Q2 2024 Rexford Industrial Realty Inc Earnings Call
Yes.
Thank you for standing by my name is Martin deep and I'll be your operator today at this time I'd like to welcome everyone to the Rec Sport Industrial Realty, Inc. Second quarter 2024 earnings call I'll watch been placed on mute to prevent any background noise.
The Speakers' remarks, there will be a question answer session if you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you like to withdraw your question Press Star. One again. Thank you I would now like to turn the call over to David Lanzer General Counsel.
May begin.
We thank you for joining a rexford industrials second quarter 2024 earnings Conference call. In addition to the press release distributed yesterday after market close we posted a supplemental package and investor presentation.
Investor Relations section on our website at Rexford industrial Uh Huh.
On today's call management's remarks, and answers to your questions may contain forward looking statements as defined by federal Securities Law.
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 10-K and other SEC filings Wexford and industrial assumes no obligation to update any forward looking statements in the future. Additionally, certain financial information presented.
On this call represents non-GAAP financial measures, our earnings release, and supplemental package present, GAAP reconciliations and an explanation of why such non-GAAP financial measures are useful to investors.
Today's conference call is hosted by Rexford Industrials co Chief Executive officers, Michael Frankel, and Howard Schwimmer, together with Chief Financial Officer, Laura Clark, who 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 David and welcome everyone to Rexford Industrial's second quarter earnings call I'll begin with a few remarks, followed by Howard who will provide market and operational detail then Laura will provide our financial results and outlook.
Like to begin by thanking our expert team for your strong results.
Administrative the strength of our expert platform and the resilience of our infill southern California industrial market.
As a reminder, we are the only industrial REIT focused exclusively on investing principally in smaller and medium sized spaces within infill southern California, where we find superior tenant demand fundamentals and substantial opportunities to add value.
With our portfolio's average space size equal to 26000 square feet, we operate in a fundamentally different segment of the market as compared to the big box market comprised of buildings in the 250000 to over 1 million square foot range.
Our segment of the market is a much larger portion of the market is a much higher barrier segment of the market and our target infill tenant base has proven to be more stable through cycles as compared to the big box market within southern California.
Turning to our second quarter performance. We are pleased with the team's strong operating results, which continue to track the expectations. We set earlier this year.
On the leasing front the team completed $2 3 million square feet of leasing activity generating leasing spreads of 68% on a net effective basis and 49% on a cash basis, we generated 400000 square feet of positive net absorption to end the quarter with our same property portfolio occupancy up 70 basis points to.
<unk> 97, 3%.
Our second quarter consolidated net operating income was up 21% and our <unk> per share it was up 11% compared to the prior year quarter.
Net operating margins were up 50 basis points to 77, 7% compared to the prior year quarter, demonstrating the quality of our growth through increased operating leverage.
As expected our infill industrial markets continue to normalize from the pandemic era levels of frenzy demand, which continues to be impacted by persistently high interest rates and uncertain domestic political environment and ongoing global unrest.
Despite these macroeconomic factors are infill southern California industrial markets continued to demonstrate relative resilience supported by the strongest underlying long term supply demand fundamentals of any major industrial market in the nation.
Drilling down into our segment of the infill Southern California industrial market, we continue to see a distinct bifurcation and relative performance in favor of higher quality highly functional small to medium sized spaces compared to the older vintage less functional product that makes up the vast majority of our $1 8 billion.
Square foot infill market.
The long term outlook for our infill southern California market remains very positive due to a virtually incurable long term supply demand imbalance the near term outlook for market rents may continue to reflect a nominal level of volatility. However, we believe the foundation for market rent growth is inherent within our markets.
Our tenants are indicating through their behaviors that they expect to pay higher rents in the future.
They are expressing that expectation through their proactive renewal activity and through the average compounding 4% annual contractual rental rate increases we are embedding within our leases.
The relative resilience and superior performance of the Rexnord portfolio reflects our differentiated business model and market opportunity focused on value creation.
The single greatest driver of our growth over time is generated through our value add modernization repositioning and redevelopment of vintage and underutilized properties within southern California.
With over 1 billion square feet of product built prior to 1980 within our target infill market, we benefit from an almost limitless pallet of opportunities to drive value creation into the foreseeable future by substantially increasing the cash flow generating capacity of these properties through physical improvements that or not really.
Ryan upon market rent growth to create value.
Retrofits forward internal growth opportunity is also substantial and reflects the balance and strength of our business model.
Over just the next three years, we expect cat, we expect cash NOI to increase by $229 million or 35% driven significantly by our value add property improvements repositioning and redevelopment.
Importantly, this assumes todays rents and no future acquisitions.
With that I'd like to thank the rest of our team once again for your sector, leading results driven by your entrepreneurial passion for creating value.
Lastly, I am pleased to acknowledge that Howard and I, just completed our 20th anniversary as partners growing Rexford together.
It continues to be a true privilege and great fun to work with you and the entire rexford team and I couldnt be more excited about the next phase of <unk> growth and with that I'm pleased to turn the call over to Howard.
Thank you Jonathan.
Thank you Michael It continues to be an incredible journey.
We're also very excited and direction of future growth.
Retro delivered delivered solid second quarter operating results delivered by the sustained strength of our high quality portfolio and great execution by our entrepreneurial team.
As Michael mentioned, we continue to see a bifurcation in performance between higher quality product compared to the older vintage.
Flexible product that represents the majority of our best infill Southern California market it.
It is important to recall that our value creation mandate focuses on converting those older vintage properties into the most functional highest quality assets within their respective submarkets. These.
These modernization and functional improvements substantially increase the utility and the per square foot value of our spaces for tenants positioning with experts to out compete through all phases of the economic cycle.
The favorable relative performance of our portfolio compared to the market is noteworthy.
For example, our 400000 square feet of positive net absorption equal to 80 basis points of our total square footage dwarfs activity in the market, which saw 10 basis points of positive net absorption according to CBRE.
Our positive net absorption contributed a 70 basis point increase in our same property occupancy ending the quarter at two 7% vacancy, which compares favorably to the overall until market vacancy of three 9% According to CBRE.
Another positive leading indicator is our continued strong renewal demand in the second quarter with 79% net effective rent spreads and 58% cash spreads. This resulted in a strong second quarter retention and backfill rates of 80%.
Looking at general market conditions within infill Southern California second quarter leasing activity was strongest in the 10000 to 100000 square foot size segment up 24% compared to the prior quarter. According to CBRE with about 60% of our expert AVR, Kevin for spaces below a 100000 square.
Our feed and given our second quarter average lease size of approximately 18000 square feet are irreplaceable assets are ideally positioned at the strongest advanced segment in the market a direct result of <unk>.
Strategic value driven business model.
Regarding rent levels as expected, we continue to see choppiness across submarkets at size ranges with rents down approximately 2% sequentially for highly functional product comparable quality to our record assets year over year, taking rats for high quality product comparable for our portfolio.
About four 5%, which compares favorably to the overall infill market.
The relatively favorable performance of well located highly functional product within our markets is logical.
As we have generally noted over recent quarters that a majority of vacancy contributing towards negative absorption in the market.
Typically comprised of lower quality older vintage or obsolete products.
Although we expect some continued near term relative volatility the current supply demand curve backdrop seems to be supporting current rent levels within a relatively tight range and maintaining the foundation for potential future growth.
This favorable backdrop is further supported by the fact that it is nearly impossible to materially increase net supply within our markets.
Instruction of new product in our size range is at near Zero and is expected to continue to be de minimis with little construction, what little construction may occur within our size range is generally replacing older product and is not adding to net supply.
Turning to record investment activity during the quarter, we completed a $170 million of investments comprising approximately 500000 square feet generating an aggregate initial yield of five 8% and a projected unlevered stabilized yield of six 1% on total cost.
Looking forward, we currently have approximately $160 million.
Of investments under contract or accepted offer which are subject to customary closing conditions.
Moving to our capital recycling program during the quarter, we disposed of four properties for an aggregate sales price of $37 million generating a weighted average 12, 9% Unlevered IRR. In addition, we have over $20 million of dispositions currently under contract or accepted offer which.
Subject to customary closing conditions.
During the quarter and subsequent to quarter end, we at least for repositioning and redevelopment projects totaling approximately 380000 square feet across the Orange County, San Gabriel Valley, and South Bay, Submarkets, which are projected to stabilize at an aggregate eight 8% unlevered yield.
We stabilized two projects with rent commencement in the second quarter totaling approximately 85000 square feet with a total investment of $54 million generating a weighted average unlevered stabilized yield of nine 5%.
Looking forward, we have $4 2 million square feet of value add repositioning and redevelopments in process or projected this start.
Over the next 18 months with the remaining incremental spend of approximately $340 million.
Which are expected to deliver a eight 6% unlevered stabilized yield on total investment.
Finally, I'd like to thank our <unk> team here dedication in delivering another strong quarter of results now I am pleased to turn the call over to Laura.
Thank you Howard and thank you all for joining us today.
Second quarter results were strong with SSO in the quarter at <unk> 60 per share, reflecting 11% year over year earnings Craig.
Same property NOI growth was 6% on a net effective basis and nine 1% on a cash basis, driven by strong leasing spreads executed over the trailing 12 months at 61% and 43% on a net effective and cash basis, respectively.
Our tenant base continue to exhibit strength and resiliency as represented by continued nominal levels of bad debt as a percent of revenue at 30 basis points in the quarter.
Moving to the balance sheet, our low leveraged balance sheet strategically positions record, allowing us to be opportunistic recycles selectively capitalize on accretive opportunities that deliver earnings per share growth and net asset value appreciation.
At the end of the second quarter net debt to EBITDA was four six times near our long term target leverage range of four to four five times.
We currently have nearly $2 billion of total liquidity comprised of approximately $830 million and forward equity proceeds available for settlement $126 million of cash on hand, and our $1 billion revolving credit facility, we have no near term debt maturities until mid two.
26, <unk> main extension options.
Record differentiated business model is positioned to continue to deliver near and long term outsized NOI growth.
With $229 million of incremental cash NOI growth embedded within our in place portfolio realized at all over the next three years and irrespective of market contracts.
The largest component of our embedded growth is generated from our value add repositioning and redevelopment.
It is expected to deliver $95 million of incremental NOI.
The mark to market of our below market leases to current market rates is currently 38% on a net effective basis and 26% on a cash basis.
And it's projected to generate another $82 million.
In addition, the average annual embedded rent steps of three 7% for the total portfolio, which is up 10 basis points compared to prior quarter.
Is estimated to contribute $47 million.
Accretion from second quarter investments is expected to deliver an additional $5 million.
Together cash NOI is projected to grow to $886 million over the next three years equal to 35% internal NOI growth note. This strong embedded growth assumes today's market rents and no future acquisition.
Turning to guidance, our 2024 <unk> per share guidance range has been increased by one.
Element of the range and is now $2 32 to $2 34.
Representing 6% to 7% year over year earnings per share growth.
Note that our guidance range does not include future acquisitions dispositions are related funding that is not yet closed.
Full year 2020 for our same property cash and net effective NOI growth is estimated to be 7% to 8% and four to five to five 5% respectively.
This remains in line with the expectations, we laid out at the beginning of the year.
Other components of 2024 guidance projections and cleared.
Average same property occupancy of 96, 5% to 97% in line with our prior projections guiding.
The guidance does imply a deceleration in the occupancy in the second half of the year. This was contemplated in our initial guidance as we have a few expected move outs in the third and fourth quarter.
Full year net effective and cash leasing spreads are now estimated in the 55% and 40% area respectively. Excluding the large prior to lease extension, we executed in the first quarter.
When compared to the prior quarter the decrease in leasing spreads.
<unk> is primarily driven by the change in the mix of leases, we expect to execute in the second half.
Concession for the full year are projected to be in the one five months areas consistent with our prior forecast while concessions year to date are slightly above our full year estimate the leases we expect to execute in the second half of the year are projected to have lower concessions driven by the composition of new and renewal leases term link.
And specific submarkets.
Full year bad debt as a percentage of revenue is unchanged at 40% to 50 basis points.
And lastly, the full year incremental <unk> per share contribution from repositioning and Redevelopments is one point lower than the prior quarter estimate.
Rent commencement timing has been pushed by an average of one month.
Some properties outperforming reflecting faster lease up and a few properties where rent commencement was pushed out by construction delays driven by construction delays, mainly associated with municipal and utility approval as well as expectations around the timing of lease up.
Looking forward the incremental NOI contribution from repositioning and redevelopment projected over the next three years is in line with our prior quarter production at $95 million.
Finally, I would like to thank our rexford team for your relentless pursuit of excellence that drives the successive record today and then tailor our exciting future ahead.
We now welcome your questions operator.
Thank you we will now begin the question and answer session.
<unk> would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue, we'd like to withdraw your question simply press Star one again.
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Your first question comes from the line of Craig Mailman with Citi. Please go ahead.
Hey, it's actually Nick Joseph here with Craig I guess, just maybe first on external growth I was hoping you could touch on the appetite for acquisitions today, and what type of opportunities that youre seeing.
Hey, Nick it's Michael Thanks, so much for joining US today, great question and look our appetite for acquisitions is as it's always been in the sense that we look for the quality of the acquisitions, we look for appropriate yield profiles, we look for investments to deliver the quality of products and the cash flow per share growth that we feel is going to be accretive to the portfolio.
Near and long term basis, and thats going to contribute strongly to NAV growth and so that is the criteria. So again, we don't put volume targets out there internally or externally.
For the very reason that we're solely focused on quality.
And then I guess.
Just on the announcement in June on looking for a CFO I was hoping to get an update on the timing there.
And kind of the opportunity for the newly created CLO positions.
Yes, that's a great question and we couldnt be more excited about the opportunity for the company.
Eventually the elevate Laura Chief operating officer role and as you mentioned we are in process.
<unk> four as a CFO replacement.
Laura has created some big shoes to fill so we're very pleasantly surprised in the early stages of that recruiting effort to see some fantastic candidates.
We're looking to recruit the best athletes on the planet so hard to predict how long that will take but we're seeing great progress.
Thanks, and then just just on the CLO opportunity and how that will add to the organization.
Oh, yes, we see a range of opportunities in the company first of all Laura.
Talked about this I think before as well, but we look at plays a pretty broad role as the CFO, probably a little more broad than your typical CFO generally speaking and so we see this as a natural extension of the impact that Laura is able to make in the company and as we grow today, we're about 50 million square feet with a significant opportunity ahead of US for addition.
Growth and we see a lot of opportunity to drive operating leverage to drive further efficiencies in the business and to become better at what we did.
Thank you guys.
Our next question comes from the line of John Kim with BMO capital markets. Please go ahead.
Thank you good morning, I wanted to ask about the occupancy guidance I know Laura you touched upon it a little bit with some of the move outs expected.
In the second half of the year, but how should we be modeling the 50 basis point decline.
Will it be kind of even throughout the next couple of quarters or will that possibly.
And the year below the 96, 5%.
Hey, John.
Thank you so much for joining us today in terms of occupancy we don't guide on a quarterly occupancy rate, but what I can say is that there is.
Move outs are projected in later in the third quarter and into the fourth quarter.
Okay.
Another question on the on commenced leases I think it was like eight $8 million of ABR, which is a little bit over 1%.
Are these going to be commence.
In 2024 or thereafter.
Uh huh.
It certainly varies and the commencement of those is included within our current within our current guidance.
Got it.
I know you don't provide the annual mark to market by year, but the last time you did provided the <unk>.
Peak years of the Mark to market on the exploration, where this year in 2026 and I am wondering if thats still the case and you've done some acquisitions since then.
Yeah.
We do have significant mark to market I wouldn't say so embedded within the portfolio. This year. This quarter alone we were able to capture $13 million of that and we have just over the next three years, another $82 million of NOI to capture through that that conversion of those below market rent to market rates.
And so that will occur over the over the coming years, and we're not going to guide on the mark to market.
<unk> forward by here.
Understood great. Thank you.
Our next question comes from the line of Blaine Heck with Wells Fargo. Please go ahead.
Great. Thanks, Michael I think you talked about near term nominal volatility in market rents. That's expected to continue so I just wanted to get yours, and maybe Howard view on.
What the catalysts are catalysts might be to see rent growth in flex from the flat to negative growth we've seen for several quarters now and any thoughts on kind of potential timing from your standpoint.
Hey, Brian. Thank you so much for joining us today and it is a great question, maybe that's one of a million dollars questions today, but unfortunately, it's just hard to predict timing.
But I think we're super comfortable with the fact as I mentioned that the potential for rent growth is truly inherent in our markets. The fundamentals the long term underlying fundamentals are exceedingly strong.
And in fact in some ways the market is performing better than it was in 2019, particularly if you look at the embedded rent steps, where we're placing our leases.
And given the proactive as I mentioned.
Activity in the tenant base the diversity of demand in the tenant base. So we still see a high level of e-commerce interest in our leasing activity.
And we're seeing a broad base from a sector perspective, a broad based demand base today.
From consumer products.
Household goods.
Pure distribution companies.
Actually apparel is coming back.
Aerospace pharmaceuticals, so I think that all those are very positive leading indicators, but difficult to predict the timing of when we start to see more persistent growth.
Okay.
Okay, Great. That's helpful and I think you alluded to this but obviously discussions around the election and potential impacts of new legislation in each scenario had been picking up and I think with respect to industrial a lot of the conversation has been focused on potential impacts from increased tariffs. So just wanted to get your thought.
On that subject and whether you guys have any concern on the potential impact to demand in the southern California market.
Well, we've probably seen a slight uptick in interest from some of the Asian importers, who are more aggressively looking for space.
Within infill southern California in anticipation of the possibility of higher tariffs for their goods coming overseas. So they are looking maybe for some more manufacturing domestically and.
And from other locations like Mexico. So we do see some early indications of that which is incrementally favorable for us actually.
And historically when we saw tariffs established and we really didn't see any negative impact to demand in our markets.
Great. Thank you guys.
Our next question comes from the line of Mike Mueller with JP Morgan. Please go ahead.
Yes, Hi, I was wondering can you talk a little bit about the bid ask spreads that you're seeing in the market for acquisitions and I apologize if I missed it for your pipeline of transactions.
At our under contract whats the mix of off market opportunities in there.
Yeah highlighted Sir Howard can hear you Paul.
Thanks.
Just a question on the latter part of your question, we really distinguish between offer on market in terms of the pipeline.
For the year over 90% of our transactions that we've closed have been off market or lightly marketed.
Let's see.
Inefficiently above prior years.
And then as far as bid ask spreads.
Yes, it's still that's still out there.
We've obviously had success in closing transactions, but overall, if you look to the market.
Transaction volume has been fairly light, which seems to indicate that there is still is.
Some significance in terms of that bid ask spread.
Got it.
Okay that was it thank.
Thank you.
Our next question comes from the line of Samir Khanal with Evercore ISI. Please go ahead.
Hey, good morning, Howard and Michael.
And so just in terms of market rent growth I know you don't know.
Provide a forecast.
For the year, but as you think about the inland Empire West I mean that got it.
Incrementally worse in the quarter, just trying to understand like what are the dynamics youre seeing on the ground there.
Is this.
Do you feel like we're sort of getting to the bottom here and you feel like we're turning the corner.
Or just trying to understand a bit more kind of what youre seeing on the ground there.
Hi, Sameer its Michael Thank you so much again for the question and for joining US today. That's a great question and I would say from our current activity in the inland Empire West Submarket actually were.
We're seeing a lot of good activity strong activity strong lease up for us internally in that market and I'll remind you that that market saw the most aggressive acceleration in rental rates through the pandemic of any submarket within our within our region here in southern California, and it actually today.
Despite the recent relative volatility, it's still probably has the highest rent growth since the beginning of the pandemic of any regional sub market in the region. So I think that.
Do you want the truth its a strong performing market. Although again as we said you should expect to see some nominal levels of volatility quarter over quarter.
Okay got it and I guess on the redevelopment pipeline just in terms of the lease up there with demand normalizing I mean, how should we think about the timing of the lease up are you seeing any sort of.
Slippage in timing at all I mean, I'm, just trying to get an idea of kind of the lease up of the pipeline given that demand continues to normalize.
Sure Hi, a customary tower.
There is.
Always some components that are moving around we've had a few delays here and there related to some permitting utility timing.
And then we've had some things that.
Sure.
Look forward a little quicker.
As well as our sales on the leasing side of scaling hedge rates, although we have some adjustments in timing related to.
Karma is et cetera leasing timeframe, sometimes given us.
All in all just a nominal change when you look in aggregate.
Over the prior quarter.
Yeah, and generic participants in contact center.
Given.
A few pushes in terms of rent commencement that currently some that we've had that are accelerating the nominal changes about one month from our prior forecast.
Okay.
Okay. Thank you.
Our next question comes from the line of Vikram Malhotra with Mizuho. Please go ahead.
Good morning, Thanks for taking the questions maybe just on the redevelopment side you mentioned.
Just been pushed very modestly by one month in terms of I think you said leads up our stabilization I'm just wondering.
For projects that may be and that's the average with projects that may be taking a bit longer sort of are these more gain in delays or are they just construction is taking a bit longer.
Because of supply chain issues like what whats, causing the delay in your stabilization estimates.
Vikram.
All of the above right.
As Laura mentioned, sometimes we're able to push things a little quicker than other titles. There are situations, where they're just out of our control we are dealing with cities and utility companies and we just can't control the timing on those.
But again these are these are fairly nominal adjustments.
Yes.
And the market.
As we've indicated is still doing pretty well and strength.
In terms of leasing activity.
So we're optimistic that it will actually be some of these timeframes as we look forward and think about I'll also add that if you look at it.
The one nominal one month push in terms of timing, but if you look at our stabilized yield a stabilized yield are largely now right in line with our expectations that we set at the beginning of the year for repositioning doing development in aggregate.
Okay. That's helpful.
So obviously you had good spreads this quarter you mentioned the cash Mark to market is now 26% I think so if I just take that forward and use your estimates for the three year opportunity on mark to market.
<unk> flat occupancy.
I'm not putting words in a month, but I'm sort of getting to six ish percent same store NOI growth next year and.
And if I never that up add your benefit acquisitions I'm. Just wondering can you still generate sort of that 14% to 17% ethical good mix in the next two years or does that get pushed out or the trajectory to get changed a little bit over the next few years.
Yes, it's a great question.
In terms of you know at the beginning of the year, we provided a forecast and I'll look forward to our <unk>.
Expected.
Three year average annual <unk> per share growth and we provided a range of 11% to 13% over the next three years and if you think about our guidance for this year and implies 6% to 7% growth. So that would imply a higher growth rate for <unk> per share and to 'twenty five 'twenty six.
And while we're not going to update that forecast today, we're going to update that on an annual basis I will say that we are still comfortable with the projection of 11% to 13% average annual <unk> growth over the next three years.
Got it and then just one last one.
It's clear you mentioned versus your product and portfolio.
There's a difference between sort of the average older product, but I'm wondering just maybe private players that are somewhat similar to your portfolio.
The other tactics differing from those private players in terms of lease up or gaining share like are they pushing incentives are prices.
And could that dynamic cause.
Maybe a bit somewhat of a mini price war over the near term just some of the larger private guys, who have maybe similar portfolios.
I have a premise Michael thanks, again for joining us today.
When you think about the landscape of ownership within our infill market is as you say predominantly private ownership.
We call mom and Pops, because they are not real estate professionals, who own the vast majority of our infill market again comprised of smaller and medium sized properties.
And yes, they are relatively passive.
Owners, so they're not generally investing in improving in their assets number one and then there is another very small segment.
We have some private people not public reads you are investing for the purpose of generating acceptable yields relative to their cost of capital.
That frankly is a really small segment of the marketplace.
Nobody with anything even close to the scale of rexford, not even a rounding error frankly and honestly. There is just we don't really see anybody deploying a strategy of any magnitude that we would call material improve.
Improving assets the way Rexford is frankly.
Some very small players here and there but the.
Vikram: But keep in mind Vikram Eastern Europe, private owner and you have a lower quality asset. It is a price war because theres not as much value on that asset and the utility for the tenant to use the space and the only way they win is on pricing.
Okay.
Speaker Change: Which is in contrast to our property frankly, because we're investing we're improving the functionality. We're complaining we're competing on a different playing field.
Higher quality highly functional space.
Of which there is an exceedingly low availability in historically and typically through periods. When we see the stated for instance market vacancy.
Let me drill down into the market vacancy generally speaking and we look at all of them are of the vacant buildings in the market at the time, how many of those buildings actually begin to compete with the <unk> portfolio on a quality functional locational basis, and typically it's well under half the stated market vacancy rate that actually even begins to compete with your extra on our quality and functional basis.
So it is the tail of a bit to markets and I know that might sound a little bit counterintuitive, but remember rexford is only about two 7% market share. So it's.
So it's through the quality and the functionality that we are really able to compete on a different playing field.
Thank you.
Our next question comes from the line of Greg Mcginniss with Scotiabank. Please go ahead.
Hey, good morning out there.
So based on the opening remarks, it sounds like new supply is not a significant factor within the Submarkets that Rex was operating so the increase in vacancy purely a demand side concern and I understand predicting an inflection point is difficult.
In the near term what are you expecting.
<unk> growth based on tenant industry demand trends that youre seeing right now.
Hey, great. Thanks, so much for joining us today.
So in terms of supply.
When we talk about the fact that you can't increase net supply for all practical purposes, we're really talking about the smaller and medium size segment of the market. Our average space size of 26000 square feet and that is the size, where it simply it's not economical to construct new product. It just doesn't it doesn't pencil hasnt for very very long time, where you see some.
Speaker Change: Supply increases in the larger size spaces.
Which again is not generally our target market and I think thats been disproportionately impacting the vacancy factors. The other the other bigger factor frankly also has the lower functional space the obsolete space, which.
In our markets has been the primary driver.
Contributing to any negative absorption and increase in vacancy in our market. So again not directly competitive to the rexford.
Product.
And with regard to market rents again, we're not really giving any guidance.
Speaker Change: We're not going to speculate on where market rents are gone.
Okay I can understand that.
Different type of product that is competing but alright.
The disclosure that you do provide.
Rent growth is for our comparable portfolio. So you are seeing.
Yes.
The headwinds on rent growth.
Comparable portfolio basis, so I'm, just trying to get some understanding as to what you think in the near term as some of the factors that could be driving that higher or lower.
Yeah, no. It's a great point, thanks for the clarification, Yeah again, as we mentioned, we do see and expect to see some nominal levels of volatility in the occupancy and rents over the near term, but again I think as we described.
We see the foundation for the potential for market rent growth.
Within our markets today.
When sentiment turns that catalyst could be interest rate driven.
The other factors that we talked about we're certainly seeing a very strong broad base of demand out there.
So I think if you want my personal opinion off the record I'd say, it's going to be a little bit more macro driven frankly.
Yes.
Lora: Okay, Alright, Thank you and then one for Lora.
The midpoint and of course <unk> per share guidance implies an <unk> headwind for the back half of the year compared to the first half just trying to understand with some of the drivers are there.
Yeah, Great question in terms of the SSL run rate through the rest of the year.
I think it's important to kind of talk about a couple of items number one is.
It's a one time item this quarter, which was around interest income. So we did hold a higher cash balances. This quarter just as a reminder, we closed on.
On the convertible issuance that we did at the end of last quarter, and we hold higher cash balances associated with that 115 billion issuance.
And that resulted in higher interest income and we don't expect to hold cash at the same levels in the second half so thats about a penny.
There is another penny of impact from higher G&A that we expect in the second half of the year and our G&A guidance remains unchanged. It's just the cadence and timing of that G&A the timing of hiring.
Fourth quarter tends to run a bit higher because of bonuses and the CFO potential CFO hire is also included in the back half of the year. So those two items have about <unk> impact.
When you look at the run rate.
Okay. Thank you Laura.
Okay.
Our next question comes from the line of Nick Billman was Baird. Please go ahead.
Hey, good morning out there, maybe starting with Howard or Michael you talked a lot about product quality in this conversation.
<unk>, so maybe just what percentage of the Socal market do you view as competitive to yours, and then maybe tying that into a little bit on the acquisition opportunity set and what youre evaluating today whats the mix between redevelopment and repositioning versus say just our traditional stabilized.
Property.
Well on the first part of your question.
It's really market driven.
If you're in a market, let's say like San Fernando Valley, which was started in August development being developed more in like the 50 to 60 days.
The quality product and that market is as a percentage of total is fairly low where obviously you go to the western inland Empire the product quality is substantially higher.
So it's hard to just.
One one figure around at all.
This is a huge huge market and frankly, that's the advantage. We have here is really having a team focused on every opportunity every building.
So we really just look at it holistically and uncover those opportunities in the marketplace.
<unk>.
Was the second part.
What was the second part of your question.
Alright.
Next.
Transactions are kind of underwriting today between repositioning redevelopment versus traditional stabilized assets.
Hi.
Well, obviously with some of the opportunities we found that these higher yield profiles.
Those are very attractive.
As they come in with very little.
Very limited risk to them in fact, if you look at the portfolio of assets, we bought this year.
Everything came in at one point was at 4 billion or $1 3 billion.
That 98% occupancy, which is very different than you've seen in prior years, where we had a lot more value add where we were buying vacancy.
So and so some of these opportunities obviously coming in our <unk>.
Short term leases, where we're capturing income and are planning the projects will occur at a later date.
At these type of yields we're definitely leaning more on that in terms of a focus to current cash flow.
Where things are in the market today and.
And what I'll add to that.
Our acquisition opportunities that is very much curated by App.
And when we think about how we're investing capital we're very much thinking about the accretion that that's going to drive today and then how we're embedding that cash flow growth into the portfolio over time and so that's what drives the.
The decisions, we make around capital allocation and the opportunities that we're seeing in the market.
And I hate to add on but I will add one more.
Similar to that which is just that what you hear from Howard Laura is that our inbound yields are very strong on the acquisition activity, but that doesn't mean that we're sacrificing the stabilized yields in fact, the beauty of our buying is being able to do in this marketplace, where we have a lot of buyers not present is that we're able to drive current initial cash flow.
And still have higher stabilized cash flows on average than we were able to achieve let's say 345 or six years ago, and so that is really the beauty of the investing opportunity today.
That's very helpful. And then maybe following up with Laura sounds as though credit quality is kind of so and credit metrics are kind of tracking on the tenant side relative to the first quarter. So maybe clarify and correct me if I'm wrong and then if you could.
Just gave what the underlying sub lease percentages as a percentage of the portfolio today.
Yeah, absolutely yeah. So in terms of tenant health Marines extremely stable.
Have a watch list of tenants that we focus on it and that watch list is about five or six tenants and that's remained consistent really for the past several years, we have over 600 tenants. So our guidance implies bad debt in the second half of the year is about 30 basis points 30, 35 basis points and this isn't a reminder, historic.
Average kind of pre Covid ran about a 50 basis point area. So the net credit remains very strong and then in terms of sub leasing activity.
This quarter in our portfolio there were eight new sub leases signed representing about 275000 square feet that compares to 12 sub leases that were signed.
<unk> that were signed last quarter in the first quarter.
In terms of kind of.
Our historical averages I would say that that leasing activity is pretty much in line with what we've seen if I kind of look back over the prior five years on a historical basis.
That's very helpful. That's it for me thanks, everyone.
Our next question comes from the line of Camille Parnell with Bank of America. Please go ahead.
Hi, there it seems like the probability of East coast ports strikes is rising every day and the west coast.
<unk> benefiting.
From this so I know you operate and slightly different areas of the market, but wanted to get your views on how much of these port volumes do you think it's temporary in nature or are you starting to see excess warehouse capacity come down leading to any leasing.
Neil: Thanks Neil.
Sure.
Yes, I think thats definitely been part of the challenge in the marketplace.
On the three PL.
World, there's been excess capacity.
That capacity has to get absorbed before you see any dramatic increase in leasing even though the ports have had fairly large increases in the volume coming through.
And look at the end of the day in terms of is it should.
Be sticky or not.
From.
Neil: Asian ports is going to be the fastest entry point is the cheapest.
And test is we're not just obviously hit to L. A to distribute and move product into the middle of America and.
That's really what Gartner these ports and Thats the advantage that will continue to half year or so.
If that pricing and timeline changes obviously.
That could be.
To think about.
We don't see any dramatic change in that sense.
And even though there's obviously onshoring and some shifts in manufacturing that are occurring there.
There's still going to continue to be a tremendous amount of product that comes through the ports.
The good news for US is that we're focused on local consumption in our portfolio. So a lot of these trade flows and changes in terms of volumes through the ports.
Really don't have much if any of an impact on our tenants.
Needs within our market.
Thanks for the color there Howard.
Laura I wanted to clarify on your comment about concessions being lower in the second half.
Are you seeing a down shift because these markets are tighter or asked in another way. If you were to sign these leases a year ago with the concession levels be the same as what you are budgeting today.
Well in terms of in terms of concession on level of <unk> for the full year. We're estimating one five months concessions and that compares to last year on average concession for one month, so that one five months compared to one month.
Indicate and tick.
Pickup and concessions that I would say that we've expected that as the market normalizes I think one five months is more consistent with a normal market.
When you look at the concessions that we expect to execute in the second half and why we projected to be lower it very much depends on the composition composition of what we expect to sign the new and renewal leases. The term of those leases, obviously, a shorter term deals have lower concessions.
Markets the size of the units all of those are indications of concessions and so as we look forward. The leases that we are projecting to execute have lower compression.
Speaker Change: Got it and I just ask one more question.
Depending on which broker you speak to it seems like there are different views of where rents have peaked and declined two and if we just step back and consider that the average lease rate you executed in 2023 was at a 7% premium to market rents.
Are you still signing leases at these premium levels today or has that gap narrowed.
I think that the.
The premium you're referring to is just the typical that we're getting we're seeding and taking as compared to what we're seeing in the market again, it's a reflection of the higher quality of the portfolio and remember it's not just that.
Properties look better with.
We invest in these properties. So that you can stack more product in them you can utilize the clear heights inside the property, we create and enhance dock high loading and access to the property, we basically maximize the throughput of goods and minimize the cycle time of getting goods in and out so.
Our property is actually worth more to the tenants on a per square foot basis. So naturally you should expect that premium to continue and generally speaking it is.
Thank you for taking my questions.
Our next question.
Our next question comes from the line of Rich Anderson with Wedbush. Please go ahead.
Thanks, Good morning, My first Rexford experience. So thanks for having me.
<unk>.
The cash releasing spread of 49% I think you said for the second quarter and in combination with declining market rents.
At what point do you sort of see.
A material reduction in net debt cash releasing spread math.
Is it is it do you start to see it start to trend down meaningfully over the next couple of years or do you still have plenty of runway to continue to produce that type of number.
Speaker Change: Shareholders.
Hey, Richard and thank you for joining us for your first record experience.
Yes.
In terms of so I mean, I think that goes back to the mark to market right and so the mark to market that's embedded in the portfolio today and as I mentioned over the next three years.
As we roll these below market leases to market.
That's going to generate an incremental $82 million of NOI.
I expect that we'll be able to continue to achieve.
Leasing higher leasing spreads as we're rolling in places that were currently not going to guide around leasing spread expectations beyond this year or the mark to market, but I do what I do think it's important.
To point out that <unk> has a very differentiated driver of growth beyond the mark to market.
More significantly than the mark to market and in fact in that through our repositioning and redevelopment and the value that we're able to add to that.
When we add there and that really is the true differentiator of Rockford that enable that enables us to drive leading <unk> per share growth as we have demonstrated over the past five years. So as we execute on that repositioning redevelopments over the next three years is expected to generate $95 million of NOI growth.
We'll continue to differentiate our growth and if you really look back look back over the last five years, we have demonstrated that growth over the last five years <unk> has been able to achieved <unk> per share growth of 16% annually and that compares to the peers at 9% to 75% differential.
The Asian and that lever that we have that repositioning and redevelopment.
Is what will continue to differentiate us into the future.
Okay fair enough and so you pivoted to value added redevelopment and that was going to be my next question anyway, what is your comfort level of having investments.
In that important arm of your portfolio.
Your strategy as a percentage of total assets is it time to ramp that up or.
Or pull it back in again relative to the entirety of the of the company.
Yeah, I mean look as I mentioned.
That's the differentiator of our growth and a really important part of our strategy.
But we're going to balance that rate works with the core opportunities that we embedded into the portfolio. So that we can continue to drive that outsized <unk> per share growth consistently and overtime and.
And also risks.
We think about it a little bit differently than most.
Most.
Discussions would be about a land bank, which is basically a fellow asked in that budget.
Income.
We're typically buying income and through the redevelopment process and repositioning process, we're raising income.
So it's not like.
Like we have hundreds of millions of dollars on our books that have no Inc.
<unk> being generated.
Speaker Change: It's really it's really a different type of businesses.
Fair enough fair enough, it's not a zero business I get that but if there is an element of risk associated with I guess is what I would say.
The last question for me you mentioned Asian Importers is are there any utility issues in the area that would need to be addressed if there was.
Sort of a meaningful movement to manufacturing.
In the region and what's the appetite of Rexford to.
Be a party of landlord party to increased manufacturing activity.
We typically focus on generic space, meaning that friction.
In terms of cost and time for tenants moving out of the buildings is relatively low.
That said.
The needs of even the warehouse users today are greater in terms of power.
Power has become.
Speaker Change: An important issue in the marketplace in terms of availability.
With utilities timing of delivery and so on and so forth. So part of our strategy right now is actually.
Two specs, a tremendous amount of power into repositioning and redevelopment assets, which.
Frankly, our ideal for not just the warehouse increased power gains, but also manufacturers so.
If the demands out there we're in a great position to capture those manufacturing issues.
Okay, great. Thanks very much.
Our next question comes from the line of Brendan Lynch with Barclays. Please go ahead.
Great. Thank you for taking my question.
Also a long time listener first time caller, so glad to be here with you guys on record this call today.
One of the things that you mentioned was that you're embedding, 4% escalators, which are above the long term industry standard maybe you could talk about a little bit where you think the limit might be there and whether you have tried to push escalators even above 4%.
Or if that's a consideration for the future.
Hi, Brendan Thanks, so much and appreciate your first question here was a record.
No it's true for MB.
Embedding pretty consistently 4% or better escalators in the leasing activity that we are.
Bleeding and we have done as high as 5% or even the isolated examples a little bit above 5%, but in terms of underwriting it seems that 4% is a pretty pretty reliable at this point.
And hard to stay with the limits are I think.
The fact is that.
Rent still represents a very small share of the overall economics of our expense structure of a typical tenant.
So I think that we still have a lot of runway in terms of rent growth.
And so where those escalators play we'll see.
But we're super excited and very comfortable about what we're seeing today.
And when you're pushing the escalators that are you getting the sense that tenants are looking for additional concessions is that part of the reason that maybe we're seeing one and a half months. This year versus one last year is that kind of unrelated.
Generally speaking I would say that's unrelated.
Okay. Thank you very much for the color.
Thank you.
Yes.
That concludes our Q&A session I will now turn the call back over to management for closing remarks.
We'd like to thank everybody today for joining us for your interest in Rexford and we look forward to reconnecting next quarter. Thank you so much and wish you all great day.
This concludes today's call you may now disconnect.
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