Rexford Industrial Realty Inc. Q1 2023 Earnings Call
Speaker 2: Greetings and welcome to the Rexford Industrial Realty Inc. first quarter 2023 earnings call. At this time all participants are in a listen only mode. The 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.
Speaker 3: 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 RexfordIndustrial.com. On today's call, management's remarks and answers to your questions may contain...
Speaker 3: 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 to differ. For more information about these risk factors, please review our 10k and other SEC filings.
Speaker 3: Rexford Industrial assumes no obligation to update any forward-looking statements in the future.
Speaker 3: 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 of why such non-GAAP financial measures are useful to investors.
Speaker 3: Today's conference call is hosted by Rushford and Industrial's 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
Speaker 2: Thank you, David. I'd like to welcome everyone to Rexford Industrial's first quarter 2023 earnings call. I will begin with a brief introduction. Howard will discuss our operations, followed by Laura, who will discuss our financial results and guidance. God bless you, our accountants, and friends of the city of protagonist Huety birth, the
Speaker 2: Our strong first quarter results reflect our entrepreneurial approach to creating value and the strength of the infill Southern California Industrial Property Market.
Speaker 2: For the first quarter, Rexford increased earnings, or FFO per share, by 8%, enabled by a full 34% increase in core FFO.
Speaker 2: And we grouped consolidated NOI by 33% compared to the prior year quarter, driven by strong and accretive internal and external growth. We completed a robust 1.8 million square feet of lease activity during the quarter, achieving leasing spreads of 80% on a GAAP basis and 60% on a cash basis.
Speaker 2: Interestingly, if we exclude one legacy renewal on a lease with the County of Los Angeles, who exercised their 3% fixed option, our leasing spreads were 97% on a GAAP basis and 77% on a cash basis.
Speaker 2: The estimated mark to market for in-place leases throughout our entire portfolio is 66% on a net effective basis and 52% on a cash basis, which alone is projected to contribute an incremental $1.90 of core FFO per share, equal to a full 89% increase, assuming today's interest rates are expected to raise directly with FFO equity hints and tax Beer semester idea for suppliers to extinction on the future received 200itude ultrhuge honestly, outside the corner and,Whole economy Hollywood, Californiaborder real Macy's market and the commission for digital mexico near all that you're watching to,. preemptively the
Speaker 2: with a remaining weighted average lease term of just under four years.
Speaker 2: In addition, our team completed $762 million of investments for the quarter.
Speaker 2: Tenant demand and market occupancy remain at historically high levels within infill Southern California, the strongest industrial market in the nation, with a virtually incurable supply-demand imbalance continuing into the foreseeable future.
Speaker 2: From an operational perspective, we believe Rexford is favorably positioned to out-compete within our markets, driven by two key facets of our business.
Speaker 2: To begin with, our mandate is to own the best locations and the most functional product within our submarkets.
Speaker 2: Our proactive value-add repositioning work positions our portfolio to outperform through economic cycles due to our superior quality and functionality.
Speaker 2: Based upon our experience and the relative performance of our portfolio today, Rexford's higher quality portfolio is expected to continue to outperform the lower quality product that makes up the vast majority of our infill markets, which includes over 1 billion square feet of product built prior to 1980.
Speaker 2: Secondarily, we continue to see substantial new tenant demand from a range of sectors that may not be as prevalent in other national markets, from the electric vehicle sector to food and aerospace to name a few. We are also seeing strength and incremental demand from the 3PL and e-commerce market as Southern California.
Speaker 2: The nation's largest regional consumption base continues to be under-penetrated in terms of short time frame and omni-channel delivery capability.
Speaker 2: By way of indication, our customer solutions and leasing teams are proactively tracking over 40 million square feet of leasing requirements within infill Southern California.
Speaker 2: This includes our active engagement on over 3 million square feet of tenant requirements that are proprietary to Rexord through our Strategic Customer Outreach Program.
Speaker 2: As we look forward, we have substantial embedded internal NOI growth estimated at 35%, equal to an incremental $175 million of NOI contribution over the next 24 months as we roll deeply below market in-place leases to higher market rents, lease up our repositioning assets, and realize incremental NOI contribution from our recent acquisitions.
Speaker 2: With regard to our external growth and investment activity, our team is leveraging our deep, sharpshooter advantage and proprietary access to the infill Southern California market.
Speaker 2: We are capitalizing upon current market dynamics and diminished levels of buyer competition to achieve superior investment yields that are the strongest we've seen in well over a decade.
Speaker 2: Our investing activity is positioning REXFORD for very favorable cash flow and net asset value growth into future periods.
Speaker 2: Moving to our capital structure, we continue to maintain a fortress-like best-in-class balance sheet at about 13.6% net leverage to total enterprise value, affording the company the ability to protect against economic uncertainty while positioning us to capitalize upon highly accretive internal and external growth opportunities.
Speaker 2: Above all else, we thank our Rexford team for your tremendous work and dedication that continue to set our great business apart. And now, it is my pleasure to hand the call over to Howard.
Speaker 4: Thank you Michael and thank you everyone for joining us today.
Speaker 4: I also want to compliment our Rickshaw team for their excellent performance this past quarter.
Speaker 4: Rexford began the year delivering strong results, a testament to the superior quality and functionality of our portfolio and the strength of our markets.
Speaker 4: Vacancy across our infill Southern California markets continues at historically low levels at 1.5% for the quarter according to CBRE.
Speaker 4: In regard to market rent growth within Rexford's portfolio, we realize approximately 13.5% year over year rent growth.
Speaker 4: During the quarter, we saw the Rexford portfolio outperform the overall infill Southern California market, which is largely comprised of lower quality and lower functionality product.
Speaker 4: By way of example, CBRE indicated negative market absorption in the central Los Angeles market for the quarter, while the Rexford central LA portfolio, in contrast, had net positive absorption.
Speaker 4: Interestingly, the negative absorption indicated by CBRE was principally driven by lower quality dysfunctional buildings vacated during the quarter.
Speaker 4: Additionally, CBRE indicated an increase in overall market sublease activity and again, in stark contrast, Rexroad's portfolio experienced a reduction in sublease activity to a historically low level of 10 basis points of occupied square footage for the quarter.
Speaker 4: well below our 50 basis point average over the last four years.
Speaker 4: These key leading indicators reflect Rexford's ability to outperform due to our higher quality portfolio, operating expertise, and information advantage.
Speaker 4: As Michael mentioned, over the next 24 months, we are positioned to deliver 35% projected internal NOI growth. This is comprised of $52 million of incremental NOI contribution as we roll below market leases with a weighted average mark to market on 2023 and 2024 expirations.
Speaker 4: estimated at 78% on a net effective basis and 63% on a cash basis.
Speaker 4: plus $24 million of incremental NOI generated from contractual annual rent steps embedded within our leases.
Speaker 4: and $56 million of incremental NOI from LISA of repositioning and redevelopment projects over the next 24 months.
Speaker 4: Lastly, incremental NOI of $43 million from acquisitions closed year-to-date.
Speaker 4: Our proven investment strategy and data-driven acquisitions methods continued to enable the execution of extraordinary industrial real estate opportunities, driving substantial cash flow growth. Including two transactions closed subsequent to quarter-end, year-to-date investment activity is now $804 million.
Speaker 4: In addition, we've exposed one property for $17 million with an unlevered IRR of 16.8%.
Speaker 4: Furthermore, our pipeline of highly accretive transactions under contract or accepted offer is about $120 million, which are subject to customary closing conditions.
Speaker 4: These forthcoming investments are projected to generate an aggregate initial yield of 5.4%, growing to a 6% stabilized unlevered yield on total cost.
Speaker 4: Finally, we have 3.6 million square feet of value-add repositioning and redevelopment in process or projected to start within the next 24 months at a total projected investment of nearly $1.3 billion with the remaining incremental spend of approximately $415 million.
Speaker 4: These investments are projected to deliver an aggregate unlevered yield on total investment of 6.4%, representing an estimated $525 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.
Speaker 5: Thank you Howard. Our first quarter results were strong and ahead of expectations.
Speaker 5: Same property NOI growth for the quarter was 10.7% on a cash basis and 7.3% on a GAAP basis, driven by higher rent spreads and lower concessions.
Speaker 5: Average same property occupancy and ending occupancy were both 98% for the quarter and in line with expectations.
Speaker 5: Strong tenant demand and landlord pricing power continues to be reflected in the annual contractual rent steps and are executed leases.
Speaker 5: In the quarter, annual contractual rent steps embedded in our executed leases were 4%. Excluding the legacy fixed renewal option Michael mentioned, annual contractual rent steps were 4.2% and largely in line with 2022. Notably, the average annual rent steps for our total portfolio continue to increase and are now 3.4%.
Speaker 5: The continued strong credit of our diverse tenant base is demonstrated by low levels of bad debt as a percentage of revenue.
Speaker 5: In the quarter, bad debt as a percentage of revenue was 20 basis points, outperforming our guidance expectations, and well below the historical average of 50 basis points.
Speaker 5: This strong operating performance combined with our accretive investments drove first quarter core FSO per share growth of 8% over the prior year quarter.
Speaker 5: We continue to maintain our low leverage fortress balance sheet that uniquely positions Rexford to capitalize on a creative growth opportunities both internally and externally, enabling us to execute on our proven business model through economic cycles.
Speaker 5: At quarter end, net debt to EBITDA was 3.6 times, below our target range of 4 to 4.5 times.
Speaker 5: In the quarter, we demonstrated access to accretive debt and equity capital sources.
Speaker 5: We settled 11.5 million shares of common stock associated with forward and regular way equity sales for a total of $657 million in gross proceeds.
Speaker 5: And we completed a public bond offering issuing $300 million of 5% senior unsecured notes.
Speaker 5: due in 2028. In the quarter, we also fixed our remaining floating rate debt through a series of swap transactions. As a result, 100% of our debt is now fixed. At quarter end, we had total liquidity of $1.25 billion, encompassing $253 million of cash on hand.
Speaker 5: and full availability under our $1 billion dollar Revolver.
Speaker 5: We also have approximately $1.1 billion of remaining capacity under our ATM program.
Speaker 5: Turning to guidance.
Speaker 5: We are increasing our 2023 core FFO guidance range to $2.11 to $2.15 per share from our previous range of $2.08 to $2.12.
Speaker 5: Our revised guidance range represents 9% year-over-year earnings growth at the midpoint.
Speaker 5: As a reminder, guidance does not include acquisitions, dispositions, or related balance sheet activities that have not closed. Next slide please.
Speaker 5: Key highlights include our same property NOI growth has been increased to 9.5 to 10.25 percent on a cash basis and 7.75 to 8.5 percent on a GAAP basis.
Speaker 5: A 12.5 basis point increase at the midpoint, driven by strong performance in the quarter.
Speaker 5: We continue to project cash leasing spreads of 55 to 60 percent and gap leasing spreads of 70 to 75 percent.
Speaker 5: Averaged same property occupancy of 97.5 to 98 percent.
Speaker 5: bad debt as a percentage of revenue of 35 basis points, and year-end occupancy of about 98%.
Speaker 5: Acquisitions closed since our previous guidance are projected to contribute approximately $18 million of incremental NOI.
Speaker 5: Lastly, our components of guidance also include the impact of our equity issuance in the quarter and timing associated with repositioning and lease up outside of our same property pool.
Speaker 5: Finally, I want to thank our dedicated Rexford team for your passion and commitment that position Rexford for future success.
Speaker 5: Thank you all for joining us today, and we now welcome your questions. Operator
Speaker 6: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad.
Speaker 6: The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker 6: The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for your questions.
Speaker 6: Our first question is coming from the line of Camille Ball with Bank of America. Please proceed with your questions. Please proceed with your questions.
Speaker 6: Our first question is coming from the line of Camille Ball with Bank of America. Please proceed with your questions. Hello. My name is Camille Ball.
Speaker 5: I understand your mark to market could be changing depending on the leasing or investment activity done in a particular quarter. Could you comment on what the portfolio mark to market would have been excluding the first quarter acquisition? Hey Camille, it's Laura. Thanks so much for joining us today.
Speaker 5: I think the better barometer of our continued expansion of market rank growth within our market is actually reflected in our same property mark to market. That is because the same property mark to market would remove noise from changes in the pool sequentially that you discussed, which is acquisitions or moving a property to reposition or redevelopment.
Speaker 5: So in terms of our same property, mark to market, over the past four quarters, our same property mark to market has actually increased by 200 basis points. And that is an increase to 75% from 73% four quarters ago in the second quarter of 2022. And that is an increase to 75% four quarters ago in the second quarter of 2022.
Speaker 5: So importantly, this same property market to market reflects continued market growth that we're experiencing, even as we've rolled leases in the same property pool to market at 86% spreads on an effective basis over the past four quarters.
Speaker 5: In respect to the overall mark to market and your question around that change, which was about 600 basis points, a number of factors certainly impact that change, including the mix of properties that you mentioned. In the quarter, that impact was outsized, driven by a higher percentage of sale lease backs within our acquisition pool.
Speaker 5: These properties certainly provide us with immediate cash flow growth and the ability to unlock substantial value creation through redevelopment in the near to intermediate term. But I think importantly, our market rent growth forecast is unchanged at about 15% for the full year and in southern California.
Speaker 5: And the change in our overall portfolio mark to market is not a reflection of market conditions changing. It's certainly just a reflection of rolling those properties to market, rolling properties to market at higher spreads as well as the change in the pool.
Speaker 7: I appreciate all the color there. My second question was acquisitions this quarter were notably high.
Speaker 7: Given expectations we might get better clarity around pricing this year and the pipeline you're tracking, how should we be thinking about the magnitude and cadence throughout the rest of this year?
Speaker 4: Thanks, Mel. It's Howard. Well, we really aren't able to give you any guidance necessarily on how much we plan to buy through the remainder of the year. We're really focused on the opportunity set versus a goal in terms of any dollar amount. What's interesting though is if you think back on our first quarter call.
Speaker 4: that just take longer in terms of the gestation timeline. And there's just so much disruption and different needs that are emerging out there that there's a lot of deals that come to us and happen very, very quickly, but we just can't predict in what volume or when those type of deals will close. Understand. And finally, just regarding the CBRE case study on central, how long will it take for them to Represent the Ble ?OOOOOOOOOP
Speaker 7: Can you speak more broadly to whether net absorption is still trending positive for more competitive inventory? We've been hearing due to the combination of lower imports into the West Coast ports, rising occupancy costs for tenants.
Speaker 7: and older stock that demand has been shifting to more affordable locations like Inland Empire and Phoenix. So any thoughts on this would be appreciated.
Speaker 2: Hey Camille, it's Michael. Thanks so much for joining us today. I think generally we're not really seeing an impact related to the factors that you described whether it's imports or otherwise. And for comparable and competitive product to Rexford, we continue to see the type of dynamics that you see in our results, frankly.
Speaker 2: and net positive absorption through the Rexford portfolio, I think is representative of that competitive set. And so, you know, and remember, you know, our...
Speaker 2: tenant based throughout the market is disproportionately serving regional consumption. And so inherently less impacted by externalities like changes associated with trade flows, even impacts from the ports in prior years where we've seen slowdowns and shutdowns. We didn't really see any discernible change in tenant demand in info Southern California and certainly not within our portfolio. So I think it's just really important to remember the nature of the tenant in relation to some of these external factors. Thank you so much.
Speaker 7: Thank you for taking my question.
Speaker 6: Thank you. Our next question comes to the line of Nate Crossett with BNP Paribas. Please proceed with your questions.
Speaker 8: Thanks for taking the question. Maybe one on pricing and I'm not sure if I heard it correctly but I think you said embedded rent steps this quarter was 4.2% on new deals.
Speaker 8: I think last quarter was 4-4. So my question is, have you kind of reached the ceiling on that? And what are the conversations with customers? Like, are you getting more pushback on those lease escalations? I'd say, so, Hina, thanks so much for joining us today.
Speaker 5: that we have that was at 3%. If that's excluded and you just look at the new deals, it's 4.3%. And you know, looking back at our rent steps that we signed in 2022, those averaged 4.3%. So really in line from a new perspective. And I say that that's where it feels like we're settling out in that four to four and a half percent range from an embedded rent step perspective.
Speaker 8: leverage levels for the balance of this year? You know, you guys are below your kind of four to four and a half range that you've given in the past. What's the tolerance to take on more leverage here? And then also how are you thinking about addressing the 2024 debt maturity? Yeah, in terms of leverage, number one focus for us is
Speaker 5: continuing to maintain a low leverage balance sheet. When we think about the four to four and a half times area range from an asset to EBITDA perspective, we're perfectly fine operating below that level. Because at the end of the day, we want to maintain this low leverage balance sheet because it protects us through all business cycles.
Speaker 5: And it enables us to continue to be opportunistic for future growth opportunities. So when we think about how we're going to fund going forward, we're going to look at attractive and accretive sources of capital that allow us to execute on those opportunities with a focus on maintaining that low leverage.
Speaker 5: In terms of the 2024 debt maturity, that's primarily made up of a $400 million term loan that has two one-year options. So we do have the ability to extend that to effectively 2026.
Speaker 6: Okay, thank you. You're welcome. Thank you. Our next question has come from the line of Craig Mailman of the City. Please proceed with your questions.
Speaker 4: Laura, maybe just to circle up with the earlier question about the 600 base point decline in the mark to market, could you give just a little bit more detail on the components of that 600 basis point decline?
Speaker 5: Thanks for joining us today. The 600 basis point decline.
Speaker 5: About 400 basis points of it is the impact from a negative impact from leasing activity in the quarter as we roll leases to market at significant spreads 80% on a gap basis 60% on a cash basis and then another 100 basis point drag from the embedded growth within the portfolio. I mentioned in the prepared remarks that our contractual rent steps now average three point.
Speaker 5: in the mix of properties that I mentioned earlier. And that's mostly driven by that out-sized impact from acquisitions we closed in the quarter that had a few more sell-leasebacks in place that don't have a mark to market. And then lastly, the positive offset to that is the sequential market rank growth that we saw in the quarter of about 3%. So if we think about...
Speaker 4: overall if you were to strip that out maybe where that would
Speaker 4: where that would kind of bring the mark to market up to, I know 300 base was just in a quarter, but is there another couple other basis points?
Speaker 4: throughout past acquisitions that are still in the others of deals you haven't gotten to start redevelopments on yet.
Speaker 5: Yeah, Craig, I think it's a good question. I think the way to think about kind of the embedded, there's two ways to think about it. I think we can go back to the same property mark to market that I talked about in terms of, you know, we're seeing if you strip all of that out, which would that noise from the mix of properties and those acquisitions.
Speaker 5: Same property mark to market has increased over the past four quarters and is up to 75 percent from 73% four quarters ago So I think that's a really good indication of the market rank growth and the strength of the market today I think the other important can
Speaker 5: component to focus on is the embedded growth within the portfolio and the components of that. So mark to market is only one component of the internal growth, internal embedded growth within the portfolio. So over the next 24 months, we're projecting 175 million dollars of internal growth.
Speaker 5: And that includes repositioning and redevelopments that are currently in process or in the pipeline and will deliver about $56 million of NOI. And then that's followed by the mark-to-market contribution of about $52 million and then another $24 million from RentStops.
Speaker 4: So I think it's important to really focus on all the components of our embedded growth, not just the mark-to-market. And that's fair. I guess just one more point on the mark-to-market, just from a bigger picture. So if we just exclude that 300 base points from acquisition rate, it would have been a net 200 basis point.
Speaker 4: fall off just given, you know, basically realizing that market market through leasing. I mean, should we be thinking about this level, kind of what you guys have this quarter as the kind of the peak unless market went gross, we accelerate.
Speaker 4: Way beyond the 15% you guys have in there that every quarter we should be losing that hundred to other basis points Off that mark to market just because of the realization S
Speaker 5: Yeah, Craig, it's a good question. We have not provided guidance around where we expect for the mark-to-market to go over time, but obviously we've got significant embedded growth within our rent steps. We're projecting leasing spreads on a net effective basis of 70 to 75 percent this year, Shadow of theEDA.
Speaker 5: 55 to 60 percent. So we do expect to continue to roll leases to market and that will have an impact on the overall portfolio mark to market.
Speaker 4: And then just separately, the case study was helpful, Howard, that you went through. I'm just kind of curious because there clearly are these growing concerns about LA, you know, Empire giving some of the broker reports out there. I mean, you guys did a million-eight of leasing in the first quarter.
Speaker 4: Is there any way to give us an update on maybe what you've done April to date or what you think you'll close in April to give us sort of a runway? Are we consistent with that 1.8 or has there been a fall off of that? Just kind of curious on the trend post quarter end.
Speaker 4: Well, maybe I'll jump in here, Craig. We actually did see a little bit of a slowdown in the market in March from some of the banking disruption. We saw a little bit of a slowdown in the market in March from some of the banking disruption
Speaker 4: But things really picked up again as we headed into April . So we have a lot of activity on really most all of our spaces that are vacant. Rents that we're negotiating in many cases are above the rents we've underwritten.
Speaker 6: So we feel really great about where the market's at and the activity we're seeing right now. Great, thank you. Thank you. Our next questions come from the line of Blaine Heck with Wells Fargo. Please proceed with your questions. Great, thanks. Good morning. Michael, in your prepared remarks, you talked about tracking 40...
Speaker 2: In regards to historical context, this is probably not far off. It was probably a little more intense during the frenzied time, during the mid and later stages of the pandemic. But this is representative of very healthy levels. We had a very strong market, an exceptional market going into the pandemic.
Speaker 2: and arguably this is probably similar levels that we were seeing at that time. But I think importantly, this is a window into the market that is not available to all players in the market. And when I talk about the amount that we're tracking, particularly over three million square feet that is proprietary to Rexford.
Speaker 2: That is a lot of Rexford driven proactive activity and engagement in the market. That is the result of our focused approach to Intel Southern California. We have a dedicated team. We call them the customer solutions team. Rexford is a separate department in addition to our leasing team.
Speaker 2: who are solely mandated with making sure that we are in front of and having conversations and engaged and having the best relationships in the market with all levels of emerging tenant demand, whether they're currently our tenants or whether they are prospective or potential tenants.
Speaker 2: When we talk about tracking, that's not necessarily just what's available to all market participants. I think that's a very important aspect of the work. Nobody has better information in infill Southern California than we do. We're, on average, consummating a new lease or renewal, more than two lease transactions every business day. Combined with that productive outreach into the market.
Speaker 2: we really do have sort of a unique window into activity. And I think you're seeing that flow through the results, frankly, as Howard highlighted in our prepared remarks, kind of differentiated from the marketplace.
Speaker 6: Thanks for that, Michael. Also, in the presentation, we noticed first quarter year-over-year rent growth was around 13.5%, which obviously I think indicates that you're expecting some year-over-year acceleration in the rest of the year to hit your 15% target. Can you just talk about what gives you confidence in that number and whether there was anything happening?
Speaker 6: nuance in the first quarter, whether it be a tougher comp from last year or anything like that. I'll just come in briefly and then maybe... Go ahead, Howard. I was going to comment briefly.
Speaker 2: Howard can be in some more detail, but I think as Howard just noted a few minutes ago, we actually had a, I wouldn't call it a pause, maybe a slight calming effect in the latter part of Q1, but we're seeing things pick up again and it's similar to what we saw during Q4 and based on the current activity we're seeing in the market, I think that's what gives us the comfort.
Speaker 6: And with that, I'll turn it over to Howard for any more detail. You covered it. Thank you. All right, great. Last one for me. Can you talk about the potential for a strike at the port and maybe how that could affect your portfolio from a leasing perspective? Just briefly on the port activity and what's happening.
Speaker 2: do expect that the negotiation dock workers will be resolved hopefully in the near term, but we're not seeing any impact with regard to our tenant base. Remember, our tenants are disproportionately serving local regional consumption directly to businesses or indirectly through businesses or directly to consumers. And these sorts of disruptions of the port.
Speaker 2: or changes in trade flows are going to impact the big bucks markets that are focused more on super regional trade and distribution, but really have never demonstrated an impact to our infomarkets.
Speaker 2: are going to impact the big bucks markets that are focused more on super regional trade and distribution, but really have never demonstrated an impact to our infill markets. Great. Thank you all.
Speaker 9: Thank you. Our next question has come from the line of Nick Billman with Barrett. Please proceed with your questions.
Speaker 10: Hey, good morning out there. Maybe touching on leasing a little bit, retention seems pretty high generally, but maybe on the 20 percent that doesn't renew, what's their usual reason for leaving? Is it expansion space or are rents, are they getting priced out of the market? Just get a picture of the credit quality.
Speaker 4: Hi Nick, it's Howard. There's not one real driving reason on some of those vacates. A lot of them are growing. A lot of them relocate here and there. I was looking at some data.
Speaker 4: In Vernon, we were talking about some of the larger amount of vacates there. There was one 300,000 foot building that was low clear, inferior in quality, and that tenant moved to Orange County where they had other space. So a lot of it is movement around the markets and really very little movement out of the markets.
Speaker 4: As Michael mentioned, most of the tenants here are focused on the conception that's occurring and frankly anyone that didn't have to be here has left the same California market many, many years ago where their businesses didn't require them to be in the market here. Hey, Nick, and I'll just jump in in terms of the credit quality part of your question.
Speaker 5: You know, we continue to see very low levels of that debt below our expectations and certainly below what we've seen pre-COVID. You know, this quarter coming in at 20 basis points and that's certainly lower than historical averages at about 50 basis points pre-COVID.
Speaker 5: Our tenant base continues to be very strong and exhibits stability. Just to put the numbers around that, our watch list currently represents the lowest percentage of ABR over the past several years. We only have six tenants that we're currently monitoring on that watch list of over 1,600 tenants. There are rotation events for
Speaker 10: So we're continuing to see very strong performance out of our tenant base. That's very helpful. Then maybe turning to the acquisition pipeline, have you seen any sort of shift on the types of assets in there, maybe more value add versus core, and that you mentioned a little bit more sale lease back in this quarter? Let me know in the comments below.
Speaker 4: very very little of what we bought year to date didn't have income in place. The inbound yields on the year-to-date acquisitions are about 5.1% with projected stabilization of 6%.
Speaker 4: And so it you know today we have more opportunities to buy buyout assets that have strong cash flow in place.
Speaker 4: and so we've we've sort of been focusing and looking for those type of opportunities in the market at the moment.
Speaker 9: That's it for me. Thanks. Thank you. Our next question has come from the line of John Kim with BMO Capital Markets. Please proceed with your questions. Thank you. Good morning. For various reasons, there has been a pickup in on-shoring or near-shoring, and I was wondering how you think that impacts your markets.
Speaker 9: And if this trend continues, are there markets outside of SoCal that look potentially attractive to you?
Speaker 2: Hi John , thank you so much for joining today. There may be a trend to nearshoring or onshoring, but we're not really seeing an impact. We don't expect to see an impact with regard to our tenant base because again, they're disproportionately serving consumption. So they're less concerned with where the goods come from. So we don't really see that. Generally, it's probably a good thing for our tenants.
Speaker 2: And no, we're not really looking at other markets. We think that we're focused on the strongest market in the country. We currently have a mere 2% market share in infill Southern California. This is where we believe we can create the most value. I think I mentioned in my prepared remarks, for instance, we have over a billion square feet built before 1980 right here in our own backyard. So we have a nearly limitless palette of value creation in front of us.
Speaker 9: probably for many management teams to come at Rexford. So no, we're not looking, and we don't really have a view on other markets. Okay. Your tenant improvement costs were low this quarter compared to prior quarters. I'm wondering if this is just a sign of the market, or is this quarter just unusually low, or should we go back to trend later this year?
Speaker 5: Hey, John . I think this quarter is just unreasonably low. We did a fair volume of renewal versus new leasing activity this quarter and have not seen a material change in terms of TI's. They've actually been really low for the past several quarters and expect for that trend to continue.
Speaker 9: Thank you. Questions come from the line of Vince Devoney with Green Street. Please proceed with your questions.
Speaker 6: Hi, good morning. Could you discuss how you view your cost of capital today? It's just a bit more complicated than normal given you're doing lease-backs. It's low five initial yield while your implied cap rate's in the low fours, but that's on today's NLI and obviously there's a big mark to market there.
Speaker 9: How do you think about the attractiveness of your cost of equity when making some of these acquisitions in the first quarter?
Speaker 5: Thanks for your question. We will continue to be, we have been and will continue to be extremely selective and focused on opportunities that are going to drive a creative cash flow and long-term NAV growth. As we've discussed in the past, we take a long-term view on our cost of capital and that's how we're making our capital allocation decisions today.
Speaker 5: You know, our valuation remains very attractive. And when you take into account the higher yields at which we're solving to today, 6% on a stabilized basis, you know, even at today's higher cost of capital, for every dollar that we invest, that investment is 40% more accretive to earnings or core FFO compared to our 2022 investment. So, said another way, the higher yields at which we're solving to today are more than overcoming.
Speaker 10: today's higher cost of capital and we're driving substantial substantially more accretion. Oh that's helpful color are you able to share you know maybe what the unlevered IRR you're expecting on that kind of sick stabilized deal and you're sure it's kind of what you guys are solving for on an unlevered IRR type basis.
Speaker 4: We look at IRRs as a guidepost on some of the acquisitions, but we're mainly focused on the cash flow and as Laura mentioned, the accretiveness of the cash flow that we're generating through these investments.
Speaker 10: Okay, got it. And then another one for me, just kind of a sale lease-back activity. I'm curious if you think any of the sale lease-back transactions are a direct result of the banking crisis and tighter debt availability for some of these users, if you make a sale lease-back more attractive to them. And if that's the case, if you think sale lease-backs may be a...
Speaker 4: Kind of a growing part of the acquisition pie over the next few quarters or so Yeah, well we've we've always done selling spec transactions We can't predict the timing of when when they happen But you know obviously this quarter had had more selling specs than others
Speaker 4: You know, it could very well be a more attractive source of capital to some of the people we're working with, but it's just really hard to predict going forward what that volume could be if it would be increasing or more in line with what we've seen in the past.
Speaker 10: Okay, great. Thank you.
Speaker 9: Thank you. Our next question has come from the line of Vikram Bahl
Speaker 11: Thanks so much for taking the questions. Maybe just first one, the dispersion you referenced, sort of your own portfolio versus peers that you're starting to see. I'm assuming that's a bit of a change versus say the last two years when sort of everything was doing very well. Can you maybe just give us some thoughts on…
Speaker 2: or maybe more color and anecdotes on how much this dispersion can widen as we go forward in terms of say vacancy or market rents or maybe even like TI packages. Hey Bikram, it's Michael. Thank you so much for joining us today. Maybe I'll talk a little bit how the dispersion is reflecting our performance and then maybe Laura Howard can drill down to a little bit of the operational.
Speaker 2: percent CAGR on our FFO per share growth over called the last five years or so. And the peers have been around 10%. So we've generated around 50% greater FFO per share growth as compared to the peer set. And I think that is a direct result of the Rexford business model. Because to your point, industrial has been pretty healthy you know for the last five years.
Speaker 2: much more expensive than it is today. And so we knew to have a great business, we had to be able to create value at the property level without the tailwinds that we've had in the last five or 10 years.
Speaker 2: And so it's that physical repositioning, the intrinsic value creation in the assets that truly sets Rexford apart, and volume at which we're able to do that. And that's really the differentiator. And I think as we move forward, as the tailwinds maybe diminish for everybody, right, as markets normalize a little bit and we don't see the crazy transient demand that we saw, and the acceleration in demand that we saw.
Speaker 2: Hopefully I answered that first part of it and open it up to Howard or Laura if you wanna dive into more of the components in the operational level.
Speaker 5: Vikram, thanks for joining us. I'll just add a little bit more color in terms of your comment around the relative performance. Even in the frenzy market that we were in over the past couple of years, our portfolio still was differentiated. From our market rank growth perspective, our portfolio market rank growth increased to
14% more than the overall until Southern California market did. And then just kind of diving into some different dynamics into these different markets, you know, central LA as an example. And the period of 2020 to 2023, market rank growth and the...
central LA market was 61% and Rexford's portfolio market records was 95%. So there has continued, there has been a bifurcation and a differentiation of Rexford's portfolio because of our high quality, higher functionality product. And we're starting to see that, as you mentioned, that bifurcation expand and which we would expect.
Okay, that's helpful. I guess just to follow up on what that is, if you're anticipating more and more of this bifurcation even within your sub-market, your grander sub-market, do you expect when you gain shares that your vacancy remains stable, others see higher vacancy?
maybe partly as you said because of normalization, partly because of economy, could this become a more competitive market, meaning more TI's, more incentives to just you know garner share, your peers said just being more competitive? You know if you want to compare it for instance the pre-pandemic periods, you know concessions were exceptionally low.
and market vacancy was around 2% plus or minus. So if we're considering that to be, generally speaking, a normalized market, then we would not expect to see any material or dramatic change in terms of concessions and whatnot and availabilities. And frankly, based on the activity that we're seeing today, given the level of uncertainty in the market and the world,
we focus on low finish industrial.
tennis moving them out of our spaces with relatively low frictional costs and so even even when there is a change in the market that change is relatively small in terms of those costs.
of our spaces with relatively low frictional costs. And so even when there is a change in the market, that change is relatively small in terms of those costs. Makes sense, thank you.
Thank you. Thank you. Our next question has come from the line of Mike Mueller with JP Morgan. Please proceed with your questions. Sorry about that. Yeah, hi. Just a quick one. On the redevelopment pipeline, I mean, most of the projects have stabilized yields in the six to seven range. But as you go through the list of what's the process and some of the planned ones, there are some that are in the mid-four.
repo redevelopment information that were purchased probably a year plus ago when market yields were a little bit different. And there's a bit of conservatism built into some of those numbers. You'll see us quarter to quarter updating.
based on changes in construction costs and market rents. And incidentally, recently we did make some adjustments based on construction costs that, not necessarily the costs coming down, but the increases in construction costs that we build into our projections were moderating. Last year they were about.
Got it. Okay, that was it. Thank you.
Thank you. Our next question has come from the line. It's Craig Nelman with Citi. Please proceed with your questions.
Hey guys, thanks for taking the follow up. Laura, I just want to circle back real quick just to clarify. I think you guys kept the 15% market growth estimate intact, but you had mentioned when you went through the puts and takes on the sequential change in the market, a 300 base impact.
from changes in the quarter of market rents. I'm just trying to get at, are these, should we be able to extrapolate the 300 base points into that market rent growth, or could it seem like that would extrapolate to a lower value than the 15%, or could you just give us some color on kind of maybe how you get that 15%, how you stay comfortable with.
keeping it there given, you know, maybe some of the
the broker reports out there. Any color would be great. Yeah, absolutely. Thanks Craig for your question. In terms of our market rank growth forecast, we're continuing to assess that year-over-year growth at 13.5% is pretty close to that 15% number and the sequential growth that we saw of about 3% is consistent with our projections.
Maybe it's important to discuss how we get to that market record forecast. First of all, we generate the forecast based on our current activity in the market and within our portfolio. Year to date has been strong. We've talked a lot about this on this call. Occupancy has held steady in our portfolio. We continue to achieve high spreads above our underwriting.
Rent steps continue to be favorable. Retention was the second highest level this quarter that we've seen in five quarters. Overall indications are that we continue to see strong demand within the portfolio.
That's the first factor that goes into our overall forecast for the full year. The second factor that goes into it is our ongoing informational advantage that we talked about on this call. Our tenant outreach, our deep dive into the regional tenant demand within our Insell Southern California market, and we're continuing to see a really wide diversity of demand. We talked about
you know, the tenant requirements that we're tracking on the market that our customer solutions and leasing team is tracking and then the three million square feet that's proprietary to Rexford. So, and that three million square feet that's proprietary to us has actually grown. So, I think all of those factors and
including the overall and ongoing persistent supply demand imbalance within our infill markets, is how we get to that forecast and how we get comfortable with that rate growth projection for the full year. But there's a little bit around. You're rounding up a little bit to 15, it sounds like.
Well, we're not providing the forecast on a quarterly basis, but for the full year, we're comfortable with that 15%. Okay. Great. Thanks for watching this1
Thank you. There are no further questions at this time. I'd like to hand the call back over to management for any closing comments.
We'd like to thank everybody for joining Rexford Industrial today. We wish you and your families a happy, healthy period over the next three months, and we look forward to reconnecting in about three months. Thank you so much.
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.