Rexford Industrial Realty Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 17, 2024

There are 17 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rexford Industrial Realty Incorporated Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. And I would now like to turn the conference over to David Lanzer, General Counsel. You may begin.

Speaker 1

We thank you for joining Rexford Industrial's 3rd quarter 2024 earnings conference call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and an investor presentation in the Investor Relations section on our website at rexfordindustrial.com. On today's call, management's remarks and answers to your questions may contain forward looking statements as defined by federal securities laws. Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information about these risk factors, please review our 10 ks and other SEC filings.

Speaker 1

BrightSphere 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 Restorative Investors Co Chief Executive Officers, Michael Frankel and Howard Schwimmer, together with Chief Financial Officer, Laura Clark. They will make some prepared remarks, and then we will open the call for your questions.

Speaker 1

Now, I turn the call over to Michael.

Speaker 2

Thank you, David, and thank you everyone for joining Rexford Industrial's 3rd quarter earnings call. I'll begin with a few remarks followed by Howard and Laura. To begin with, we'd like to thank our Rexford team for your outstanding work delivering another strong quarter. Our team generated a 5.4% increase in FFO per share compared to the prior year quarter, which brings our FFO per share growth to 9.3% for the 1st 9 months of the year compared to the prior year period. With our consolidated stabilized portfolio occupancy of 97.6% at quarter end, our infill Southern California tenant base continues to demonstrate resiliency, driven by the mission critical nature of our infill locations, fueled by regional consumption that remains stable and has continued to grow each year since 2021, driven by the nation's largest regional population and most diverse economy.

Speaker 2

With regard to general market conditions, increased levels of global unrest, uncertainty related to the presidential election and an uncertain economic outlook continue to weigh on markets and business decision making. Although our infill Southern California industrial market continues to demonstrate superior long term tenant demand fundamentals, current leasing activity reflects some tenants taking longer to make decisions. Looking forward, as the economic and political environment stabilize, we believe our infill Southern California industrial markets favorable supply demand backdrop inherently positions our market for future rent growth. Most importantly, our Rexford portfolio remains well positioned for favorable FFO per share and net asset value growth, driven by the high quality of our properties and the substantial volume of value add property repositioning and functional enhancements driving the accretive internal growth embedded within our in place portfolio. By way of indication, assuming 0 market rent growth, we currently project about 34% cash NOI growth embedded within our portfolio realizable over the next 3 years.

Speaker 2

And with this, I'm very pleased to turn the call over to Howard.

Speaker 3

Thank you, Michael, and thank you all for joining us today. Rexford ended the 3rd quarter with solid operating results, a testament to our value creation business model. The Rexford portfolio continues to be favorably positioned relative to the overall infill market. We executed 1,600,000 square feet of leases, driving 394,000 square feet of positive net absorption, equal to positive 80 basis points, outperforming the overall market's negative 25 basis points of net absorption according to CBRE. Leasing spreads in the quarter showed continued strength at 39% 27% on a net effective and cash basis respectively, in line with our prior quarter projections.

Speaker 3

Additionally, annual embedded rent steps in our executed leases averaged 3.9%. Excluding the lease up of the 275,000 Square Foot DuPont Repositioning Project, rent steps averaged 4% in line with prior quarters year to date. With regard to market rents, we have seen taking rents for highly functional product comparable to the Rexford portfolio down approximately 2.5% sequentially and 7.5% year over year reflecting continued normalization following the extreme market rent growth during the pandemic of over 80% in aggregate within our infill markets. Turning to Rexford's investment activity. During the quarter, we completed $60,000,000 of investments and subsequent to quarter end, we closed an additional $70,000,000 investment through an off market transaction.

Speaker 3

In aggregate, these investments comprising 550,000 square feet are generating an initial yield of 5.8% and a projected unlevered stabilized yield of 5.9% on total cost. Looking forward, we currently have approximately $200,000,000 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 1 property bringing year to date disposition activity of $44,000,000 generating a 12.8% weighted average unlevered IRR. In addition, we are negotiating on over $90,000,000 of dispositions, which will be subject to customary closing conditions.

Speaker 3

During the Q3, we rent commenced and stabilized 3 repositioning and redevelopment projects totaling approximately 325,000 square feet, representing a total investment of $99,000,000 These projects achieved a weighted average unlevered stabilized yield on total investment of 7.6%. Year to date, we have stabilized 7 projects across 450,000 square feet, which achieved an 8.4% weighted average unlevered stabilized yield on total investment of $165,000,000 In the quarter, we also leased our 275,000 Square Foot DuPont property in the Inland Empire West, which stabilized subsequent to quarter end at a 5.5% yield. Importantly, I'd like to thank our Rexford team for your entrepreneurial efforts that continue to drive Rexford success. And with that, I'm pleased to turn the call over to Laura.

Speaker 4

Thank you, Howard. 3rd quarter results were in line with expectations. FFO per share was $0.59 representing 5.4 percent growth over the prior year quarter. Same property NOI growth on a net effective and cash basis was also in line with projections at 2.6% and 5.3% respectively, bringing year to date same property NOI growth to 4.7% on a net effective basis and 7.7% on a cash basis. 3rd quarter net effective same property NOI growth was driven by a positive 7.50 basis point contribution from base rent growth, primarily offset by a few items, including 320 basis points related primarily to lower straight line rent associated with an elevated level of early renewals last year, an 80 basis point impact from the timing of recoveries associated with higher seasonal utility expenses and property taxes, and a 70 basis point impact related to bad debt.

Speaker 4

While bad debt in the quarter was a healthy 30 basis points of revenue, the Q3 of 2023 included the positive reversal of a prior reserve impacting the current quarter comp. In regard to the balance sheet, net debt to EBITDA is 4.7x, near our long term target leverage range of 4x to 4.5x. During the quarter and subsequent to quarter end, we settled $220,000,000 of outstanding forward equity related to our March equity offering and currently have $614,000,000 of net forward proceeds remaining for settlement. In total, we have liquidity of approximately $1,700,000,000 including $62,000,000 in cash on hand and $995,000,000 available under our revolving credit facility. We have no near term debt maturities until mid-twenty 26 assuming extension options.

Speaker 4

Turning to guidance. 2024 FFO per share guidance has been increased by $0.01 at the high and low end of the range to $2.33 to $2.35 representing 7% year over year earnings growth per share at the midpoint. Note that our guidance does not include future acquisitions, dispositions or related funding that has not yet closed. 2024 same property NOI growth guidance is now 4.25% to 4.75% and 7% to 7.5% on a net effective and cash basis respectively, both within the range of our previous expectations reduced 25 basis points at the midpoint. Drivers of our same property NOI growth range include the following expectations.

Speaker 4

First, 2024 average occupancy of 96.5 percent

Operator

to

Speaker 4

96.75 percent compared to our prior range of 96.5% to 97%. We expect 4th quarter occupancy to be impacted by a few known move outs included in our prior guidance combined with the timing of lease commencement on vacant units that are now projected to commence in early 2025. 2nd, full year leasing spreads in line with the prior quarter's forecast at 55% on a net effective basis and 40% on a cash basis. 3rd, concessions for the full year of approximately 1.75 months, up from 1.5 months, largely driven by 3 leases with longer durations signed in the Q3. Finally, bad debt as a percentage of revenue in the 50 basis point area in line with year to date and historical averages.

Speaker 4

Our updated same property NOI growth guidance also includes the projected move out of LL Flooring, occupying 504,000 square feet at our Mission Boulevard property, who sold their business after recently filing for bankruptcy. We anticipate the tenant will vacate the building at the end of November. However, per our original redevelopment plan, we are currently in the entitlement process. While the vacate of this large space has an outsized impact on portfolio occupancy, the impact to NOI is relatively nominal due to the current estimated rental rate being approximately 2 50% below market. Other components of our increased FFO per share guidance range include a positive $0.01 per share contribution from $131,000,000 of acquisition activity, plus an incremental $0.01 per share contribution related to higher than expected occupancy in our non same property pool, which represents approximately 27% of our total portfolio.

Speaker 4

The incremental NOI contribution from repositionings and redevelopments is in line with our prior projections and full year G and A of $83,000,000 is also unchanged. Looking forward over the next 3 years, we have an estimated $222,000,000 of internal cash NOI growth embedded within the current portfolio, assuming no further acquisitions in today's market rents and includes $91,000,000 of incremental NOI from repositionings and redevelopments, dollars 72,000,000 from the portfolio cash mark to market of 19% as we roll in place rents to current market rates, $51,000,000 from portfolio annual embedded rent steps averaging 3.7 percent and $8,000,000 from acquisitions closed in the quarter and subsequent to quarter end. Together, this represents 34% growth in cash NOI over the next 3 years. Note that in the Q3, we captured approximately 3.50 basis points of mark to market realizing $13,000,000 of incremental annualized NOI. Finally, I would like to quickly touch on the 3 year FFO per share outlook we spoke about at the beginning of the year.

Speaker 4

Based on the dynamic market environment and current conditions, as well as the inherent challenges with forecasting the timing of market inflection, we will be focusing on our annual guidance going forward, which we will provide when we report Q4 earnings in early February. Before I turn the call over for your questions, I want to recognize and thank our Rexford team. We are inspired daily by your passion and pursuit of excellence. Thank you for all you do to drive the success of Rexford. Operator?

Operator

Thank you. We will now begin the question and answer session. And your first question comes from the line of John Kim with BMO Capital Markets. Your line is open.

Speaker 5

Thank you and good morning. I wanted to ask about the low decision making that a lot of your tenants you're talking to are having today. It seems like it's a common theme. What would you attribute this to in terms of our tenants pushing back on the higher rent levels versus uncertainty in the economy and the upcoming election? Or is it something else like the cost of holding inventory or automation or another reason?

Speaker 2

Hi, John, it's Michael. Thank you so much for joining us today. No, I think it's predominantly driven by factors that are not necessarily specific to the company, the tenant or their industry or sector, really more driven by some of the macro concerns and general decision making around the economy. And I think we're seeing really short term impacts by elevated levels of economic uncertainty really driven in part by geopolitical and unrest globally, uncertainty around the election. Interest rates still remain sort of an uncertainty as well.

Speaker 2

I think a lot of folks had hoped there'd be more certainty around interest rates at this point in time. And we're really seeing tenants make decisions or slow their decision making, maybe that's kind of staying put. And but we're also saying, I think it's important to note this underlying strength in the businesses of our typical tenants. Regional consumption remains stable, strong and growing in Southern California. And frankly, our 3rd Q leasing activity, I'm sure the team will get into this later, reflects our performance that is essentially in line with our guidance set at the beginning of the year.

Speaker 2

So again, we're not really seeing any big surprises in the tenant base in terms of decision making in that respect. So I think really predominantly driven by macro factors. And in that sense, as those macro factors stabilize, we continue to see a favorable backdrop with regard to demand.

Speaker 5

Okay. And then on your rents that you signed this quarter, it was at $17.88 on a GAAP basis. I think it's kind of bounced around up and down this year. How indicative of the current rents or the rents you signed in Q3, how indicative of that is it versus rents that you will be signing for the remainder of the year and into 2025? It would suggest market rents declining more than 7.5% that you presented.

Speaker 5

And also we're trying to figure out what the true mark to market is on 2025 expirations.

Speaker 2

Yes. I'll start, I'll just say the different the differential in rents is really more about the mix of leases. And I'll pass it to Laura with a little more detail on that and the rest of your question.

Speaker 6

Hey, John, thanks for your question. In terms of Michael said, it's true. It is about the mix of leasing. When we look at our full year guidance for net effective spreads, as an example, of 55% on a net effective basis and 40% on a cash basis, is unchanged from our expectations last quarter. That does imply 40% net effective spreads and 25% cash spreads into the 3rd Q4.

Speaker 6

You can see that our 3rd quarter spreads came in right in line with our expectations at 39% 27%. So as we look into the Q4, we are expecting to generate similar spreads that we did this quarter. And really what's driving that is the smaller spaces are mark to market, they're mark to market more near term. So I think on average, the average size is 9,000 square feet and average term was 3.5 years.

Speaker 5

And Laura, do you have the expiring rents on 2025 expirations? It's presumably lower than the 15.10 in your supplement?

Speaker 6

Yes, we can follow-up with you after the call.

Speaker 5

Okay, great. Thank you.

Operator

And your next question comes from the line of Jeff Spector with Bank of America. Your line is open.

Speaker 7

Great. Thank you. One follow-up from John's first question on the reason why tenants are making slower decisions. There is a key difference, Michael, from what you said, what we heard at our conference from some of your peers in our broker call. And maybe there is a key difference, whether it's your tenant size, your markets.

Speaker 7

I mean, we were hearing the main reason is a result of excess space. Tenants took too much space. I don't think you mentioned that. So are you making a clear difference here or is that just is that another reason and you accidentally left that off?

Speaker 2

Hi, Jeff. Thanks so much for joining us. I think that we do see that as a driver. It's probably less of a driver than for the big box product. And so it's probably why you don't hear us emphasizing it as much.

Speaker 2

We continue to see very high utility at our properties by our tenants and we continue to hear of interest for more space. We're just seeing a delay in decision making. So I do think the dynamics are a bit different for our smaller tenant base within our infill markets as compared to the big box market and that's probably why you hear us not emphasizing in the way that you do for the big box market.

Speaker 7

Thank you. And then, Michael, you also said the mark to market is 34%. That would assume market rent stays flat from here. I think you're not providing market rent forecast now, but I guess can you provide a little bit more color on that comment, the 34%? Are you saying you do feel that lease market rents are stabilizing?

Speaker 2

I think the 34% is a reference to our embedded NOI growth. I'm not sure. Can you clarify the question a little bit?

Speaker 7

Sorry, I thought at the beginning you said the mark to market is 34%. It's on one of your slides. And that's I assume that's based on today's market rent. And so I didn't know if you were implying like you think market rents are finally stabilizing for your product.

Speaker 6

Hey, Jeff. This is Laura. The 34% that you're referencing is the embedded NOI growth within our portfolio over the next 3 years. We have about $222,000,000 of embedded NOI growth from repositionings and redevelopments mark to market, our embedded rent steps as well as the acquisitions we closed in the quarter.

Speaker 7

Okay. Thank you.

Speaker 8

Appreciate that.

Speaker 7

And then my last, I just wanted to confirm on the current re devs and lease up re devs, I see some of that is coming online in the coming quarters. Any expectations on the lease on leases signed? Any comments you can make?

Speaker 3

Hi, Jeff, it's Howard. Well, obviously, we've already commented on the timeline for decision making being a little slower than we've seen in the past. That said, we are seeing reasonable amounts of activity on space and we've made adjustments in terms of some of the lease up timeframes in the redevelopment and repositionings. Just some things are pushed out. On average, we've pushed those out about 2 months and half of it is related to construction delays and half of it really being related to leasing.

Speaker 3

But overall, there is activity out there. And really, I'd echo a lot of the comments Michael made in terms of some of the reasons why the decisions are slower. But we're fairly optimistic in terms of turning some of that activity into some signed transactions into the latter part of the year and into early 2025.

Speaker 7

Great. Thank you.

Operator

And your next question comes from the line of Craig Mailman with Citi. Your line is open.

Speaker 9

Hey, good morning. Just want to circle back to the redevelopment pipeline here. I know you guys are saying that you've been kind of stabilizing projects in the kind of high 7% range, but then DuPont was sort of a 5.5% stabilized. How should we think about where yields or returns are coming on the redevelopments you guys have underway or going to start soon relative to that 7, 8, I mean, was the 5.5 a one off or is that more of where returns are going to trend given kind of higher construction costs and moderating rents and maybe elongated lease up timeframes?

Speaker 3

Hi, Craig. It's Howard. You can certainly refer to the supplemental that has all the data property by property in terms of projected yields. But in terms of that specific property, as you recall from some of our prior comments, 275,000 feet in the Inland Empire West had been one of the softest segments of that market because of an oversupply of the product. And so rents, even when you just look around all the markets, rents declined probably, I'm going to say, the most for that kind of product because of the amount of vacancy that there is in it.

Speaker 3

So that's really more of a one off in terms of the stabilized yield you see there on that particular asset.

Speaker 9

Right. Yes. No, I see the 6% unlevered yield in the deck. I just I was asked this question because I know the 3 year roll forward that you guys pulled this quarter was really predicated primarily on the redevelopment. I think it was 11% to 13% that you had talked about.

Speaker 9

And I was just trying to get at the reason for pulling that if you guys are continuing to start redevs and it feels like you feel pretty good about your return expectations. Could you just talk a little bit more about the decision to pull that guidance here so quickly after you gave it?

Speaker 6

Yes, Craig, I think it's purely a function of timing because we are really excited about the embedded growth within the portfolio and we're very, very well positioned to generate substantial growth over the near and long term. We're looking at the forecast and when you look back to the initial outlook that we said at the beginning of the year, it was based on the market dynamics at that time. Since then, there has been continued economic uncertainty. So we believe it's prudent to push aside the forecast at this time. We're really focused on our 2025 growth, when we have better visibility, and we'll provide that those expectations, when we report 4Q earnings.

Speaker 6

And the focus for us is executing on that significant and

Speaker 4

better growth within the portfolio.

Speaker 9

Okay, that's fair. Just a clarification on LO Flooring. I know that it didn't last as long as you had hoped to get you through the planning stage or entitlement stage on that redevelopment. Do you anticipate doing a short term lease there? Or should we just assume that that's going to be down until you guys start the rev at 1601?

Speaker 6

Yes, Craig. I mean, we'll certainly put it on the market and see if we were able to get some short term income in that space. It's not anticipated at this point in our guidance.

Speaker 9

Okay. And then just maybe one last one. You guys are still sitting on a good amount of cash to deploy. And what we're hearing is stabilized yields are coming down on acquisitions, particularly in good gateway markets. How do you guys kind of with what's in the acquisition pipeline?

Speaker 9

I know you guys don't always buy stabilized, you're buying some value add. How do you feel the return opportunities are relative to maybe the cost of capital you raised the equity add earlier this year?

Speaker 2

Hey, Craig. Thanks again. It's Michael here. Thanks again so much for joining us today. And no, we're excited about any opportunities that you that we might have in our pipeline.

Speaker 2

The only reason that they are in our pipeline is because we believe they're going to deliver substantial accretion relative to our steady state cost of capital and which would mean accretive to on average to the near term impacts to the company as well as long term. It doesn't mean from time to time we might not buy a vacant asset, but we're going to expect that we're going to get paid for that with a high much substantially higher stabilized yield. But in general, you're going to see us continue buying on average cash flowing assets with in general opportunities to create value that we believe are going to be accretive to the portfolio and to shareholders both in the near and long term on average.

Speaker 9

Great. Thank you.

Operator

And your next question comes from the line of Nicholas Yulico with Scotiabank. Your line is open.

Speaker 10

Thanks. Hi, everyone. I just wanted to go back to the same store occupancy change in guidance. So in terms of the tenant move out that you talked about, can you just quantify how big of an impact that was on the same store occupancy guidance?

Speaker 6

Yes. In terms of our same store occupancy guidance, we did reduce the midpoint by about 25 basis points. So and we reduced the high end by about 25 basis points. In terms of the drivers, the 2 drivers, rent commencement timing on vacant units, we've pushed out projected commencement into early 2025. That's about half of the drivers.

Speaker 6

Just given the overall leasing dynamics, where tenants are delaying leasing decisions and overall leasing negotiations are taking a little bit more time, we've pushed out that projected timing. I'll note that on really the 10 largest units that account for the majority of the change, we do have activity on about 6 of those units. So it's more of a function of expecting that commencement to be in 1Q and not 4Q. And then, LL Flooring is about 10 basis points.

Speaker 10

Okay. Yes. Thanks, Laura. So, yes, just following up on that. So, it sounds like, the piece that's being delayed to 2025, there's not anything specifically leased for that space and there's a lease in place just not going to commence until next year.

Speaker 10

It's all sort of speculative leasing that is being delayed into occupancy for next year.

Speaker 6

Yes. It's just based on our expectations in terms of commencements and the activity we have in place and the paper that we're trading today.

Speaker 10

Okay. Thanks.

Operator

And your next question comes from the line of Nick Thielman with Baird. Your line is open.

Speaker 11

Hey, good morning out there. Laura, I wanted to kind of touch on some of the leasing mix dynamics you kind of laid out on the smaller tenants having shorter lease terms. So you've kind of already converted that mark to market on that term. But maybe just looking at your schedule, like should we kind of view that as since 2026 is kind of more larger leases that that would be greater spreads or like how should we think about that dynamic?

Speaker 6

Yes, I'm certainly not going to speak to spreads for next year or 2026 at this point in time. I look forward to providing more guidance around our spread expectations when we report Q4 earnings and put out 2025 guidance. I think it's important to look at we have provided the portfolio net effective mark to market at 31% and our cash mark to market today is a strong 19% as well.

Speaker 11

And then going pivoting back to kind of the repositioning redevelopment sort of bucket, like how much of that NOI flow through are we kind of expecting like is this we could capture half of it loaded into 25, or is this more of a back half sort of weighted forecast?

Speaker 3

Are we are you asking specifically about the product that we've delivered or the entirety of the pipeline, Niko?

Speaker 11

I'm kind of asking on particularly like what's laid out for the 2027 roll forward, like what percentage of that? I know you guys kind of give stabilization dates, but those kind of flow through, I guess, just on with your internal modeling, like is it logical to see some of that upside in 2025 or are we thinking this is still going to continue to be pushed to more 2026, 2027?

Speaker 2

Yes, I

Speaker 6

mean, look, we provide our stabilization timing for every property within the pipeline. So you're we're going to see some impacts into 2025, 2026 and 2027.

Speaker 11

So just you're pretty confident on those stabilization dates or anything in market dynamics that shifted in the last 90 days to make you sway one way or the other?

Speaker 6

Yes, I mean, look, that's why we made the update that we did, to some of the timing. And so that's our view and what we're seeing in the market today, that's incorporated in our current projections around stabilization dates.

Speaker 11

That's it for me. Thanks.

Operator

And your next question comes from the line of Mike Mueller with JPMorgan. Your line is open.

Speaker 12

Yes. Hi. I guess what are the attributes of the $90,000,000 of dispositions that you're finalizing? And to the extent that you find acquisitions, how are you thinking today about, I guess, incremental dispositions versus pulling down the forward that you have in place?

Speaker 3

Well, hi, Mike, it's Howard. I'll speak to the dispositions. We're not because usually we are really more comfortable reporting as these happen. But we do this is I think of a larger amount of product that we are looking at and circling at the moment. So we're excited to be $44,000,000 year to date and having the other $90,000,000 plus that we're working on.

Speaker 3

But I think we'd be more comfortable giving you more information about that as we close the various transactions.

Speaker 4

Yes. Okay.

Speaker 12

And oh, good. Sorry, Laura.

Speaker 6

Yes. Mike, yes, I'll answer the second of your question around how we're thinking about funding. I mean, we have a variety of uses in which to fund. We have a pipeline of acquisitions of about 200,000,000. We also have about 75,000,000 of additional repositioning and redevelopment to spend through the remainder of this year and about 200,000,000 next year as well.

Speaker 12

Got it. Okay. And maybe last quick one. I think during the quarter you had sequential occupancy declines of about 200 basis points San Diego and Ventura. And any color there in terms of some of the moving parts?

Speaker 6

Yeah, it's really a number of properties in San Diego in particular average about 15,000 square feet. There were 2 larger property move outs roughly about 30,000 to 40,000 square feet. One of those actually in San Diego is already released at a 50% cash spread and the other one we expect to release at about a 50% cash spread. In Ventura, we had it was made up of about 7 properties, averaging 26,000 square feet, driven by about 2 large move outs still around 40,000 square feet, expect to release those at about a 30% cash spread.

Speaker 12

Got it. Okay. Thank you.

Speaker 5

Yes.

Operator

And your next question comes from the line of Blaine Heck with Wells Fargo. Your line is open.

Speaker 13

Great. Thanks. Good morning. Can you talk about AB-ninety eight and the impact on your portfolio? I guess, are there any planned redevelopments or repositioning projects that may not be possible to build out given the increased restrictions?

Speaker 13

And then on the other side, you expect this to result in better long term rent growth? Could it actually push tenants into other markets? Just how are you thinking about the net effect of all of the aspects of that build?

Speaker 3

Hi, Blayne, it's Howard. Maybe just high level to start for the benefit of others listening. AB-ninety eight is really viewed more as state level zoning changes and primarily dealing with setback requirements near sensitive uses such as home, schools, parks, etcetera. And it's really addressing this by buffer zones. Really most impactful to buildings that are logistics projects that are 250,000 feet and larger, nominal impact to product below that, but certainly some.

Speaker 3

As far as impacts for Rexford, really no material risk to us for any of the projects right now we have in our pipeline. There's no impact at all for repositioning and renovating buildings unless you're going to add more than 20% to the size of the building. And that's a rare occurrence in terms of our repositioning. And really to the latter part of your question or the initial part of your question, I should say, this possibly does create more value in our 50,000,000 square foot portfolio because of the challenges it does present. But mostly these impacts are going to be seen throughout the larger big box markets out East.

Speaker 13

Great. Thanks, Howard. Just following up on same store and the decrease that seems to have been driven mainly by occupancy headwinds. I guess when you look at the timing of occupancy commencements on vacant space, which I think you mentioned earlier on in the call as being a little bit more delayed than expected, and then also movement of properties into and out of the same store pool. I guess, how do you see same store occupancy comps as we move into 2025?

Speaker 13

And how that could influence same store NOI as we look forward?

Speaker 6

Blaine, that's a great question, and we look forward to providing same property NOI growth and guidance when we report 4th quarter earnings.

Speaker 13

Fair enough. I guess, is the LL flooring asset going to remain in the same circle?

Speaker 6

Okay. That's a good question. As in terms of LL flooring, this is a property and I'll just give a little bit more color here. And this was a, we had executed a short term lease with LLL Flooring at a rent that was 2 50% below market. We've been in the process of this redevelopment.

Speaker 6

We're actually currently in entitlements. We're very excited to deliver buildings to the market that really can't be replicated given the regulation that's in place in this particular municipality. So it's a great opportunity to create long term value. And importantly, because of the low rent, the 2 50% below market rent, it's going to have an outsized impact on occupancy, but not necessarily on NOI because obviously of the below market rent. So all that being said, it is a redevelopment.

Speaker 6

And so we will most likely be moving it into the same property pool next year. I'm sorry, out.

Speaker 13

Okay, great.

Speaker 6

That's Yes, that's not in. It's already there.

Speaker 13

Yes, that's helpful. And then just to follow-up on some of the questions on your acquisition appetite, you guys talk about the steady state cost of capital. Can you give us any color on where that steady state cost of capital is? I guess just what's that input when you're evaluating value creation or accretion from deals?

Speaker 2

Well, hey, Blayne, great to hear from you today. Thanks again for joining us. Michael here. We don't disclose how we perceive our cost of capital. I'll tell you that our expectations are that our acquisition activity on average is accretive to today's cost of capital.

Speaker 13

Great. Thanks, Michael.

Operator

And your next question comes from the line of Vikram Malhotra with Mizuho. Your line is open.

Speaker 14

Thanks for taking the question. I guess maybe last, Mary, at the same time, you had sort of mentioned that this is sort of maybe the best time to acquire and it's going to you'll see why. And I'm just wondering, could you sort of maybe size the TAM for us today like what's the theoretical whether it's pipeline or the full opportunity set for you to acquire at a stabilized yield of X, redevelop it and then get whatever 100 basis points, 200 basis points higher. I'm just wondering like has that opportunity set just reduced given market conditions?

Speaker 2

Hey, Vikram. Thank you so much for joining us today. Appreciate it. We don't really see the opportunities that having shifted. Rexford's business model is predicated on a pretty unique market opportunity, almost 2,000,000,000 square feet of product within infill Southern California over 1,000,000,000 square feet of it prior to 1980, replete with opportunities to create value by buying a lot of these legacy assets, mostly within place cash flow and ability to take them with nominal investment to a substantially higher level of cash flow per share.

Speaker 2

And that market opportunity continues. In fact, I think our access to that, our direct addressable market opportunity with respect to improving over time. That hadn't been said, we're going to be exceedingly judicious, careful and conservative in terms of how we acquire and when we acquire. I think this is certainly a market environment where we're going to have heightened caution and scrutinize our investment opportunities that much more as we always do frankly. So, I think the key driver is Rexford in that respect in terms of governing the pace at which we acquire and I think it's the same posture we take at all phases of the cycle, but we're only going to focus on the very best opportunities for shareholders.

Speaker 5

That's fair. I was hoping

Speaker 14

you can give a bit more color on the decision to kind of take away the 3 year guide. I know you mentioned market dynamic, but I guess SoCal or the West Coast has been challenged for a while. So what like could you give some more color like what specifically changed in the last 3 months for you to pull the guide?

Speaker 2

I'll just add to Laura's comments briefly earlier and it's just that we're really good at industrial real estate in Southern California, creating value in our asset class. We're less good about prognosticating about 2, 3 years out where the economy goes, where overall external factors may go that impact at the end of the day decision making for our tenants. And so I think for us we found it's just more prudent to focus on the business in hand to provide the annual guidance that we have a history of providing where we have more visibility and transparency into the tenant base and it does not really reflect any long term concerns about our infill Southern California market. In fact, I think the backdrop is very favorable for our business in our markets. And frankly, the health of our portfolio continues to be very healthy by all the metrics that you see predominantly high occupancy levels, exceedingly low bad debt, etcetera.

Speaker 2

So, it doesn't really reflect concerns about our market or the tenant base. It's really more about focusing on what we do best, which is creating value in the real estate.

Speaker 14

Okay. And then just last one, two numbers question. Just given sort of the high sublet volumes across the West Coast or parts of SoCal, I should say, do you mind giving us like what percent of your portfolio is sublet, number 1? And number 2, just given all the leasing that you may have already done for the Q4 or probably even the Q1, just can you give us a sense of where you think the near term rent spreads are trending? Thank you.

Speaker 3

Yes, sure. Hi, Vikram. It's Howard. In terms of subleasing, this past quarter actually the amount of subleasing occurring in our portfolio came down. It was equivalent to about 30 basis points of our occupied square feet, which was comparable to 60 basis points last quarter, and which is really more, I'd say, overall in line with where our projection in terms of 1 quarter of 2024.

Speaker 3

But to put some numbers around that, the amount of product in our portfolio that was actively on the market for sublease at the end of the second quarter was 1,500,000 square feet, And that's also declined. That's now down to 1,300,000 square feet. So, subleasing is always a good indication of what's happening and changes in the market. And so, I think that's, at the moment, a bright spot in the market when you see those numbers start coming in.

Speaker 6

And then in regards to leasing spreads that we're seeing quarter to date, really coming in at this point in line with our expectations. Our guidance implies spreads in the 40% net effective area and 25% cash area for 4Q.

Operator

And your next question comes from the line of Samir Khanal with Evercore ISI. Your line is open.

Speaker 15

Good morning, everyone. Hey, Howard, I guess my question around is around the Inland Empire. The West was still down about 3%. But certainly, you saw a bit of an improvement from the prior quarter when you look at it sequentially. I mean, are you seeing some improvements there?

Speaker 15

Are you getting sort of less bad as we think about the market bottoming or even stabilizing here?

Speaker 3

Well, our average product size in the market, the space size is 30,000 feet. So it's performing much differently than the broader market. And rent decline in terms of that product size in the Inland Empire, 50,000 feet and under, which is a lot of the space we have there and throughout the portfolio is actually, I'd say, slowed down in terms of where you're seeing any of the rent decline. And today, it looks like it's happening more in some of the larger spaces above 50, above well above 100,000 square feet. So, it's boding well, I'd say, in terms of how we see the market and really where the average size of 25000 ish square feet in our portfolio lies.

Speaker 15

And if you sort of step away from that inland empire, but just kind of look at the broader market in Southern Cali, I mean, are you seeing any sort of green shoots at this point where you start to say maybe the market rent growth market rents start to bottom, I mean sequentially you've seen them come down. As we think about 2025, is there any sort of green shoots you're seeing in the horizon that make us kind of feel like that market is starting to stabilize or at least starting to get less bad?

Speaker 6

Hey, Samir. Yes, I can maybe provide a little bit more detail around what we saw in the quarter from a submarket and size performance because it really is dependent on submarket and size. In terms of the Q3, we saw the smallest declines in rent in the San Fernando Valley, Orange County and San Diego markets. We saw accelerated declines in mid counties in the San Gabriel Valley. When you look at the market in terms of the size segments, our smaller spaces exhibited relative strength.

Speaker 6

Spaces under 50,000 square feet saw less declines in market rents compared to those over 50,000 square feet.

Speaker 2

Okay. Thank you. And Sameer, I would just add one thing in terms of green shoots. Tenant behaviors, we look at overall tenant behaviors and we don't see tenants really shedding space in our portfolio in any material way. And in fact, they continue to lock in very high annualized contractual rent bumps in the leasing activity that we're executing.

Speaker 2

And I think that the lease bumps that we're signing today and through the last quarter are very good leading indicators in terms of tenant expectations and tenant health. And when we see them continue to lock in 3.9% to 4% on average annual escalators in the leasing activity that they're locking in for the next 2, 3, 4, 5 years. I think the tenants are telling us that they expect to stay in the space, they expect to pay more rent, they value the space, they need the space, it's essential for their business. And so I think there are green shoots, but you probably have

Speaker 14

to look at some of

Speaker 2

it holistically, look at the tenant behaviors. Thank you.

Operator

And your next question comes from the line of Richard Anderson with Wedbush. Your line is open.

Speaker 16

Thanks, Jim. Good morning. So just a comment on perhaps the linearity or lack thereof of market rent changes. You mentioned 7.5% down year over year this quarter. The number was down 2% in the Q1.

Speaker 16

What happens if next quarter it's like 7.5% again? I mean, I just wondered in your mind, is this a linear exercise where when we see something stop declining then that's a pretty good sign that we're getting someplace? Or could this sort of be all over the map based again on tenant behaviors and the psychological exercise of trying to figure out where they're headed?

Speaker 2

Hi, Richard. It's Michael. Thank you so much for joining us today. I think as much as we have tried to describe it frankly for the last year and a half or so, which was following the incredible acceleration and increase in rents we saw during the pandemic that we expect to see some normalization and that the normalization should based on tenant behaviors we're observing that the normalization should be some moderate rent declines, plus minus 1%, 2%, 3% sequentially quarter over quarter. You might even see some gains in certain submarkets quarter over quarter, but not to expect anything really dramatic based on the tenant behaviors we continue to see.

Speaker 2

And when that ends and we finally see rent growth kick in more strongly, it's just hard to say. It's very difficult to predict that inflection point. But that having been said, we're really comfortable with the backdrop. Tenant health in our portfolio continues to be extremely strong and we do think it's a very favorable backdrop that portends well for market rent growth. Just hard to predict exactly when you start to see that inflection.

Speaker 16

Okay, fair enough. And so when you think about that dynamic, minus 2% to minus 7.5% and wherever it may go from here, how is it that you underwrite the next redevelopment and repositioning project relative to where you expect market rents to be? Are you haircutting that even more to make it pencil? I'm just curious how you get comfortable redeveloping projects with the movement down in market rents?

Speaker 2

By the way, just to clarify that minus 2%, plus or minus and then minus 7.5%, those aren't apples to apples. The minus 7.5% will be a year over year comparison, whereas the minus 1% to 2% would be a sequential change. So we're not seeing anything.

Speaker 16

No, I think that's unless I'm reading it wrong, it was minus 2% down in the Q1 of this year on an apples to apples basis. I believe I see that right, but perhaps I'm wrong. But at any rate, the question still applies on how you underwrite redevelopments in this current quarter.

Speaker 2

So we take a granular bottoms up approach on redevelopments and we take a close look at where we think rents are for the given opportunity and space and we really do take a bottoms up approach and we take into consideration where rents are today and where they're trending.

Speaker 16

Okay. And apologies if I have that number wrong. I very might well have it wrong. What about space utilization irrespective of occupancy? Do you have a read on that and what how that's competing with need for more space from your tenants?

Speaker 2

I think as I mentioned earlier, we continue to see very high utilization among our tenants in their spaces within our portfolio. And again, that we think contributes favorably to the backdrop that we see, That's more about decision making and less about fundamentals. And so again, we continue to see very favorable levels of utilization within the portfolio.

Speaker 16

Okay. Last question, status of the CFO, Haier?

Speaker 2

That's a great question. We're making a great progress and we're going to let you all know as soon as we have a definitive answer, but we're super excited with the progress and super excited for the company and shareholders in that respect.

Speaker 16

Okay, wonderful. Thanks very much.

Operator

And your next question comes from the line of Brendan Lynch with Barclays. Your line is open.

Speaker 8

Great. Thanks for taking my question. On LL Flooring, where do they on the watch list? And more broadly, how many tenants are currently on the watch list?

Speaker 6

Where they on the watch list? It was a bankruptcy, so it did hit our watch list. In terms of the overall watch list, it continues to be very consistent with what we've seen throughout the year. We have less than 10 tenants on the watch list and really no changes in trends in terms of industry concentration. I mean, I'll note that our bad debt levels continue to be very low, very healthy.

Speaker 6

Year to date, we're at 50 basis points and then projecting 50 basis points for the full year.

Speaker 8

Great. Thanks. That's helpful. And then on dispositions, I know you don't want to speak too much about the $90,000,000 that could be coming. But can you discuss the characteristics of the assets you have sold year to date and how we think how we should think about what you're prioritizing when disposing of assets?

Speaker 3

Hi, everyone. It's Howard. Yes, for the most part, there have been some multi tenant type projects, very management intensive on our for our team and not much growth that we were projecting going forward. The small building that we just transacted on was 25,000, I think 25,000 and change that we did a light renovation. And the equivalent cap rate to the projected rent on that versus the sale was very attractive.

Speaker 3

I believe it was in the low 4s on a market rental rate. So, yeah, they're typically assets where really there's no more value creation opportunity or sometimes it can have to do with the margin that we're achieving on an asset. Just there's some of the more intensive management or capital needs that we might be seeing coming up that we'd like to avoid because they're not going to produce any incremental value.

Speaker 8

Great. Thank you for the color.

Operator

And that concludes our question and answer session. I will now turn the call back to management for closing remarks.

Speaker 2

Well, we'd like to on behalf of the company and our Board of Directors, we'd like to thank everybody for joining us today. We wish you a great rest of the quarter, happy holidays, and we look forward to reconnecting next quarter.

Operator

And ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.

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Key Takeaways

  • Q3 2024 results: Delivered 5.4% FFO per share growth year-over-year ($0.59 per share) with a 97.6% stabilized portfolio occupancy at quarter end.
  • Strong leasing performance: Executed 1.6 million sq ft of leases with 39% net effective spreads and average annual embedded rent steps of ~3.9%, outpacing the overall market’s negative absorption.
  • Robust investment and capital recycling: Completed $130 million of acquisitions (initial yields ~5.8%) with ~$200 million under contract, while dispositions of $44 million YTD generated a 12.8% unlevered IRR, and liquidity remains at ~$1.7 billion.
  • Embedded portfolio growth: Projecting ~34% cash NOI growth over the next three years from $222 million of internal drivers, including repositionings, roll-in-place mark-to-market step-ups, embedded rent escalators, and recent acquisitions.
  • Upgraded 2024 guidance: Increased FFO per share outlook to $2.33–$2.35 (≈7% growth) and same-property NOI growth to 4.25–4.75% (net effective) and 7–7.5% (cash).
A.I. generated. May contain errors.
Earnings Conference Call
Rexford Industrial Realty Q3 2024
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