Greetings, and welcome to the Rexford Industrial Realty Third Quarter 2018 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Investor Relations.
We would like to thank you for joining us for Rexford Industrial's Q3 2018 earnings conference call. In addition to the press release distributed yesterday after market close, we have posted a quarterly supplemental package with additional details on our results in the Investor Relations section on our website at www.rexfordindustrial.com. On today's call, management's remarks and answers to your questions may contain forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward looking statements are usually identified by the use of the words such as anticipates, believe, estimate, expect, intend, may, plan, project, seeks, should, will, potential, predicts and variations of such words or similar expressions. Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today.
Examples of forward looking statements include those related to revenue, operating income or financial guidance. As a reminder, forward looking statements represent management's current estimates. Rexford Industrial assumes no obligation to update any forward looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward looking statements contained in the company's filings with the SEC. In addition, certain of the financial information presented on this call represents non GAAP financial measures.
The company's earnings release and supplemental information package, which were released yesterday afternoon and are available on the company's website, present reconciliations to the appropriate GAAP measure and an explanation of why the company believes such non GAAP financial measures are useful to investors. Today's conference call is hosted by Rexford Industrial's Co Chief Executive Officers, Michael Frankel and Howard Schwimmer, together with Chief Financial Officer, Adeel Khan. They will make some prepared remarks, and then we will open the call for your questions. Now, I will turn the call over to Michael.
Thank you, and welcome to Rexford Industrial's Q3 2018 earnings call. I will start with a summary of our operating results and some perspective on our go forward market opportunity. Howard will then cover our recent acquisition activity as well as an update on our repositioning projects. A deal will follow with more details on our financial results and our guidance. We will then open the call for your questions.
We are pleased to report strong results that demonstrate our team's continued execution of our value driven strategy, capitalizing upon the sustained strength of the infill Southern California industrial market. Specifically, company share of core FFO grew by 44% year over year, driven by strong 26% top line revenue growth and $504,000,000 in acquisitions completed over the prior 12 months. On a per share basis, core FFO was $0.28 up 12% year over year. We generated exceptional same property NOI growth of 12.6% on a GAAP basis and 14.8% on a cash basis. After netting out the impact of repositioning, our stabilized same property NOI grew 8.7% on a GAAP basis and 11.6% on a cash basis.
Stabilized same property portfolio occupancy ended the quarter at 98.4%. Our leasing spreads continue to reflect historic levels of tenant demand with 32.2% spreads on a GAAP basis and 21.1% on a cash basis. Leasing volumes also remain strong with 106 leases signed during the quarter for a total of 944,000 square feet. Our retention rate this quarter was 55%, reflecting our strategy to trade some incremental retention for substantially higher rents with little downtime. As a result, on new leases, we achieved GAAP leasing spreads of an impressive 47%.
Market conditions within our infill Southern California industrial markets continue at unprecedented levels of high tenant demand and record low availability, with overall market vacancy continuing at below 2%. Our infill markets are truly differentiated as we continue to see a net reduction in supply with more products removed from the market than can feasibly be constructed over time. However, we don't have to look far to see very different supply demand fundamentals, with cyclical new supply and availability increasing and many other major industrial markets. With regard to tenant demand, we see no relief in sight for the deep supply demand imbalance within the infill Southern California market, particularly as the dramatic growth in e commerce and the push for shorter delivery timeframes continue to drive sustained incremental demand growth into the foreseeable future. Our warehouses provide not only the first stop for goods emanating from the nation's 2 largest ports, but also serve as the last stop or last mile fulfilling directly to consumers, businesses and retailers within the largest regional zone of consumption in the nation.
In fact, California is now the 5th largest economy in the world measured by GDP, surpassed only by the entire United States, China, Japan and Germany. California share of the national economy grew from 12.8% to 14.2% from 2012 to 2017. Southern California accounts for over half of our state's GDP. Further, infill Southern California industrial valuation metrics are in a class by themselves. Rental rates are over 90% higher on average than the next 10 largest markets and market cap rates are comparatively low, reflecting superior long term tenant demand fundamentals.
Consequently, the implied value of our infill Southern California industrial market equals the value of about the next 5 largest U. S. Markets combined. While we probably don't need to debate the extraordinary quality and size of the infill Southern California industrial market, I'd like to focus briefly on Rexford's tremendous growth opportunity before us. Although we have grown our portfolio nearly fourfold since our July 2013 IPO, with sector leading total shareholder returns of 163%.
Our 20,600,000 Square Foot Portfolio currently only represents about 1% market share in Southern California. Looking forward, we are positioned for continued high quality accretive growth driven by the following key factors. To begin with, the quality and depth of our investment pipeline continues to increase as we leverage our extensive originations research and decades of market relationships to capitalize on the extreme size and fragmentation of our infill SoCal markets. Consequently, about 60% to 70% of our transactions continue to be generated through off market and lightly marketed opportunities, which have translated into better economics and substantially better than core unlevered cash yields. We are also hyper focused on creating and adding value wherever possible.
Not only do our research driven originations efforts enable a substantial volume of value add investments, but we're also deploying our extensive team of construction, leasing and asset management specialists to create value at every stage of the ownership lifecycle on a space by space, property by property basis throughout our portfolio. The above market cash yields achieved on our value add repositioning projects and our sector leading releasing spreads demonstrate our capacity for value creation and our ability to capitalize upon the 3,400,000 square feet of expiring leases through the end of 2019, which are estimated to be about 15% below market. Further, with over 1,000,000,000 square feet with an infill Southern California built prior to 1980, we have a deep well of value creation opportunities available to us. Finally, we are positioned to capitalize on emerging market opportunities with a potent low leverage balance sheet comprising a debt to EBITDA ratio of 3.8 times and a net debt to enterprise value of 15.3%. Our capital structure represents our long term commitment to maintain a low leverage balance sheet as an integral part of our business model.
In fact, we've now completed 9 consecutive quarters with our debt to EBITDA ratio well below 6x and we intend to maintain this ratio below 6x. On a related note, we are pleased to advise that our investment grade rating was increased to BBB with a stable outlook as reported by Fitch Ratings this week, which further validates the strength of our business model. Most importantly, we'd like to thank and acknowledge the entire Rexford team. It is your tireless work, dedication and entrepreneurial creativity that enable our extraordinary growth. And with that, I'm now very pleased to turn the call over to Howard.
Thanks, Michael, and thank you everyone for joining us today. Our infill Southern California industrial markets continue to differentiate themselves with superior demand and supply fundamentals as we move through this cycle. Our target markets excluding the Eastern Inland Empire ended the 3rd quarter at 98 0.2% occupancy with asking rents up 4.7% on a weighted average basis over the past 12 months. Infill Southern California Industrial continues to benefit from strong growth in demand combined with a shrinking supply due to an accelerating conversion of industrial property to other uses. These factors have produced long term sustained rental growth.
Looking forward, unlike past cycles, today there is virtually no land available to deliver the new supply needed to meet demand fueling further pressure on rent growth. While we are certainly a beneficiary of these sustained strong market fundamentals, Rexford does not rely solely on market tailwinds for our growth. As Michael stated, we are uniquely positioned within a market with nearly 1,000,000,000 square feet of industrial space built before 1980, much of which has been passively managed and undercapitalized for decades. Core to our strategy is curing functional obsolescence to unlock value as we deliver modernized space back to market. We believe our team's single market focus and unique approach to sourcing and repositioning industrial property at accretive returns may allow us to produce sustained outperformance throughout market cycles, continuing to position us to generate long term value creation for our shareholders.
Moving on to our recent transaction activity. Since the start of the Q3, we've completed 4 acquisitions of high quality industrial product for a total of $43,800,000 bringing year to date acquisitions to $371,000,000 adding approximately 2,300,000 square feet to our portfolio. 2 thirds of acquisitions for the year have been off market or lightly marketed transactions. We continue to benefit from our internal research efforts as well as our deep local relationships as we capitalize on attractive investment opportunities in our target markets. In July, we acquired Norwalk Boulevard in the Mid County submarket for $10,800,000 The 100% leased 53,000 square foot high image property is 24 foot clear with 7 dock high loading positions.
The current rent is estimated to be 13% below market with an initial yield of 4.3%. In July, we acquired Avenue Sherman in the Greater San Fernando Valley submarket for $9,500,000 The 68,000 square foot single tenant building is currently vacant. After moderate cosmetic and functional upgrades, we will deliver a modern 26 foot clear building to a very supply constrained market. We project to achieve a 5.2% stabilized yield on costs. Also, we acquired Carmineeta Road in the Mid County submarket for $13,300,000 in an off market transaction.
The 109,000 square foot building is currently leased by 1 tenant at rates estimated to be 26% below market. The property is designed to accommodate 2 tenants and we plan to implement cosmetic and functional improvements at December lease roll to reposition the building for 2 tenant occupancy at substantially higher expected rents. The projected stabilized yield on cost is 5.6%. Subsequent to quarter end, we acquired Rocky Point in the North San Diego submarket for $10,200,000 The 3 tenant high quality buildings totaling 74,000 square feet are 31% occupied and we project a 5.7% yield on cost upon stabilization. Looking ahead, our pipeline of acquisitions under LOI or contract totals approximately 194,000,000 dollars These acquisitions are subject to completion of due diligence and satisfaction of customary closing conditions and we will provide more details as transactions are completed.
Regarding our disposition activity, we sold $38,000,000 of assets year to date and continue to mine the portfolio for opportunities where we feel value has been maximized or we can realize outsized returns. We are presently marking buildings for sale totaling 441,000 square feet with projected sales consideration totaling approximately $82,000,000 These sales are subject to customary closing conditions and there can be no assurance that they will close. We'll update you when sales are completed. Now I'd like to update you on a few of our repositioning projects, where our platform continues to create significant shareholder value. We're pleased with the progress we have made both in the execution and lease up of our repositioning pipeline.
Specifically, we've achieved 100 percent occupancy at our 134,000 square foot, port adjacent, 14 unit Figueroa project. The stabilized yield on the project increased slightly to 7.8%. We are 85% leased at our 200,000 Square Foot Nelson Project in the San Gabriel Valley, leasing 12 of 15 spaces in only 4 months at higher than projected rents. The projected stabilized yield has increased from 7.4% to 8%. We pre leased the 112,000 Square Foot Single Tenant Avenue Payne Building in the San Fernando Valley submarket.
The repositioned 30 foot clear building was stabilized at a 6.1% yield on costs. We are also pleased to report that our 57,000 Square Foot Surveyor Avenue new development project in Ventura County was 100% pre leased to an e commerce tenant with delivery expected in January 2019. We outperformed projected rent increasing the previously projected 5.3% yield on cost to 5.7%. We continue to take advantage of our opportunity to be a consolidator in what we believe is the strongest industrial market in the country. Our data driven acquisition platform and local sharpshooter expertise allow us to catalyze the volume of investment opportunities not available to many competitors and our in house redevelopment team unlocks maximum value from each acquisition we make.
I'll now turn the call over to Adeel.
Thank you, Howard. Beginning with our operating results. For the Q3 2018, net income attributable to common stockholders was approximately $6,300,000 or $0.07 per fully diluted share. This compares to $600,000 or $0.01 per fully diluted share for the Q3 of 2017. For the 3 months ended September 30, 2018, company share of core FFO was $26,100,000 as compared to $18,000,000 for the 3 months ended September 30, 2017.
On a per share basis, company share core FFO was $0.28 per fully diluted share representing a 12% increase year over year. Core FFO per share increased to our strong acquisition activity completed in the past 12 months and same property portfolio growth, which was partially offset by higher diluted share count. Same property NOI was $28,800,000 in the 3rd quarter, which compares with $25,600,000 for the same quarter in 2017, an increase of 12.6%. Our same property NOI was driven by a 10.3% increase in total rental revenue and a 3.6% increase in property operating expenses. On a cash basis, same property NOI increased by 14.8% year over year.
Stabilized same property NOI growth, net of the impact of repositioning was 8.7% in the 3rd quarter on a GAAP basis and 11.6% on a cash basis. Turning now to our balance sheet and financing activity. We continue to diversify our capital sources, optimize our cost of capital and maintain balance sheet flexibility as we grow our business over the long term. During the Q3, we issued approximately 1,500,000 shares of common stock through our ATM at a weighted average price of $31.79 per share, which resulted in net proceeds to Rexford of approximately $46,700,000 We utilized this funds to fund our acquisition for working capital and other corporate purposes. At the end of the quarter, we had $183,900,000 of cash, full availability on our $350,000,000 credit facility and approximately $194,100,000 available under the $400,000,000 ATM program.
We have no debt maturities through 2021 with our next maturity being our 100,000,000 term loan in 2022. With regard to our dividend on October 29, our Board of Directors declared a cash dividend of $0.16 per share for the Q4 of 2018 payable on January 15, 2019 to common stock and unitholders of record on December 31, 2018. Additionally, our Board of Directors declared a preferred stock cash dividend of approximately $0.37 per share for the Q4 of 2018 payable in December 31, 2018 to our preferred stockholders as of December 14, 2018. Finally, we're increasing our full year 2018 guidance for company share core FFO to range of $1.08 to $1.10 per share from our previous range of $1.05 to $1.07 per share. This was driven by our strong acquisition activity as well as better than expected portfolio and our growth so far this year.
Specifically, we now expect same property NOI growth to range from 9.5% to 10.5%, up from our previous range of 8% to 9.5%. And we expect stabilized same property NOI growth in a range of 7% to 8%, up from our previous range of 5.5% to 7%. For G and A, we're tightening our guidance to a range of $24,800,000 to $25,000,000 including about $8,500,000 of non cash company wide equity compensation. Please note that our guidance does not include the impact of any transaction or capital market activities that have not yet been announced, nor acquisition costs or other costs that we typically eliminate in calculating this metric. That completes our prepared remarks.
With that, we'll open the line to take any questions. Operator?
Thank you. The first question comes from the line of Manny Korchman with Citigroup. Please proceed with your question.
Hey, guys. You mentioned the $194,000,000 near term pipeline. Over what time period do you expect or could we expect for that to all close?
Hi, Manny, it's Howard. I mentioned we had $194,000,000 worth of transactions. We generally don't give guidance on what the timing is, but we're pretty excited about what we have lined up. And these are not typically transactions that take months months to close. That's not typically how we've reported on the pipeline.
So I can't tell you specifically, but hopefully that info will help.
Manny, this is Sudhir. Just to add one further comment. Obviously, with the capital that we have on the books, we further always think through how best to deploy that capital in terms of timing wise. So that also should add a little bit more color in terms of what Howard added just now.
Got it. And then in terms of given the tight leasing markets, I was wondering if there's been any changes in lease terms or bumps or anything else sort of from lease economics that you've been able to push tenants on given their lack of other options?
Well, I think our example of mentioning some of the updates on our repositioning projects are really the most telling about the market. We're pre leasing buildings before they're done. We leased up that Nelson project 85 percent in only 4 months. In that particular project, we are pushing rents in terms of the increases. We are getting 4% increases on an annualized basis.
We're trying to push on a few of the other projects as well. But yes, the market is still tight as a drum. There's not a lot of quality product out there. And the results we are showing are really emblematic of what's happening throughout the market.
Thanks guys.
Our next question is from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Thanks. Hi, guys. Michael, I just wanted to go back to your last point in the prepared remarks, which I thought was worded interestingly. You talked about capitalizing on emerging market opportunities. I think you were referring mostly to your balance sheet capacity, but I wanted to focus on the emerging market opportunities.
I guess, are there any segments of the market that you guys think are going to be particularly strong areas of growth for you guys that maybe you guys aren't taking advantage of now? And similarly, any additional markets or submarkets that you guys would look to expand into?
Hey, Blaine. Yes, thanks for the question. And look, generally speaking, I think our focus remains consistent. We're going to stay focused on the same markets that you see us investing in consistently. Greater LA, Orange County, the Ontario area, that represents well over 70% of our portfolio and probably should represent the lion's share of our acquisitions going forward.
So it's not as if there is a specific emerging geographic opportunity within the infill market, really more referring to the quality of our pipeline. And frankly, that's a testament to the research driven originations method that we've been deploying here for 15 years or so, and been able to invest in those processes in an accelerated fashion since we went public about 5.5 years ago. And so today, we're in a very unique position to benefit from the cumulative impacts of all that research and relationships in the market. And frankly, the quality of our pipeline today is far better than it was 2 years ago or 3 years ago because of all the work that we've been doing in the marketplace. And although literally every week we're seeing new opportunities to consider, our primary source, our largest source of new investments is through the mining of our existing pipeline of opportunities in our workflow system, which I know you guys have seen.
And so really it's just a testament to the work here at Rexford. We do have a very active pipeline as Howard mentioned. And so there's not it's not as if we see an incremental opportunity that we haven't really shared with you in the past. It's just the consistent strategy that we've always expressed. We're just getting better.
We're digging deeper. And I think we're going to see the results.
Great, very helpful. And then just looking at the reposition properties that have stabilized over the past few years, stabilized at kind of 5.5% to 8% yield. Obviously, there's been upward pressure and movement in land and construction costs. Have you guys seen any signs that this could cause a little bit of a decrease in the yields you guys can generate? Or has the growth in rents been strong enough that we should expect a similar range on the properties that are currently under repositioning?
Well, hi Glenn, it's Howard. It's hard to predict quarter to quarter really what those opportunities will be. If you look at our repositioning page, the assets on there have been aggregate blended deal of about 6.6% and new opportunities that we're looking at today, I think fit into the range you were describing earlier in the 5.5% and well north of 6%, 7% cap rates. Just you know the timing and so forth in the markets and what we happen to unearth in any one quarter. But the pipeline is fairly robust.
And I think in terms of the percentages you see us quoting in the past in terms of what we buy, the vast majority about half of what we buy tends to be what we call the core plus type assets. And then we kind of book in that with some core and then on the other side obviously the value add transactions and the pipeline in terms of the deals under contract or LOI seems to mirror those percentages.
And Blaine, it's Michael. I'll just add to that because I think an important aspect of our ability to deliver those outsized above market, call it better than core yields. Of course, the market when the market when you have tailwinds, that helps. But I think what's going to truly differentiate Rexford is that when those tailwinds when those market tailwinds start to slow down, you're going to still see us continuing to create value. And I think on average, the primary determinant of our ability to create value is our originations efforts, which Howard described through that the off market, lightly marketed transactions.
Our team is disproportionately focused on seeking and developing value add opportunities. And when we go to work to create physical value and intrinsic value in these assets, the value we're creating is more often than not dependent on market rent growth. The work that we do with the properties, the ability to increase the cash flow generating ability of these properties without market rent growth is really a key to our business. And I think as we move through the cycle, we're going to see that differentiate Rexford in an even greater way as we move forward.
Okay, very helpful. Then Adeel, it looks like you've got a couple of swaps expiring, one late this year, one early next year. I think the one later this year has been extended, but can you just touch on those and how you're thinking about those expirations?
Yes, Blayne. So as of right now, we have $150,000,000 term loan that is not swapped and that puts us at about eightytwenty swapped or fixed to variable. And I think we monitor the yield curve consistently. I think that's not a bad percentage to have in a portfolio and obviously it allows us some flexibility after a couple of years with the $150,000,000 term loan. So we're constantly monitoring it.
I think we like to operate in this range. Previously, we've operated in about 92% swap to fixed range. So we're not out of the zone. So we're looking at those numbers consistently and trying to match that up to the yield curve and how we see that progressing and we'll make the right decision hopefully for the company. But overall, I think we're in a really good spot in terms of where we ended the quarter.
Great. Thanks guys.
The next question is from the line of John Guinee with Stifel. Please proceed with your question.
Great. Deal, does Rexford remind you of your days at Maguire?
It does not whatsoever, because I have a tape player that reminds me of those times and I play it every morning when I get out to those.
Talk about 2020 Prop 13 likely gets on the ballot split roll all that sort of thing. How does that work for you guys?
Hi, John. It's Howard.
Hi. Well,
there actually were enough signatures already obtained and it's going to be on the 2020 ballot. Obviously, all the commercial landlords are going to throw a lot of weight behind defeating it. In terms of our portfolio, we've bought our assets very recently. Keep in mind, 5 years ago, we had about 5,000,000 feet. We're over 20,000,000 feet today.
So the majority of the assets were bought within the past couple of years. So the market, let's call it, on the tax side of it isn't that dramatic anyway. And then you look at the lease structures we have, we can pass through literally almost 100% of those tax increases. There's only a handful of leases that limit us in our ability to pass through any increases. So what we think of in terms of the impact to Rexford is really just maybe a short term disruption in our ability to continue pushing rent higher.
Okay, very fair. And then the next question is, how do you think land on a per FAR or per buildable foot is being valued in your various markets right now? Or is that something you guys don't look at? Is it over 50% of replacement cost yet? Or is it still under 50?
It's probably gone over 50%. Land values in Central Los Angeles, South Bay, even in some of the Orange County and Mid County areas, there is land comps you're going to start seeing that are well above $60 a square foot. And so you marry that to construction costs that are going to be in the, you know, say $40 to $60 plus square foot range and your land basis is well over 50% of the building cost.
Great. Thank you very much. Keep up the good work.
Thanks, Tom.
The next question is from the line of Joshua Dennerlein with Bank of America Merrill Lynch. Please proceed with your question.
Hey, guys. Let me turn to the big picture. What's the latest on the ground feedback from leasing brokers or tenants getting nervous at all from tariffs seeing any impact to their tenant business?
Hey, Josh, it's Michael. Thanks for connecting with us today. Good question. Today, we've really not seen any indication from our tenants whatsoever that they're changing their view on their space needs, resulting from anything in the economy or tariffs or the potential for changing trade flows. And we have seen shifts in trade flows in the past.
Frankly, we've had periods where the port shut down in 2,002, slowed down in 2014, both due to labor related issues. And even during those periods, which were extreme in terms of the disruption of the movement of goods through the ports, we saw really no change, no hiccup in our tenants. I think the key there is, again, our tenants are consumption driven. They're serving the largest zone of consumption in the nation by far. And they're literally a stone's throw from the endpoints where they need to deliver goods.
So the key for them is that that infillocation, it's less so. The key for them is less where the goods come from. It's more about their ability to deliver in a timely fashion. And of course, those delivery times are shortening pretty dramatically. So the space in terms of value to these businesses is pretty dramatically increasing despite the possibility for tariffs.
We just haven't seen any indication whatsoever from the tenant.
Got it. Thank you, Michael. And then maybe I saw the retention ratio fell this quarter. Any thoughts on how that might feed into like your ability to push rents going forward in the next few quarters?
Yes, actually the story behind the retention rate is a great indication of our ability to push rents because for example, if it weren't for 112,000 square foot space in the South Bay, which we probably could have extended, the tenant was about $0.52 and instead we let the tenant go. We didn't extend the tenant. We did a little bit of work in the space, upgraded to ESFR sprinklers, did some work on the office to modernize the office space and the work didn't take 6 months. So it didn't go into the repositioning pool. So it stayed in the measure pool for retention.
And frankly, we're marketing that and we have leases in play at $0.72 at about a 42% mark to market or leasing spread on that. And frankly, if it weren't for even just that one space, if we kept that tenant, retention would have been at 70%. And there are a few other tenants with similar examples. So the low retention is frankly a direct result of our deliberate strategy to trade a little bit of retention for NAV growth and to drive substantially higher rental rates and value. And by the way, the incremental investment in that space relative to it's a substantial return on capital.
So it's payback in about 2 years, but a 42% annual return on the incremental investment. So, we love that map. And so, I think the story behind that retention is really fundamentally our ability to drive rents.
Awesome. Thank you, Michael. Appreciate it.
Thank you. Thank you. Next question is coming from the line of Chris Lucas with Capital One. Please proceed with your question.
Hi, guys. Just a quick sort of follow-up on the trade related question. Just curious if you're hearing anything about the new NAFTA agreement that would impact sort of the demand side of the markets you're in?
Again, we haven't really it might be early yet, but we really haven't heard or seen any indication from the tenants. I think the idea is to bring some more economic output back to the United States, frankly. So if that is a benefit to demand overall, that could be a benefit to us. But we really haven't seen any indication of an impact.
Okay, great. That's all I had. Thank you.
Thank you. At this time, I'll turn the floor back to management for closing remarks.
On behalf of the entire team at Rexford, we'd like to thank everybody for joining us today and we look forward to reconnecting next quarter.
Thank you. This will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.