Rexford Industrial Realty Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2023

There are 13 speakers on the call.

Operator

Welcome to Rexford Industrial Realty Inc. 3rd Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce David Lanzer, General Counsel. Thank you. You may begin.

Speaker 1

We thank you for joining Rexford Industrial's 3rd quarter 2023 earnings conference call. In addition to the press release Distributed yesterday after market close, we posted a supplemental package and investor presentation In the Investor Relations section on our website at rexfordindustrial.com. On today's call, management's remarks and answers Your questions may contain forward looking statements as defined by federal securities laws. Forward looking statements address matters They are subject to risks and uncertainties that may cause actual results to differ. For more information about these risk factors, please Review our 10 ks and other SEC filings.

Speaker 1

Rexford 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 explanations of why such non GAAP financial measures are useful to investors. Today's conference call is hosted by Rexford Industrial's Co Chief Executive Officer, Michael Franklin 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 turn the call over to Michael.

Speaker 2

Thank you, David, and welcome everyone to Rexford Industrial's 3rd quarter earnings call. I'll begin with a few remarks, followed by Howard, who will provide some additional market and operational color. Then Laura will provide more detail related to our performance And financial results. To begin with, I'd like to thank our Rexford team for delivering a strong quarter across all of our value creation initiatives. Compared to the prior year quarter, our team grew FFO by 33% and grew FFO per share by 12%, Driven by strong same property pool average occupancy of 97.8 percent, exceptional leasing spreads of 65% on a GAAP basis And 51% on a cash basis as well as the substantial cash flow per share growth generated from our investments completed over the prior year.

Speaker 2

Tenant demand within our infill Southern California industrial markets continues to demonstrate resilience, with market occupancy hovering around 98%, roughly equating to the 2019 market occupancy levels immediately preceding the pandemic. As expected, we continue to see rent growth normalizing from the unprecedented growth we experienced during the pandemic. With regard to our Rex Root portfolio, Providing high quality and prime locations within our submarkets, we continue to experience healthy diverse tenant demand as reflected in our strong operating metrics. Although general economic conditions remain uncertain, Rexford remains well positioned. The company is currently situated With an estimated 33% embedded cash NOI growth within our existing portfolio is realizable over the next 2 years, assuming today's rents.

Speaker 2

Our largest driver of NOI growth derives from our repositioning and redevelopment work, which we continue to grow as we mine our in place portfolio for incremental value creation And as we layer in new investments that are delivering strong levels of FFO per share accretion. Looking forward, as markets nationwide normalize towards their post pandemic levels of equilibrium and supply, We believe Rexford's entrepreneurial asset management, repositioning and value add investing programs will enable the company to Associated with our infill Southern California industrial markets will continue to drive the strongest tenant demand fundamentals of any major market in the nation. Further supporting Rexford's favorable outlook, we remain focused on maintaining our investment grade low leverage balance sheet, Ending the quarter at 16.7 percent net debt to total enterprise value, which provides the ability to both protect the company during uncertain times, while also positioning Rexford to capitalize upon accretive investment opportunities as they may arise. With that, I'd like to acknowledge our Rexford team once again And now it's my pleasure to hand the call over to Howard.

Speaker 1

Thank you, Michael, and thank you everyone for joining us today. Rexford concluded the Q3 with strong results, driven by a high quality portfolio and execution of value creation initiatives. With regard to market conditions, Infill Southern California continues to demonstrate superior long term demand fundamentals with a virtually incurable supply demand imbalance. According to CBRE, in the Q3, infill Southern California markets experienced 2,600,000 square feet of positive net absorption. The infill Southern California market continues to outperform with vacancy at 2.2%, the lowest vacancy in the nation.

Speaker 1

A sequential 30 basis point vacancy increase compares favorably to an average increase of 70 basis points for the other major U. S. Markets. Also, supply risk continues to be substantially lower for infill Southern California compared to the nation's other major markets. Port traffic may also be on track toward normalization following the resolution of the dock workers' contract, With the most recent LA Long Beach port activity reflecting a 20% increase month over month and the 2nd highest volumes in the past 12 months.

Speaker 1

While in contrast, the East and Gulf Coast ports experienced a decrease in activity. Turning to the Rexford portfolio, 3rd quarter performance continues to demonstrate our favorable position within the infill Southern California market. Our team 1,500,000 square feet of lease activity, driving 100 basis points of positive net absorption and highlighting the sustained demand for our highly functional portfolio. Annual embedded rent steps in our executed leases increased to 4.3%, demonstrating our tenants' ability to pay increasing rent for the mission critical locations. In regard to market rents, We observed 3% year over year market rent growth for highly functional product comparable in quality to the Rexford portfolio, impacted by a 1% sequential decline quarter over quarter.

Speaker 1

Interestingly, the 1% decline was principally driven by larger buildings. Turning to our investment activity in the quarter, we closed 6 transactions for a total of $315,000,000 Bringing year to date investment activity to approximately $1,200,000,000 Our 3rd quarter investment collectively generate An initial yield of 5.2% and a projected unlevered stabilized yield of 6% on total cost. In addition, we currently have a pipeline of approximately $400,000,000 of highly accretive investments under contract or accepted offer. This includes the imminent closing of $245,000,000 of investments in the San Gabriel Valley submarket It has an aggregate 6.8 percent initial yield. This pipeline, including the imminent transaction, is subject to customary closing conditions.

Speaker 1

With regard to our robust internal growth initiatives, we have approximately 4,000,000 square feet of value add repositioning and redevelopments in process or projected to start within the next 24 months. These projects are expected to deliver an aggregate unlevered yield on total cost 6.4%, representing an estimated $500,000,000 of value creation. Lastly, I'd like to thank our entrepreneurial Rexford team For their dedication and for delivering on another strong quarter, I will now turn the call over to Laura to discuss our financial results.

Speaker 3

Thank you, Howard, and thank you to our incredible Rexford team. Your exceptional performance and value creation focus continues In the Q3, core FFO per share grew 12% over the prior year quarter, driven by same property NOI growth of 9.5% on a cash basis and 8.9% on a GAAP basis. 3rd quarter leasing spreads outperformed projections and year to date leasing spreads are 62% and 82% On a cash and GAAP basis, respectively, the portfolio is positioned for significant internal cash NOI growth into the Just considering the next 2 years, value add repositioning and redevelopments representing our largest driver of growth Are projected to contribute $71,000,000 of incremental NOI. Annual embedded rent steps of 3 0.5% for the total portfolio are projected to contribute another $26,000,000 and acquisitions closed in the 3rd quarter and 4th quarter to date contribute an incremental $28,000,000 In addition, the net effective portfolio mark to market is estimated at 50 6%, representing $77,000,000 of incremental NOI over the next 2 years. As we look further out, the conversion of the total portfolio net effective mark to market equates to $350,000,000 of incremental NOI growth equal to $1.70 per share of FFO contribution or 79% FFO per share growth.

Speaker 3

Now to our funding strategy and balance sheet. Our focus remains on internal and external investments We continue to demonstrate a highly selective rigorous approach to capital allocation As reflected in our investments to date that are driving substantially higher accretion than our prior year investments, inclusive of today's higher cost of capital. We will continue to assess accretive capital sources At quarter end, net debt to EBITDA is 3.7x and we have liquidity of $1,500,000,000 This includes $83,000,000 of cash on hand, full availability on our $1,000,000,000 revolver And approximately $450,000,000 of forward equity remaining for settlement. Turning to guidance. We are increasing our 2023 core FFO per share guidance range to $2.16 to $2.18 per share, up from our previous guidance range of $2.13 to $2.16 per share.

Speaker 3

Our revised guidance range Represents 11% year over year earnings growth at the midpoint. Please note that our guidance range includes or related balance sheet activities that have not yet closed are included in our updated guidance range. Our projected 2023 cash And GAAP same property NOI growth remains unchanged at the midpoint compared to our prior guidance, and we have tightened our ranges to 9.75% to 10% on a cash basis and 8% to 8.25% on a GAAP basis. Average same property occupancy for the full year is projected to be approximately 97.75%, unchanged at the midpoint compared to our prior guidance. Other assumptions in our same property guidance include: Full year cash and GAAP leasing spreads are now projected to be 60% to 65% and 75% to 80%, respectively, An increase of 500 basis points at the midpoint, driven by higher than expected Q3 executed leasing spreads.

Speaker 3

And lastly, Bad debt as a percent of revenue is expected to be approximately 35 basis points, in line with our prior guidance and below the historical average of 50 basis points, reflecting the continued health of our tenant base. Further guidance updates, including a roll forward of our revised FFO per share guidance range can be found in our supplemental package. Finally, as part of Redford's continued commitment to creating value through our comprehensive ESGI approach, We are excited to announce our target to reach net 0 greenhouse gas emissions by 2,045 as well as near term reduction targets. Our mission targets were validated by SBTI and are a testament to our focus on driving substantial environmental value Thank you all for joining us today and we now welcome your questions. Operator?

Operator

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer Our first question comes from the line of Camille Bonnell with Bank of America. Please proceed with your question.

Speaker 4

Hi, everyone. Can you talk to the change in market net absorption, which turned positive this quarter? Was this driven by any particular submarket and given today's economic outlook feels very different than it was 3 months ago, do you expect this trend to continue?

Speaker 1

Hi, Kamil. It's Howard. Nice to hear your voice. There was an uptick in absorption in the Inland Empire West submarket that was, I think, mainly responsible for the large amount of absorption.

Speaker 3

Hey, Camille. It's Laura. I'll talk a little bit about our portfolio as well. Howard mentioned the market change, but our portfolio did experience an increase in absorption of about 434,000 square feet that Represents about 100 basis points. Importantly, we've experienced positive absorption within our portfolio every quarter this year, Certainly outpacing the market and really demonstrating the differentiation of our portfolio in the market, which we've been discussing.

Speaker 3

In terms of select markets, we actually, if you dive into the absorption, we saw positive absorption in every one of our markets from Greater LA, I. E. West, Orange County and San Diego.

Speaker 4

Thank you. And It looks like some of the stabilization dates in your redevelopment program were pushed out. What were the factors influencing this And how is your leasing pipeline tracking?

Speaker 3

I'll take that, Camille. So in terms of timing, pushes in terms of repositioning and redevelopment, there's A couple of drivers there. One is around the permitting and approval process, which has continued To impact construction timing, the other is around timing of our lease up. It's certainly returning to more normalized levels. If you look back historically pre COVID, lease up timing upon completion of redevelopment was about 6 months.

Speaker 3

During the last few years, we saw that timing compressed pretty significantly given the friendly levels of demand. But as we look forward, current lease up timing, we believe will be more consistent with pre COVID levels, which is around that 6 month area.

Speaker 4

And finally, can you please walk through the drivers behind the mark to market changes in your lease expiration schedule as well as the changes Incumulative FSRO contribution is driven by changes in the overall portfolio composition. Why hasn't the lease expiration schedule remained relatively stable?

Speaker 3

Hey, Camille. Great question. And I think it's important to walk through the various components that contribute to mark to market. First, we're certainly excited to be able to capture the mark to market and convert that into FFO and cash flow. But as we've communicated in the past, The mark to market is going to decline and that's going to be driven by a number of factors.

Speaker 3

The first and really most significant is This is substantial and better mark to market that we're able to recognize today was driven by the incredible market rent growth that we saw. Since 2019, if you look back to the Q4, market rents have grown 80%. So as we convert market, The mark convert the mark to market into cash flow and FFO, unless market rent growth continued at those same levels, The mark to market is going to decline. 2nd, mark to market is impacted by the leases that we're signing and that conversion of the mark to market into FFO. And so if you look year to date, we've executed on an impressive leasing spreads, 5,400,000 of leasing 82% GAAP spreads, 62% cash spreads.

Speaker 3

The conversion of mark to market represents an incremental $50,000,000 of annualized NOI just this year alone, 3, 3 quarters. The last real component that moves around The mark to market has an impact is certainly the properties that move in and out of the pool. For example, when we Move a property into repositioning or redevelopment, that property gets removed from the mark to market pool, and that value creation is now represented Represented an accretive stabilized yield. Today, our repositions and redevelopments are generating 6.4% stabilized yields. In this quarter, the impact was about 200 basis points to our mark to market as we move 7 properties into Acquisitions can also are also part of that move in and out of the pool for

Operator

Our next question comes from the line of John Kim with BMO. Please proceed with your questions.

Speaker 5

Thank you. On the net absorption, your stats are positive, but it does, sound as I think from some of your space that you put Into redevelopment, I was wondering if you could comment on overall net absorption in the market or demand that you're seeing In your portfolio or in the market overall over the last few weeks, just given the rising interest rate environment and uncertainty in the financial markets?

Speaker 2

Hi. Thanks so much for joining us today. And This is Michael and I'm pleased to answer the call. I think with regard to the last few weeks, we really haven't seen much change relative to what we're reporting for the quarter. So really no trend line there that's incrementally different.

Speaker 3

And then I'll add to that just around that absorption and the overall market. We've actually taken a pretty deep dive and analyzed every building in the market that's contributed to negative net absorption. Throughout the year, We've been communicating those metrics and it's been really consistent. Only about 20% of the buildings that contributed to negative absorption And the overall market is what we would deem to be kind of higher quality, higher functional type building. So said another way, 80% of The product that's hitting the market, in terms of the negative net absorption throughout the year, doesn't directly, compete with And so this like I mentioned, this trend has really helped throughout each quarter of the year and certainly speaks To the metrics that and to the results of our portfolio, and that differentiation is certainly driving our results.

Speaker 5

Okay. I know that the lease term that you signed this Quarter. First of all, are your leasing tax signed or commenced? That's Part A.

Operator

But on the leasing

Speaker 3

It's signed. It's

Speaker 2

signed.

Operator

Okay.

Speaker 5

The lease terms were 3.4 years and on renewals 2.1, which seems low compared to where it has been historically. Just wanted to get some commentary on that?

Speaker 3

Yes, John, I can take that. Our weighted average lease Term this year was a little bit shorter. It was driven by several shorter term deals that were 12 months or less in term, And those were signed in advance of repositionings and redevelopments, giving us the ability to capture revenue while we're positioning those for construction start.

Speaker 5

So would you characterize that as an aberration or going forward, are lease terms going to be shorter in nature?

Speaker 3

Yes. I think it was really driven by there were about 3 to 4 deals that had a larger impact on the weighted average lease from this quarter.

Speaker 5

Okay. And just one final one on the

Speaker 2

mark to market disclosure on Page 15.

Speaker 5

The 7% reduction from 63% to 56%, which you clarified. Going forward, the outer years, The projections that you have are down 6% from last quarter. And I'm wondering why it's not the full 7%, including the market rental change?

Speaker 3

I think it's important as you think about the First of all, the calculation there and you can certainly have various rounding impacts, but I think it's important to look at the disclosure, a few comments there On the disclosure that we provide by year from a mark to market perspective, because you'll see that the change in mark to market It has varied across years. And so that's really driven by the pool of leases that's included in any given year that's constantly changing. That's driven by the leasing activity that we're doing, the acquisitions, the properties we're moving to repositioning, redevelopment. So just by way of example, if you have a lease that expired in the Q3 of 'twenty three and we executed a new lease, Let's say we executed a new lease at 100 percent leasing spread. We captured that mark to market and that NOI is now reflected in our cash flow.

Speaker 3

Let's say that that lease had a 3 year lease term. That expiration is now reflected in our 2026 mark to market at the market rent And that resets the market mark to market to 0. So because of those constant changes Within the pool across various years that are driven by a number of factors, you will see different impacts from a mark to market perspective.

Speaker 2

Got it. Okay.

Speaker 5

So this quarter, it just happened to be 6% change per year, but going forward that could change year by year?

Speaker 3

Yes. I mean, if you look at this quarter, the mark to market change for 2426 were actually closer to 1200 basis points. And the factors that I just mentioned drove those changes.

Speaker 5

Thank you very much.

Operator

Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Speaker 6

Great, thanks. Good morning out there. So you touched on this a little bit in prepared remarks, but you all continue to be active on the Position market with $400,000,000 under contract, but you're getting a little lower on forward equity at $450,000,000 You have Capacity on the line, but the rate is much higher than it has been and your cost of equity has increased. So can you just talk a little bit more about how you're thinking about the Case of additional acquisitions and how much of that funding for future acquisitions could be driven by disposition proceeds?

Speaker 3

Hey, Billie. Thanks for joining us today. I'll jump in here as well. We as we've mentioned and it continues to be a Significant focus is going to be on driving accretion and NAV growth through how we deploy capital. So when you think about capital deployment for Rexford, That includes our internal investments, so our repositionings and redevelopments that today are yielding a very accretive yield at 6.4%.

Speaker 3

Our External investments, today, if you include the pipeline that you mentioned, the $400,000,000 stabilized deals are 6.4%. So our investments today are accretive. They're driving more accretion today than they did last year even at our higher cost of capital And that's driven by our higher initial and stabilized yields. As we think about sources of capital Going forward, we're going to continue to assess debt and equity and dispositions and sources of capital In relation to the hurdle rates in which we're solving to today, as well as the embedded growth of those investments are going to contribute over the long term to Rexford. In terms of dispositions specifically, they will be another potential source of capital.

Speaker 3

We believe that there is a great opportunity to realize the value creation efforts that we've executed on and we can redeploy that into Higher yielding assets and grow our overall net asset value. So today, we're currently actively pursuing a number of dispositions In the market, and we'll provide updates on those properties as they close.

Speaker 6

Okay, great. Just a follow-up on that. Can you talk about kind of the spread between the stabilized cap rates at which you think you can Suppose of assets and the stabilized cap rates, do you think you can use those funds to invest it?

Speaker 2

Hi, Blayne. Hi, Blayne. It's Michael.

Speaker 1

Yes. Go ahead, Michael.

Speaker 2

No, I was just going to say that Suffice to say that the reason we're disposing of such assets is because we believe they'd be highly accretive in our recycling capital. And so We'll disclose those spreads when we close those disposition transactions. Otherwise, it's kind of tough just to speculate.

Speaker 6

Okay, fair enough. And then lastly, I was hoping you could talk a little bit about the types of tenants that are creating the most And across your portfolio today and maybe you can touch on tenant size and industry?

Speaker 2

Sure. It's pretty interesting in terms of what we're seeing in the market. Demand is pretty broad based. And despite economic concerns generally in the overall Economy. We see demand from consumer products, food industry, the beverage industry, a lot of incremental demand reflected in the leasing Activity during the quarter from those sectors.

Speaker 2

We continue to see the electric vehicle market as a very strong contributor towards demand. We continue to see distribution companies, whether they're e commerce driven or 3PLs. Obviously, a lot of change and shifting in the 3PL market, given the incredible growth in demand they saw during the pandemic. But nonetheless, we continue to see very healthy demand from the 3PL market And e commerce players in general. And omnichannel distribution for your traditional retailers is here to stay.

Speaker 2

It's a path to survival for retailers and so we continue to see demand from traditional old time retailers who are Continue to build out their omnichannel distribution capability, requiring warehouses closer to their endpoints of distribution. So pretty broad based demand drivers actually, which is great to see.

Speaker 6

Great. Very helpful. Thank you all.

Operator

Our next question comes from the line of Craig Mailman from Citigroup. Please

Speaker 7

It's actually Nick Joseph here with Craig. Just following up on the disposition comments, I was hoping you could quantify maybe how much you have out to market

Speaker 2

Hey, Nick. Thanks so much for joining us today. And it's similar to our acquisition activity. There are so many Factors that contribute to whether or not we close a certain volume of transactions on the acquisition side in any given quarter or year that we don't give acquisition guidance. Similarly on the disposition Although we have, as Laura mentioned, a range of properties as potential disposition candidates that are actively in process, There's so many factors that play into when and whether they close and what timeframe.

Speaker 2

So we just are reticent to give that kind of guidance, But we hope that you'll be pleased when we actually announce closings.

Speaker 7

Yes. No, I appreciate that. I guess, not necessarily looking for guidance, but I think you obviously talk on the acquisition pipeline. So hoping kind of a similar comment on at least just a broad range of where the dispositions Could be. Are we talking $100,000,000 Are we talking $500,000,000 Just recognize things can fall in or out of that pipeline?

Speaker 2

Again, with regard, the reason we give a visibility on the pipeline for acquisitions is arguably there are more things in our control because we're the buyer. And on the disposition front, there are fewer things in our control because we just can't predict how a prospective buyer may behave or may close. So we just don't give that kind of guidance. And I apologize, but it's just not we just don't find a big benefit in giving that kind of guidance.

Speaker 7

All right. And then just one other question on the dispositions. You mentioned maybe harvesting some of that value. Would it have an impact on the mark to market for the existing portfolio or these assets that have maybe been leased More recently or should we not expect any impact on that number?

Speaker 2

Well, consistent with the notion that we're harvesting our value creation, We wouldn't expect the impact to be terribly material.

Speaker 7

Thanks. Hey, guys. It's Craig here with Nick. Just wanted to follow-up on the San Gabriel acquisition. The yield there is almost close to a 7.

Speaker 7

Could you just talk about the nature of that asset and what the upside in that could be? Is this more of a sale leaseback and future redevelopment? Just any kind of color would be helpful.

Speaker 1

Hi, Craig. It's Howard. While I'd love to tell you all about it because It's really an amazing transaction that our team was able to negotiate off market and without Frankly, much of any other competition, I think we're going to wait until we close and then we'll be happy to provide full details. Okay.

Speaker 7

And just one last one. You guys bought the TireCo building, did the sale lease back with them back In 1Q, it's your largest tenant now with a 2025 expiration. Could you guys just talk about The prospects of that tenant staying, are they definitely out? And where the mark to market expectation is today on that versus Maybe when you bought it, closer to the beginning of the year.

Speaker 3

Hey, Craig. In terms of PowerCo specifically, We are in constant communication with our tenants and tire co specifically. And at this time and based on Those conversations, they currently have no intentions on vacating in 2025.

Speaker 7

Okay. And they have options to stay?

Speaker 3

They do. They have options. Okay,

Speaker 5

perfect.

Speaker 3

And those options are they have fixed options to say.

Speaker 7

I know they led to 4% annually just in perpetuity?

Speaker 3

3%.

Speaker 7

3%. Okay, great. Thank you.

Operator

Our next question comes from the line of Greg McGinnis with Scotiabank. Please proceed with your question.

Speaker 8

Hey there. Laura, I have another question on clarifying that mark to market closure, we're hoping to dig into that 2% quarter to quarter impact from portfolio vacates or moving to Repositioningredevelopment, is that just a lack of comparable rent on a now vacant asset, so you can't provide the upside? And if thinking about that potential mark to market was previously greater than 56%, which is why it came down before. Why would those properties need to be repositioned or redeveloped anyways?

Speaker 3

Well, it's that those can be 2 separate things. So to your point, yes, on the vacate side, there's not a comparable there's not obviously a comparable rent. But on the repositioning redevelopments, This can be a different set of properties. So as we are able to get properties back and Execute on the repositioning redevelopment plan, then they move out of the mark to market.

Speaker 8

Right. But I'm saying so is the rent growth, the mark to market assumed on those properties, is that contingent on repositioning?

Speaker 3

For those properties that are moving into the repositioning, the repo and repositioning pipeline, is that your question specifically?

Speaker 7

Yes. I'm just trying to figure

Speaker 8

out like basically CapEx requirement on achieving the 56% mark to market?

Speaker 3

No, that is not. They are not.

Speaker 8

Okay. And then is there beyond like typical second generation TIs, Is there any additional spend that we should be thinking about for achieving the mark to market?

Speaker 3

No. If a property is in the mark to market pool in that calculation in the 56%, It's not in our repositioning. If a property is in that pool, it would just be your typical TI's leasing commission, capital reoccurring capital spend.

Speaker 8

Okay, great. And then my apologies for what Might be an ignorant question here, but we are new to the coverage. How does the 100 basis points of positive net absorption impact reported occupancy?

Speaker 3

In terms of the overall portfolio or the same property pool, what specifically

Speaker 8

Yes, overall portfolio. So if you have Changing 10 basis points quarter over quarter, but it's 100 basis points of positive net absorption. Just trying to figure out where the delta is there and How it's actually impacting occupancy to have the positive absorption?

Speaker 3

Yes. I can, Greg, maybe it'd be better off Fine. I can take that with you and walk you through the components of that.

Speaker 5

Okay, great. Thank you.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Nick Thielman with Robert W. Baird. Please proceed with your question.

Speaker 9

Hey, just wanted to touch a little bit on economics. It does seem like Shorter lease duration, just curious if you're seeing any more like free rent being given or just more TI associated with your leasing?

Speaker 3

Thanks so much for joining us. In terms of concessions or free rent this quarter, Free rent was actually 0.7 months, so lower than what we've experienced on the prior quarter. Year to date concessions are 1 month, that's in line with our guidance and in line with our prior 4 quarter average. So if we look back year to date, We haven't really seen a material or increase overall in terms of concessions. Looking back to prior years, Concessions have averaged about 1.25 months, so we continue to be inside of that.

Speaker 9

And then more of your question

Speaker 10

Go ahead.

Speaker 5

I'm sorry.

Speaker 3

Your question around TIs, no, we haven't seen any material change in terms of TIs.

Speaker 9

That's helpful, Laura. And then maybe just another question related to just GAAP leasing spreads. You guys have been pretty big Acquirers over the last 2 to 3 years, so when we're looking at when you're quoting GAAP leasing spreads, are you guys including the adjustment made to GAAP fair value of those leases When are you quoting the spreads quarter by quarter? Just kind of seeing which is going to actually be flowing through to FFO going forward?

Speaker 3

Yes, that would be included in the acquired leases.

Operator

Our next question comes from the line of Vince Tibone with Green Street.

Speaker 11

Hi. Occupancy guidance implies about a 75 basis point drop In the Q4 compared to Q3 levels, can you just discuss the drivers there, whether it's a known move out or just some conservatism and forecasting?

Speaker 3

Yes. Hi, Vince. Thanks for joining us today. In terms of our same property occupancy guidance, Yes. As you mentioned, our guidance for the full year is 97.75%.

Speaker 3

So we did tighten our guidance range to the midpoint. That occupancy guidance implies a decline in the Q4 of about 60 basis points. Just as a reminder, our prior guidance Also implied a decline of about 30 basis points in the second half of the year, largely driven by A bit more downtime in some spaces where we are performing some light and moderate repo and that factored into our prior guidance. New into our updated guidance, about us that we have a 30 basis point impact from a space that we got back from a tenant that was on our pre watch list, And that moves the guidance range to our midpoint. That was a tenant, just a little color there, who went through an acquisition of their business earlier this year.

Speaker 3

We've had them on the pre watch list for several quarters now. They had some challenges in the integration of that merger. And so we were so we did get that space back at the end of the quarter.

Speaker 11

Great. Thank you. And then since the port labor agreement has been finalized and some of the backups to Panama Canal have gotten worse, Have you seen any pickup in tenant interest or touring activity or other size that SoCal Industrial could benefit from some of these

Speaker 1

Hi, Vince. It's Howard. Yes, we're really pleased to see that increase in port activity. Keep in mind that our tenant base is really mainly serving the consumption occurring here in Southern California. So Through cycles, we haven't really seen impacts from port slowdown, shutdown, etcetera, in terms of that tenant base that we focus on and is in Portfolio, but the ports are really more connected to super regional global So some of those larger buildings that typically you'll see out in the Eastern and even the Western Inland Empire and Absolutely.

Speaker 1

Certainly, that's a benefit. There's a lot of revenue generated from ancillary services and so forth throughout Southern California through part volume. It's really nice to see those volumes increase and hopefully that it's a go forward trend in terms of some further recovery.

Speaker 11

Great, thanks. And if I could maybe squeeze in one more, I'd be curious to get your view on how The transaction and secured debt markets have changed over the past few months since the treasury rates moved up pretty substantially here.

Speaker 3

Hey, Vince. I'll take that around the transaction market. We continue to see capital flowing into the Southern California market. And interestingly, we're seeing new market entrants Into industrial, and that has been, I'd say, an incremental change over the past quarter or 2. So although, yes, you've certainly seen an increase in interest rates and certainly availability of that capital It can be challenging.

Speaker 3

There continues to be transactions occurring in the market and cap rates Really hasn't moved that materially, maybe up about only about 25 basis points. Buyers are still accepting lower cap rates For properties that have mark to market, and are even taking on waiting some time to get Stabilization. So there's a property that traded just recently in the North Orange County, Mid County market, About $50,000,000 transaction is going in initial cap rate of 3.4%, stabilizing about 5 years from now, a little over 5% and that was a new entrant into the market from a buyer perspective. So there continues to be even with The increase in interest rates there continues to be capital flowing into the market.

Speaker 5

Great.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.

Speaker 1

Yes. Hi. Just a quick one. I was wondering, can you talk about the yields that you're expecting on new repositioning starts Compared to the overall in place yield on that pipeline and what you're achieving on acquisitions today? Hi, Mike.

Speaker 1

It's Howard. Those yields vary. Some of them are legacy Acquisitions that we might have bought at the peak of the market that might have a bit of a lower stabilized yield, while there's others that have substantially higher Yields are both that 6.4% stabilized yield that we're mentioning. In terms of anything we'd look to buy, we've absolutely reset the targets in terms of those stabilized yields we're seeking. But again, those also have to do with when we're actually going to get to the assets that we can stabilize.

Speaker 1

We've got Quite a few examples of assets we bought recently that had very strong in place rents in place where we're able to entitle properties And then start construction maybe 2, 3 years down the road and get to even higher stabilized rates on top of that. So We're really selective. And as far as bringing in some of these assets, that strategy definitely is different than it would have been looking back A year or 2 years ago.

Speaker 3

Hey, Mike. And just, Michael, a little bit more color there. We added 7 new projects to reposition redevelopment pipeline or current in process representing about 600,000 square feet of properties. On those investments, the yield the aggregate stabilized yield is 6.5%. So actually coming in a bit above The aggregate yield for everything and the repositioning redevelopment pipeline.

Speaker 5

Got it. Okay. Thank you.

Operator

Our next question comes from the line of Vikram Malhotra with Mizuho, please proceed with your question.

Speaker 10

Hi, thanks for taking the question. Just two quick ones. So first of all, on the mark to market, The changes, if I just run the math sort of forward, I would assume that your negative 1% rent growth had a lot of variability By market and by size, for there to be like a 600 basis point, 700 basis point impact. So given that you said it was larger boxes, Can you just also kind of give us a sense of what the ranges were to impact? And just if I'm correct, if I roll all that forward assuming current conditions, I sort of get to your mark to market being 25%, 30% by year end 2024.

Speaker 10

Is that fair?

Speaker 3

In terms of the mark to market over the next several years, We actually provide a disclosure around the projected portfolio net effective market by year, Assuming current rents and no further rent growth. So that and by the end of 2023, so by the end of next quarter, It's 52%. By the end of 2024, it's 42%. Now as a reminder, there's And as I talked about earlier, there's a lot of different components, right, that can impact that, the leases that we're executing, repositioning and redevelopment opportunities. So acquisitions that we're acquiring, but based on the current portfolio and where it sits today, The end of 2024, we would be at a 42% projected portfolio net effective mark to market.

Speaker 10

Okay. But just to clarify that negative 1% market rent growth, if I just flow that through the forward projections that you have made, I'm just still it's still hard to get to such a like the 600 point change in say 25%. So I'm wondering is there a lot of variability in that negative 1% Good market rent.

Speaker 3

There's some variability, and that's obviously driven by Because the change in market rents is not straight lined across the portfolio. So there's variability in terms of submarkets, there's variability in terms of the size of spaces. But as I mentioned before, there's many other factors that are driving the mark to market besides the change in end market runs.

Speaker 10

Okay, fair enough. And then just a follow-up on your largest tenant, the Tyreco acquisition or exploration. Can you just clarify, I think you said there are automatic renewals or is it just highly likely they're going to renew? I only ask because It seems like in 2025, there is a step down. And I'm wondering what you have sort of embedded on renewal For that lease?

Speaker 10

Thank you.

Speaker 3

Yes. They have an option to renew the lease. And that's a fixed option at 3%. So they that is impacting our mark to market in 2025 Because we're capturing that option at 3% and not what would be the fully embedded mark to market if we were And

Speaker 10

just sorry, just as it stands today, is that a roll up or a roll down if nothing changes?

Speaker 3

In terms of if we were to get the space back, would it roll up or down, if that's your question?

Speaker 10

Yes. I guess you're saying you're not getting the full mark to market because of the 3%

Speaker 3

quarter that

Speaker 10

would roll up. It would roll up? Okay.

Speaker 3

It would roll out that that places below market today.

Speaker 10

Okay. Thank you so much.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Nate Trotsat with BNP. Please proceed with your question.

Speaker 12

Hey, good afternoon. Quick one on just recurring CapEx. It's up quite a bit the last Couple of quarters. Just wanted to know if you can maybe unpack that. Is there anything we should know going forward for maybe recurring CapEx expenditures?

Speaker 12

And then also G and A, I think the guidance for the year implies a significant ramp into 4Q. And maybe you can just kind of unpack what that is?

Speaker 3

Hey, Nate. Thanks so much for your questions today. So in terms of recurring CapEx, it's really largely driven by seasonality, especially related to As you know within the Q3 and some of into the Q2, we do take advantage of Some of the hotter, drier weather conditions for that exterior work such as roof and exterior painting. So that really drove Our Q3 capital expenditures higher, as we look forward, we would expect 4th quarter to be more in line with prior quarters. And To your question around G and A, I'll note this is the first increase in G and A in 2023.

Speaker 3

We do continue to realize Really significant operating synergies. Our G and A as a percentage of revenue for the full year is expected to be 9.6% And that compares to 10.2% in the prior year. In terms of the Q4, the driver is that is really primarily related to non cash Equity, true up, and that's related to performance based equity compensation. So that non cash Equity compensation is not realized unless Rexford is continuing to perform at elevated levels. So that's the primary driver in the 4th quarter.

Speaker 12

Okay. That's helpful. And then sorry if I missed it, I can't remember if you disclosed it or not, but lease escalation on new contracts, What was it this quarter versus day last quarter?

Speaker 3

Yes. This quarter, our embedded rent steps on our The Q2 leases was 4.3%. And then compared to the prior quarters, this is actually The highest rent steps that we signed through the past through year to date and the 2nd quarter embedded rent steps were 4.1% and in the Q1 they were

Speaker 12

4%. Okay. I'll leave it there. Thank you.

Speaker 3

Thank you so much.

Operator

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Speaker 2

On behalf of the entire company, we'd like to thank everybody for joining us today and we look forward to reconnecting next quarter. Thank you so much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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Earnings Conference Call
Rexford Industrial Realty Q3 2023
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