visibility and two or three you know three and for Q exploration will certainly provide updates to guidance as we go through the year.
Really appreciate all the color there and just finally from me the.
The operating dynamics of the million square foot industrial property is very different from the typical asset within our portfolio.
Should we expect a shift towards these larger acquisitions moving forward or was this more of a one time deal.
Hey, Camille it's Michael it's a great and important question and number one we don't expect a shift in Mexican strategy and I think our strategy and our business model has been very consistent and I think even going back to the IPO. The way, we communicate our business model and our strategy is that on average you one should expect us to be acquiring a high volume of.
No single assets or smaller portfolios or even some some large or medium sized portfolios or Laura and and once in a while from time to time, you should also expect us to buy larger assets or substantially larger portfolios the larger assets and a substantially larger portfolios are harder to predict in terms of timing and they also tend to be heavily marketed so that's why we.
We tend to see fewer of those.
However, one should expect to see some some share of our investment activity to include larger assets and larger portfolios and on average we're really targeting a blend of yield profiles through that activity and their one should expect 50% to 75% of our activity on the investment side should be able to have a core plus or value add orientation with relatively.
The high yields and then maybe 25, 30% over time over the long term might include more stabilized assets, which often times will include a larger transaction. So that's how we would encourage you to think about the activity.
Thank you for taking my questions.
Our next question is from Jason Belcher with Wells Fargo. Please proceed.
Hi, good morning out there I'm just wondering if you could talk a little bit about which types of tenants are creating the most demand across your portfolio today and maybe if you could touch on tenant side as an industry.
And also if you're noticing any differences in demand within or across your submarkets.
Yeah.
Yeah, Hi, Jason.
It's Howard.
Nice to hear your voice.
No I think really it's business as usual no theres, such a varied amount of demand in our markets.
You know, it's it's really not.
Typical the point to prevent them from from any any one particular user group.
But you know we're you know today there there are emerging industries and different groups that we see a bit more activity from you know we've seen some heightened demand from food and beverage users Ah, there's there's incremental demand from our building construction materials.
Electric vehicle manufacturing medical devices.
Stable industries like fashion and apparel.
And in e-commerce as well.
And in other household goods, but you know other otherwise very diversified still and we've seen as a laura.
Laura I think I mentioned earlier, we see really a resurgence in demand after the new year.
Yes.
Oh, that's great. Thank you and then.
Oh on the contracts I mean on the acquisitions that you have under contract.
At this point.
Any color you can give us on the breakout between our core deals and.
The portion that might be value add or or land plays.
Yeah, Yeah, we really really like don't like to report an advance on what that mix is.
We of course will put on clothing, because you know these things vary from quarter to quarter and generally the mix Michael just referenced seems to blend out over over the course of the year with a 75% value adds.
Core plus and then and then there's about 25% to 30% in the core or stabilized bucket.
Hey, Jason I'll add to that that when you look at our acquisition pipeline and where we're seeing you know continue to see strong yields approximately 5% initial yield on that 125 million dollar pipeline and 6% stabilized yield.
Great. Thank you and then just lastly for me.
You guys can share on how you're dealing with or mitigating a cause.
Higher construction and labor cost.
What kind of impact you might be seeing from that.
Sure.
It's it's an interesting topic and.
So really we think of it in terms of escalating construction costs.
Cost you know cost are coming down here and there in different categories.
Last year, we saw basically escalation that we were using in our modeling of 25% to 30%.
That occurred during the year today, we're looking at underwriting, 12% Escalations and we see potential for that AR to come down further so.
Our cost for instance, in our supplemental on all of our repositioning and redevelopment projects include the expected escalation so quarter to quarter.
Going forward we.
We may actually be able to lower some of those projected cost escalations.
<unk> to come come in.
But you know.
You know typically you know the main lingering issues out there still permitting no cities are under resource so permitting occasionally takes longer than expected.
And and Labor you know theres, a lack of available workforce.
So really it's all about getting to the point, where you can start the project because once we start a project, we're generally going to be on track.
In terms of timing.
And to make sure about that.
We've got a strong program in place, where we're buying a lot of the materials that are needed in advance to avoid any delays such as roofing materials electrical switch gear H B C and so forth. So I think you know we've we've done all we can to mitigate some of the costs and delays and so forth.
And we're really pleased to see the escalations, starting with shrimp out.
Encouraging to hear thank you very much.
Yeah.
Our next question is from Dave Rodgers with Baird. Please proceed.
Yes, good morning out there maybe Howard Michael you have talked about Reacceleration in leasing and maybe a real acceleration of rent growth for the market.
Since the end of the year, but I guess going back to the fourth quarter market rent growth really kind of flatline wondering about pushback from tenants on rent I'm sure you always get it but are they pushing back for more concessions and then when you talk about 2023, having kind of more downtime.
Is this really just a function of higher churn in the portfolio, where tenants just can't keep up I wanted to get a better sense for tenant health overall since I'm talking kind of help I'll just throw the last question for Laura which is bad debt in the outlook and kind of any experience with bad debt so far.
Late in 'twenty two early 'twenty three.
Well why don't I start and then Michael and Laura can jump in.
You know as far as tenant demand yeah. It's it's really it's really been strong we're really pleased.
And we are you know as Laura mentioned earlier, we have activity on 90% of our vacant space that's available for occupancy so that's very encouraging.
And you know in terms of you know what's happening there there was a little bit of a slowdown.
And a pause in the fourth quarter and we were hearing from people that they were concerned about inflation.
Inflation they were concerned about interest rates they were concerned about the economy, but I think what's happened is and some people I think probably have this wait and see attitude thinking you know, let's wait a little longer maybe rents are going to go down and so that obviously hasn't happened, there's still rent growth and so the resurgence.
I think people realizing that they have to do something about their space needs.
And they really can't wait because they are hearing from the brokerage community is that rates are going up.
No. In fact, we you know subsequent to quarter end, we signed a lease at a at a record lease rate on a renewal in the South Bay. We on AR I think is about 130000 foot state of the art building that we just renewed a $2 30 <unk> triple net.
And that you know from from our vantage represents fairly substantive near term rent growth.
You know from similar buildings that were leased and that's a micro market.
Just in the past 90 days. So we're very encouraged from what we see.
Maybe I'll, just add a little bit to that and that just sort of anecdotally when we talk to tenants.
And your question was around you know they are we getting much pushback in terms of rents and given your kind of expectations and when you look at the availability of product in the market in other words, if you look at what alternative space is available to the typical tenant.
Have an overall market vacancy of one 1% and as Howard mentioned earlier, many of our largest submarkets are well below 1%, but if you were actually look into those vacant buildings, let's say well of the vacancy in the market how much of that actually even begins to compete with rexroad because again, we're typically the best locations and the most functional product in each submarket we <unk>.
And also.
Also thanks to our repositioning activity and we believe that less than half of the stated market vacancy even begins to compete with our product on average on a location on functional basis. So we continue to hear the same refrain from tenants, which is that hey, they may not like the rent.
The new rate.
They may look around in the market, but it's just so exceedingly difficult to identify alternative space for them that they eventually come back to the table pretty short order typically.
Oh, one other comment I'd like to do.
<unk> is on sublease that.
That is a very good indication of the health of the tenants in the marketplace.
And then in the fourth quarter, we saw the fewest number of sublease as occurred during the year and if we then drill down and look at our sublease square footage as a percentage of our overall portfolio. It was lower than in 2019 pre COVID-19 and its about half of what we've seen on average over the past three years.
So that is a very very close indicators that we track are which really speaks to the health of our tenants in the market.
Yeah.
And then Dave I'll I'll take your questions around downtime and then specifically around the health of the tenants that that in terms of downtime as I mentioned it. It's it's really not directly related to you know anything that we're seeing the market in terms of demand. It's more of that 2022 was abnormally low because of some of these proactive move out for me.
We had very very little downtime in our states and we haven't underwritten is when we think about 2020 three but it's possible that that those could continue but at this point.
Our forecast is in line with the downtime that we've experienced in 2020 and 2020, one of 90 days, which as I mentioned earlier is still considerably less than the downtime that we were experiencing preto pre COVID-19 of four plus four plus months.
In terms of you know the health of our tenants now are our tenant base continue to exhibit incredible strength and stability.
As reflected in her bad debt you know it was a positive 10 basis points and the full year 2022, and even if we exclude reversals.
Bad debt was 20 basis points compared to the pre Covid average of about 50 basis points. So you know our forecast of 35 basis points at this point I think it's prudent given that we're early in the year, there's certainly still some yeah.
Economic uncertainty out there, but you know I'll note that we have not seen an increase in tenants on our watch list in fact bad debt as a percent of revenue in the fourth quarter was only 10 basis points, even when you exclude prior year reversal. So the health of the tenant base I would say is stronger than ever.
Okay.
Thanks, everyone.
Yeah.
As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is from Jessica Zhang with Green Street. Please proceed.
Hi, Good morning, I was wondering if you could share your view on how the new transfer tax and L. A and my impact property values in the city and whether it has any impact on your external growth strategy.
Yeah.
Hey, Jessica Thanks, so much for your question, Yeah, I think it's a little too early to know the full impact of the transfer tax but at this point, we're not seeing a material impact on valuations in the transaction market importantly.
Note that the tax does not impact rental rates. So you know the impact on valuation actually it could be potentially accretive to our yields on acquisitions and you know while it could have a modest impact on.
Your IRR, it's less impactful for us as long term owners, so you know and for us as well.
Our exposure is is a bit limited there. This this tax only applies to the city of L. A and our portfolio.
Folio about only about 15% of our portfolio is and the city of L. A I'm just referencing just 150 municipalities within our infill markets. The city of L. A is just one of those and you know if you look at our 2022 acquisitions only about 8% of our acquisitions that are $2 4 billion in 'twenty two.
'twenty two than in the city. So you know, we're continuing to watch and track them the impacts and potential impacts.
Across other municipalities, but at this point, we're not seeing a material impact.
Great. Thank you very much and then just a second question from me.
Seeing import container volumes at the port of L, a and long beach falling more than 20% year over year in the fourth quarter.
Are you seeing any impact of that kind of trickling through to the warehouses at all and then what's your view on what it could mean for just overall tenant demand in the Socal markets. If this trend kind of persist in the next few months.
Hey, Jessica Michael Thanks for joining US today, you know first.
First of all the reduction in core volumes is principally in and primarily a reflection of a comparison against last year, which was a record level for port volumes, driven by the impacts of Covid and sort of a whipsaw effect of.
Manufacturing and shipping bottlenecks and all the rest as it flowed through the supply chain globally and actually last year was the second best year on record in terms of volume and I think about 8% greater volume in 2019 by way of indication.
So you know there's still a lot of noise in the market. We're still the full COVID-19 whipsaw has.
As you know still resolving itself throughout the supply chains globally.
To some degree and with US with regard to the impact of our tenant base, we really haven't seen an impact of the tenant base.
And in part because of the reasons that I described that because volumes are actually still quite robust, but also and maybe more importantly that our tenant base is truly disproportionately focused on regional consumption.
So, they're they're really less concerned about where the goods come from or how they are received rather there over the ocean through airports or otherwise.
Fundamental tenants within our portfolio is more driven by regional demand in terms of business and consumer.
Consumption and so we've seen even in prior years in prior decades, when they've had port slowdowns or even even port shutdowns due to labor or whatever we've never seen.
A change in demand from the tenant base in fact, not even not even I can't even think of an example of a tenant coming to us and saying, Oh Gee I might need to change because of the ports. So I think we're very fortunate in that respect.
Great helpful color. Thank you.
Our final question is from Mike Mueller with Jpmorgan. Please proceed.
Yeah, Hi, just curious how should we be thinking about I guess, the head count G&A trends over the next few years just given.
The continued pace on the acquisition front.
And my Thanks to hear from you in terms in terms of our G&A, we continue to realize economies of scale within our operating platform relative to our portfolio growth and when you think about 'twenty 'twenty. Two we grew NOI by 40% and we also saw it you know what that's in that 18%.
Expansion at our square footage.
So significant growth, but at the same time, we're realizing operating synergies at an accelerated pace. So when you look at our 2023 G&A as a percent of revenue and we're projecting about nine 8% G&A as a percent of revenue and that compares to 10, 2% in 2022 and 2022 was down from 10.8.
Per cent in 2020, one so we do expect for that downward trend to continue as our platform is is nearly fully built out and our team is very focused on continuing to find those operating efficiencies as well as innovation through technology.
Got it okay. Thank you.
Thank you we've reached the end of our question and answer session I would like to turn the conference back over to management for closing comments.
On behalf of the entire company and our board of directors, we want to thank everybody for joining today, we wish you a great day, and we look forward to reconnecting in about three months. Thanks, everyone.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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