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spk02: Greetings and welcome to Rexford Industrial Realty Inc. Third Quarter 2023 Earnings Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce David Lanzer, General Counsel. Thank you. You may begin.
spk03: We thank you for joining Rexford Industrial's third 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 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-K and other SEC filings. 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 Howard Schlemmer, 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.
spk14: Thank you, David, and welcome everyone to Rexford Industrial's third 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%, exceptional leasing spreads of 65% on a gap 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. 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 market rent growth normalizing from the unprecedented growth we experienced during the pandemic. With regard to our RexRoot 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, realizable over the next two years, assuming today's rents. 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 opportunities, 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 further differentiate our performance and FFO per share growth. We also believe, over the near term, that the favorable supply-demand dynamics 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% 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 for your market-leading efforts that continue to differentiate Rexford's performance. And now it is my pleasure to hand the call over to Howard.
spk06: Thank you, Michael, and thank you, everyone, for joining us today. Rexford concluded the third quarter 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 third quarter, infill Southern California markets experienced 2.6 million 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. 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 second highest volumes in the past 12 months. While in contrast, the East and Gulf Coast ports experienced a decrease in activity. Turning to the Rexford portfolio, third quarter performance continues to demonstrate our favorable position within the infill Southern California market. Our team executed 1.5 million square feet of lease activity, driving 100 basis points of positive net absorption and highlighting the sustained demand for a 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. Interestingly, the 1% decline was principally driven by larger buildings. Turning to our investment activity in the quarter, we closed six transactions for a total of $315 million bringing year-to-date investment activity to approximately $1.2 billion. A third quarter investment collectively generates an initial yield of 5.2% and a projected unleveraged stabilized yield of 6% on total cost. In addition, we currently have a pipeline of approximately $400 million of highly accretive investments under contract or accepted offer. This includes the imminent closing of $245 million of investments in the San Gabriel Valley submarket that has an aggregate 6.8% initial yield. This pipeline, including the imminent transaction, is subject to customary closing conditions. With regard to our robust internal growth initiatives, we have approximately 4 million 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 of 6.4%, representing an estimated $500 million 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.
spk09: Thank you, Howard, and thank you to our incredible Rexford team. Your exceptional performance and value creation focus continues to differentiate Rexford. In the third quarter, 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 gap basis. Third quarter leasing spreads outperformed projections, and year-to-date leasing spreads are 62% and 82% on a cash and gas basis, respectively. The portfolio is positioned for significant internal cash NOI growth into the foreseeable future. Just considering the next two years, value-add repositioning and redevelopment, representing our largest driver of growth, are projected to contribute $71 million of incremental NOI. Annual embedded rent steps of 3.5% for the total portfolio are projected to contribute another $26 million, and acquisitions closed in the third quarter and fourth quarter to date contribute an incremental $28 million. In addition, the net effective portfolio mark-to-market is estimated at 56%, representing $77 million of incremental NOI over the next two years. As we look further out, the conversion of the total portfolio net effective mark-to-market equates to $350 million of incremental NOI growth equal to $1.70 per share of FFO contribution or 79% FFO per share growth. Now to our funding strategy and balance sheet. Our focus remains on internal and external investments that drive near and long-term accretion and NAV growth. 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 to fund internal and external growth opportunities, including dispositions. Our sustained focus on maintaining a fortress balance sheet positions us to capitalize, on our value-driven business strategy in the current environment. At quarter end, net debt to EBITDA is 3.7 times, and we have liquidity of $1.5 billion. This includes $83 million of cash on hand, full availability on our $1 billion revolver, and approximately $450 million 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. Our revised guidance range represents 11% year-over-year earnings growth at the midpoint. Please note that our guidance range includes the imminent closing of the San Gabriel Valley transaction Howard mentioned. No additional acquisitions, dispositions, 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 gap 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 third-quarter executed leasing spreads. 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 Recford's continued commitment to creating value through a comprehensive ESGI approach, we are excited to announce our target to reach net zero greenhouse gas emissions by 2045, 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 through our differentiated business model. Thank you all for joining us today And we now welcome your questions. Operator?
spk02: Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Camille Bonnell with Bank of America. Please proceed with your question.
spk11: 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 three months ago, do you expect this trend to continue?
spk16: Hi, Camille. It's Howard.
spk06: 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.
spk09: 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. 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, IE West, Orange County, and San Diego.
spk11: 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?
spk09: Hey, Camille. I'll take that, Camille. So in terms of timing pushes and repositionings 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 six months. During the last few years, we saw that timing compress pretty significantly given the frenzied 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 six-month area.
spk11: And finally, can you please walk through the drivers behind the marked market changes in your lease expiration schedule, as well as the changes in cumulative FSO contributions? If driven by changes in the overall portfolio composition, Why hasn't the lease expiration schedule remained relatively stable?
spk09: 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 SSO 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. The first and really most significant is that the substantial embedded 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 fourth quarter, market rents have grown 80%. So as we 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. Second, you know, 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 spread, 5.4 million square feet of leasing, 82% gap spread, 62% cash spread. The conversion of mark-to-market represents an incremental $50 million of annualized NOI just this year alone, three, three-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 in the creative stabilized yields. Today, our repositions and redevelopments are generating 6.4% stabilized yields. In this quarter, the impact was about 200 basis points for our mark-to-market as we moved seven properties into repositioning and redevelopment. Acquisitions are also part of that move in and out of the pool for mark-to-market and can certainly have an impact.
spk11: Thank you for taking my question.
spk02: Our next question comes from the line of John Kim with BMO. Please proceed with your questions.
spk04: Thank you. On the net absorption, your stats are positive, but it does benefit, 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.
spk16: Hi, thanks so much for joining us today.
spk14: 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.
spk09: 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 in the overall market is what we would deem to be kind of higher quality, higher functional type buildings. 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 Rexford. Like I mentioned, this trend has really helped throughout each quarter of the year and certainly speaks to the metrics and to the results of our portfolio and that differentiation is certainly driving our results.
spk04: Okay. I know that's the lease term that you signed this quarter. First of all, are your leasing stats signed or commenced? That's part A. It's signed. It's signed. Okay. The lease terms were 3.4 years and on renewals 2.1, which seems low compared to where it has been historically.
spk16: Just wanted to get some commentary on that.
spk09: Yeah, 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 repositions and redevelopments, giving us the ability to capture revenue while we're positioning those for construction start.
spk04: So would you characterize that as an aberration or going forward our lease term is going to be shorter in nature?
spk09: Yeah, I think it was really driven by there were about three to four deals that had a larger impact on the weighted average lease during this quarter.
spk04: Okay. And just one final one on the mark-to-market disclosure on page 15. You know, 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.
spk09: 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 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 property for moving to repositioning and redevelopment. So just by way of example, if you have a lease that expired in the third quarter of 23 and we executed a new lease, let's say we executed a new lease at 100% leasing spread, we captured that mark-to-market and that NOI is now reflected in our cash flow. Let's say that that lease had a three-year lease term. That expiration is now reflected in our 2026 mark-to-market at the market rent, and that resets the mark-to-market to zero. 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.
spk04: Got it. Okay. So this quarter, it just happened to be 6% change per year. But going forward, that could change year by year.
spk09: Yeah. I mean, if you look at this quarter, the mark-to-market change for 24 and 26 were actually closer to 1,200 basis points. And the factors that I just mentioned drove those changes.
spk16: Thank you very much. Our next question comes from the line of Blaine Heck with Wells Fargo.
spk02: Please proceed with your question.
spk13: 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 acquisition market with $400 million under contract. but you're getting a little lower on forward equity at $450 million. 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 pace of additional acquisitions and how much of that funding for future acquisitions could be driven by disposition proceeds?
spk09: Hey, William, thanks for joining us today. I'll jump in here as well. 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%. Our external investments today, if you include the pipeline that you mentioned, the $400 million, stabilized yields 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 of sources of capital in relation to the hurdle rates in which we're solving to today. as well as the embedded growth that 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. We believe that there's 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.
spk13: Okay, great. Just to follow up on that, can you talk about kind of the spread between, you know, the stabilized cap rates at which you think you can dispose of assets and the stabilized cap rates you think you can use those funds to invest in?
spk06: Hey, Blaine, it's Michael. Oh, go ahead, Michael.
spk14: No, I was just going to say that, you know, 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, you know, we'll disclose those spreads when we close those disposition transactions.
spk16: Otherwise, it's kind of tough just to speculate. Okay, fair enough.
spk13: And then lastly, I was hoping you could talk a little bit about the types of tenants that are creating the most demand across your portfolio today, and maybe you can touch on tenant size and industry.
spk14: 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. 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 omni-channel distribution for your traditional retailers is here to stay. It's a path to survival for retailers. And so we continue to see demand from traditional old-time retailers who are building out, continue to build out their omni-channel distribution capability, requiring warehouses closer to their endpoints of distribution. So pretty broad-based demand drivers, actually, which is great to see.
spk16: Great. Very helpful. Thank you all.
spk02: Our next question comes from the line of Craig Mailman from Citigroup. Please proceed with your question.
spk05: Thanks. It's actually Nick Joseph here with Craig. I'm just following up on the disposition comments. I was hoping you could quantify maybe how much you have out to market and where they stand in terms of the process.
spk14: Hey, Nick, thanks so much for joining us today. And, you know, it's similar to our acquisition activity. There's 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, you know, we don't give acquisition guidance. Similarly, on the disposition front, although we have, as Laura mentioned, a range of properties as potential disposition candidates that are actively in process, you know, there's so many factors that play into when and whether they close and what time frame. So, you know, we just are, you know, reticent to give that kind of guidance, but we hope that you'll be pleased when we actually announce closings.
spk05: Yeah, no, I appreciate that. I guess, you know, not necessarily looking for guidance, but I think you obviously talk on the acquisition pipeline, so I'm hoping kind of a similar comment on at least just A broad range of where the dispositions could be. Are we talking $100 million? Are we talking $500 million? Just recognize things can fall in or out of that pipeline.
spk14: Again, with regard, the reason we give a disability 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 we just don't find a big benefit in giving that kind of guidance.
spk05: 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?
spk14: Well, consistent with the notion that we're harvesting our value creation, we wouldn't expect the impact to be terribly material.
spk05: 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 seven. Can 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? Is this a Just any kind of caller would be helpful.
spk06: Hi, Craig. It's Howard. Well, 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.
spk05: Okay. And just one last one. You guys bought the Tire Co. 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?
spk09: Hey, Craig. In terms of TireCo specifically, we are in constant communication with our tenants and TireCo specifically. And at this time and based on those conversations, they currently have no intentions on vacating in 2025. Okay. And they have options to stay? They do. They have options.
spk05: Okay. Perfect.
spk09: Thank you. And those options are those that they have fixed options to stay.
spk05: I know they've had the 4% annually, just in perpetuity.
spk16: 3%? Okay. Great. Thank you.
spk02: Our next question comes from the line of Greg McGinnis with Scotiabank. Please proceed with your question.
spk07: Hey there. Laura, I have another question on clarifying that mark-to-market disclosure. We're hoping to dig into that 2% quarter-to-quarter impact from portfolio vacates or moving to repositioning slash redevelopment. 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?
spk09: Well, those can be two 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 redevelopment, this can be a different set of properties. So as we are able to get properties back and and execute on the repositioning and redevelopment plan, then they move out of the mark-to-market.
spk07: Right, but I'm saying, so is the rent growth, the mark-to-market assumed on those properties, is that contingent on repositioning?
spk09: For those properties that are moving into the repositioning, the repo and repositioning pipeline, is that your question specifically?
spk07: Yeah, I'm just trying to figure out like basically CapEx requirement on achieving the 56% mark-to-market.
spk09: No, that is not. They are not.
spk07: 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?
spk09: 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, leasing commission, you know, capital, reoccurring capital spend.
spk07: 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?
spk09: In terms of the overall portfolio or the same property pool, what specifically? Yeah, overall portfolio.
spk07: So, if you have occupancy 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.
spk09: Yeah, I can, Greg, maybe it'd be better offline. I can take that with you and walk you through the components of that.
spk16: Okay, great. Thank you.
spk02: Thank you. Our next question comes from the line of Nick Thielman with Robert W. Baird. Please proceed with your question.
spk10: I 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.
spk09: 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 in the prior quarter. Year-to-date, concessions are one month. That's in line with our guidance and in line with our prior four-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.
spk16: And then a more technical question. Oh, I'm sorry.
spk09: I'm sorry. Your question around TIs. Yeah, your question around TIs, no, we haven't seen any material change in terms of TIs.
spk10: That's helpful, Laura. And then maybe just another question related to just gap leasing spreads. You guys have been pretty big. acquirers over the last two to three years. So when we're looking at when you're quoting gap leasing spreads, are you guys including the adjustment made to gap fair value of those leases when you're quoting the spreads quarter by quarter? Just kind of seeing which is going to actually be flowing through to SFO going forward.
spk09: Yes, that would be included in the acquired leases.
spk16: Our next question comes from the line of Vince Tabone with Green Street.
spk02: Please continue with your question.
spk08: Hi. Occupancy guidance implies about a 75 basis point drop in the fourth quarter compared to third quarter levels. Can you just discuss the drivers there, whether it's a known move out or just some conservatism in forecasting?
spk09: Yeah. Hi, Vince. Thanks for joining us today. In terms of our same property, occupancy guidance Yeah, as you mentioned, our guidance for the full year is 97.75%, so we did tighten our guidance range to the midpoint. The occupancy guidance implies a decline in the fourth quarter 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 and some spaces where We are performing some light and moderate repo, and that factored into our prior guidance. New into our updated guidance, I thought 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 moved 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. 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 did get that space back at the end of the quarter.
spk08: 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 signs that SoCal Industrial could benefit from some of these factors.
spk06: Hi, Vince. It's Howard. Yeah, 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 slowdowns, shutdowns, et cetera, in terms of that tenant base that we focus on and is in the portfolio. But the ports are really more connected to super regional global trade. So some of those larger buildings that typically you'll see out in the eastern and even the western Inland Empire. And absolutely, certainly that's a benefit. There's a lot of revenue generated from ancillary services and so forth throughout Southern California through port volumes. So You know, it's really nice to see those volumes increase and hopefully that it's a go forward trend in terms of some further recovery.
spk08: Great, thanks. And if I could maybe squeeze in one more, I'd be curious to get your view on how the transaction and secure debt markets have changed over the past few months since the Treasury rates moved up pretty substantially here.
spk09: Hey, Vince. I'll take that around the transaction market. You know, we continue to see capital flowing into the Southern California market. And interestingly, you know, we're seeing new market entrants into industrial. And that has been, I'd say, an incremental change over the past quarter or two. So although, yes, you've certainly seen an increase in interest rates and Certainly availability of that capital can be challenging. There continues to be transactions occurring in the market and cap rates really haven't moved that materially, maybe up only about 25 basis points. Buyers are still accepting lower cap rates for properties that have mark to market. and are, you know, even, you know, taking on, you know, waiting some time to get to stabilization. So, you know, there's a property that traded just recently in the North Orange County, Mid-County market, about $50 million transaction, going in initial cap rate of 3.4%, stabilizing about five years from now, a little over 5%. And that was, you know, and that was a new entrant into the market from a buyer perspective. So, you know, there continues to be, even with, you know, the increase in interest rates, there continues to be capital flowing into the market.
spk16: Great. Thank you.
spk02: Our next question comes from the line of Mike Mueller with J.P. Morgan. Please proceed with your question.
spk12: Yeah. 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?
spk06: Hi, Mike. 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 above that 6.4% stabilized yield that we're mentioning. So 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 asset that we can stabilize. And we've got quite a few examples of assets we've bought recently that had very strong in-place rents in place where we're able to entitle properties and then start construction maybe two, three years down the road and get to even higher stabilized rates on top of that. So we're really selective. And, you know, as far as bringing in some of these assets, that strategy definitely is different than it would have been looking back a year or two years ago.
spk09: Hey, Mike, and just, Mike, a little bit more color there. We added seven new projects to our reposition and redevelopment pipeline or current in process, representing about 600,000 square feet of properties. On those investments, the aggregate stabilized yield is 6.5%, so actually coming in a bit above the aggregate yield for everything in the reposition and redevelopment pipeline.
spk16: Got it. Okay, thank you.
spk02: Our next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question.
spk00: Hi, thanks for taking the question. Just two quick ones. So first of all, on the mark to market, the changes, you know, 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 six, 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 24. Is that fair? In terms of,
spk09: 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. 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, as I talked about earlier, there's a lot of different components 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 market.
spk00: Okay, but just to clarify that negative 1% market rent growth, if I just flow that through the forward projections that you have made, it's still hard to get to such a 600-point change in, say, 25. So I'm wondering, is there a lot of variability in that negative 1% market rent growth?
spk09: 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 sub-market, 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 market rents.
spk00: Okay, fair enough. And then just to follow up on your largest tenet, the tire co-acquisition or expiration, can you just clarify, I think you said They're automatic renewals or is it just highly likely they're going to renew? I only ask because it seems like in 25, there's a step down. And I'm wondering what you have, you know, sort of embedded on renewal for that lease. Thank you.
spk09: Yeah. Yeah, they have an option to renew the lease. And that's a fixed option at 3%. So 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 to get that space back.
spk00: And just as it stands today, is that a roll-up or a roll-down if nothing changes?
spk09: In terms of if we were to get the space back, would it roll up or down? Is that your question?
spk00: Yeah, I guess you're saying you're not getting the full mark-to-market because of the 3% automatic renewal. That's correct. It would roll up. It would roll up? Okay.
spk09: It would roll up. That place is below market today.
spk00: Okay. Thank you so much. Thank you.
spk02: As a reminder, it's Star 1 to ask a question. Our next question comes from the line of Nate Trosat with BNP. Please proceed with your question.
spk01: Hey, good afternoon. Quick one on just recurring CapEx. It's up quite a bit the last couple quarters. Just wanted to know if you can maybe unpack that. You know, is there anything we should know going forward for maybe recurring CapEx expenditures? And then also G&A, I think the guidance for the year implies a significant ramp into 4Q. So maybe you can just kind of unpack what that is.
spk09: 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 exterior work as, you know, within the third quarter and somewhat into the second quarter, 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 third quarter capital expenditures higher. As we look forward, we would expect fourth quarter to be more in line with prior quarters. And to your question around G&A, I'll note this is the first increase in G&A in 2023. We do continue to realize really significant operating synergies. Our G&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 fourth quarter, the driver 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 fourth quarter.
spk01: 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, say, last quarter?
spk09: Yeah, this this quarter our embedded rent steps on our executor leases was 4.3 percent and then compared to the the prior quarters this is actually um the highest rent steps that we've signed um through the past through year to date and the second quarter embedded rent steps were 4.1 percent and in the first quarter they were four percent okay i'll leave it there thank you thank you so much
spk02: If there are no further questions in the queue, I'd like to hand the call back to management for closing remarks.
spk14: 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.
spk02: 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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