Greetings, and welcome to the Rexford Industrial Realty Inc. 2nd 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.
It is now my pleasure to introduce your host, Cara Smith, Investor Relations. Thank you, Ms. Smith. You may begin.
We would like to thank you for joining us for Rexford Industrial's Q2 2018 earnings conference call. In addition to the press release distributed yesterday after market closed, we have posted a quarterly supplemental package with additional details on our results in the Investor Relations section on our website at www.brexfordindustrial.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 words such as anticipates, believes, estimates, expects, intends, may, plans, projects, 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 Q2 2018 earnings call. I will start with a summary of our operating results, some comments about market conditions and our unique value driven strategy. Howard will then cover our recent transaction activity and Adeel will follow with more details on our financial results and our guidance. We will then open up the call for your questions. We are pleased to report another very strong quarter.
We grew company share of core FFO by a full 44% year over year, driven by continued strong top line internal growth as well as our active acquisition activity. Core FFO per share was $0.27 up 17.4% year over year. Our team increased same property NOI by 10.5% on a GAAP basis and by 9.9% on a cash basis, with stabilized same property portfolio occupancy up 210 basis points to 98.4 percent at quarterend. Stabilized same property portfolio NOI growth, net of the impact of repositioning, was 7.7% in the 2nd quarter on a GAAP basis and 9.5% on a cash basis. Leasing volume remains high with 128 leases signed during the quarter or 843,000 square feet.
We again achieved exceptional double digit leasing spreads at 35.5 percent on a GAAP basis and 23.9% on a cash basis. Tenant retention was 71% for the quarter. So far this year, we've acquired $348,000,000 of industrial property throughout infill Southern California, increasing our portfolio square footage to over 20,000,000 square feet. Our infill Southern California industrial market remains strong. Tenant demand continues at historic levels with overall market occupancy above 98%.
Our portfolio operates in and among the nation's largest population center, which represents one of the world's largest regional economy. Our industrial property footprint comprises the last mile of product distribution, representing the last stop for the delivery of goods to end users and consumers. Consequently, our infill tenant demand is principally driven by consumption. In this way, our target infill markets differ from non infill big box markets, where tenant demand may generally be driven by global or super regional trade and distribution. This is a key differentiator, particularly with the potential for increased tariffs and changing trade patterns.
It is instructive to consider historical examples when we have experienced the change in trade flows. For example, during 2,002, when the ports of Los Angeles and Long Beach shut down and during 2014 when the ports slowed down, both due to labor issues, we did not see any material reduction in infill tenant demand within our portfolio. As a result, we also do not expect to see a material impact to our portfolio from changing trade flows that might result from an increase in tariffs in the future. In addition, e commerce, which is still in its early stages of growth, together with the growing demand for shorter delivery timeframes, is expected to continue to drive growing industrial tenant demand into the foreseeable future. Looking forward, we believe that infill Southern California as the nation's largest endpoint of distribution, will continue to benefit like no other market from the growth in e commerce.
We also believe the introduction of new technologies from smart warehouses and 3 d printing to blockchain enabled transactions and product distribution platforms will continue to make our infill warehouse locations more productive and more valuable. Our infill Southern California markets are also differentiated by the fact that although we are experiencing ongoing tenant demand growth, we continue to see a net reduction in supply as more industrial product is removed from our infill markets and can be built. With respect to our specific operating strategy, we continue to play offense by expanding upon our competitive advantages that make for a great business at Rexford. Playing offense means that we innovate to out compete in every key aspect of our business. We innovate with leading edge technology and research to enable us to generate our own investment opportunities with most of our acquisitions acquired through off market or lightly marketed transactions, which lead to superior cash yields and value creation.
We position ourselves to outperform the market in leasing space by utilizing our vertically integrated asset management platform and superior technology. We also innovate in our back office as we build a company with increasing and growing operating margins, leveraging technology and process improvement as we grow our portfolio. As a result, in the 5 years since our IPO, we have increased our net operating margins by 3.30 basis points to 75.3% and we have increased our FFO per share by approximately 45%. Playing offensive Brexford also means maintaining a low leverage balance sheet, positioned to strike as opportunities arise. Consequently, we finished the quarter with a net debt to adjusted EBITDA ratio of 4.1 times and a debt to total combined market capitalization of 6.3 Finally, a strong offense at Rexford means setting new standards in sustainability and community stewardship, which goes beyond merely improving energy efficiency at the property level.
When we reposition Blythe's industrial property into high functioning industrial assets, we're also helping to reposition neighborhoods and communities by enabling higher quality local businesses, jobs and safer living and working environment. We pride ourselves on our unique mandate to recycle and to reinvent existing buildings to create not just superior economic returns, but to create the potential for substantially reduced environmental or carbon impact compared to discarding existing buildings and replacing them with new buildings. All these factors contribute to our ability to perform through cycles and to out compete after industrial market in infill Southern California. Our go forward market opportunity is vast as the economic value of the Southern California industrial market equals the value of the next 5 largest markets combined. Further, with over 1,000,000,000 square feet having been built prior to 1980, within a more than 2,000,000,000 square foot total market, we are capitalizing upon a nearly limitless well of value creation opportunities before us into the foreseeable future.
Most importantly, we'd like to acknowledge our tremendous Rexford team for driving exceptional execution of our unique business. And with that, I'm very pleased to turn the call over to Howard, who will discuss our acquisitions activity in more detail.
Thanks, Michael, and thank you, everyone, for joining us today. Fundamentals in our infill Southern California industrial markets remain consistently strong. Our target markets, which exclude the Eastern Inland Empire, ended the Q2 at 98.3 percent occupancy and asking rents increased 3.3% on a weighted average basis. Strong demand for industrial space combined with low availability of inventory continues to place upward pressure on rents. We had a very busy second quarter of investment activity, completing 13 acquisitions of high quality industrial product totaling just under $275,000,000 85 percent of these acquisitions were off market demonstrating the power of our research driven platform to continue uncovering opportunities to acquire quality investments in our target markets with better than core stabilized yields.
In April, we acquired Lawrence Drive in the Ventura County submarket for $6,600,000 We are now planning to construct a new 90,000 square foot 4 tenant building on the 5 acre site, replacing an existing 50,000 square foot structure. Once complete, we project an unlevered stabilized yield on total cost of approximately 6% or more. In April, we acquired 1581 Main Street, a 40,000 square foot building in the Orange County North submarket for $7,200,000 The 100% leased building is 24 foot clear with 10 dock positions, ideal for last mile distribution. The initial yield is 4.8% based on an in place lease estimated to be 18% below market. Additionally, we acquired Calle Platino in the North San Diego submarket for $20,000,000 The 143,000 square foot building is 100% leased to 4 tenants at rates estimated to be 39% below market.
Over time, we expect to drive the initial 4.3% yield to a stabilized yield on cost of 6.2%. We also closed on North Twin Oaks Valley Road in the North San Diego County submarket for $14,000,000 The fully leased 2 building property contains a total of 97,000 square feet. The initial stabilized yield is 6.1%. We purchased West Carson Street in the Los Angeles South Bay submarket for 7,500,000 dollars We have begun repositioning the vacant 28 Foot Clear, 44,000 Square Foot Building, including extensive dock high loading, ESFR sprinkler upgrades and overall modernization. Our expected stabilized yield is 5.9%.
In May, we acquired Sheila Street in the LA Central submarket for $121,000,000 The 36 foot Clear Logistics facility contains 700,000 square feet on 36 Acres of Land with 118 cross dock loading positions and excess land accommodating storage for almost 500 containers. The property is leased long term on an absolute triple net basis to a high quality credit tenant at a rate that is estimated to be 17% below market. The initial yield is 4.3%. Also in May, we completed the acquisition of Stanford Court in the Orange County North submarket for $6,100,000 The property contains a modern 35,000 square foot building leased short term to a single tenant at a lease rate estimated to be 30% below market. After minor functional and cosmetic upgrades, we expect to roll the rent to market and achieve a 5.3% yield on costs.
We acquired Surveyor Avenue located in the Ventura submarket for 5,800,000 dollars The under construction building once complete will encompass 56,000 square feet on 3 acres with 30 foot minimum clear height and 5 dock height loading positions. The property is in a prime location within a severely supply constrained submarket and the stabilized yield is expected to be 5.6%. We acquired Gateway Circle in the Orange County Airport submarket via a sale leaseback transaction for approximately 8,100,000 dollars The 37,000 square foot modern building is leased to an entrenched tenant on a long term lease at an initial yield of 5%. In June, Rexford acquired Fujita Street in the Los Angeles South Bay submarket for $14,000,000 The property contains 91,000 square feet on about 4 acres and has been occupied by an entrenched tenant since 1992. The in place yield is 5.2% with optionality for value added visibility should the in place tenant vacate.
Also in June, we purchased North McKinley Avenue in the Los Angeles South Bay submarket for $30,000,000 The recently constructed state of the art property contains 137,000 square feet with 32 foot clear height, ESFR fire sprinklers and 27 dock high positions. The building was fully leased during escrow to a logistics tenant at an initial yield of 4.4%. We acquired Azusa Canyon Road in the LA San Gabriel Valley submarket for 12,000,000 dollars The property contains 71,000 square feet with excess land equating to only 27% site coverage. The building is leased short term at a below market rent to a credit tenant with optionality for value add repositioning or redevelopment at lease expiration. The initial yield is 5%.
At the end of June, we acquired Montague Street in the LA San Fernando Valley submarket for 22,500,000 The recently renovated 123,000 square foot building is 100% leased on a short term basis to a single tenant at a lease rate estimated to be 18% below market. The initial 3.3% yield is expected to stabilize at a 5.7% yield on cost at lease roll. Subsequent to quarter end, we acquired Norwalk Boulevard, a stabilized asset in the LA Mid County submarket for $10,800,000 at an initial yield of 4.3%. Avenue Sherman, a vacant value add building in the LA San Fernando Valley submarket were $9,500,000 with a projected stabilized yield of 5.1%. For 2018, we've completed $348,000,000 of acquisitions so far and our pipeline includes over $85,000,000 of acquisitions under LOI or contract.
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 2 properties for approximately $11,000,000 in the 2nd quarter $38,000,000 year to date. In aggregate, these dispositions generated a weighted average unlevered IRR of 31% for the 2nd quarter and 21% for the year to date total. All proceeds have been efficiently reinvested through tax deferred exchanges. I'll now turn the call over to Adeel.
Thank you, Howard. Beginning with our operating results. For the Q2 2018, net income attributable to common stockholders was approximately $5,200,000 or $0.06 per fully diluted share. This compares to $17,800,000 or $0.26 per fully diluted share for the Q2 of 2017. Net income for the Q2 of 2018 included $1,600,000 of gain from the sale of real estate as compared to $16,600,000 of gain for the Q2 of 2017.
For the 3 months ended June 30, 2018, company share of core FFO was $22,900,000 as compared to $15,900,000 for the 3 months ended June 30, 2017. On a per share basis, company share of core FFO was $0.27 per fully diluted share, representing a 17% increase year over year. Core FFO per share increased due to our strong acquisition activity completed in the past 12 months and same property portfolio growth, which was partially offset by higher interest expense and higher diluted share count. Same property NOI was $28,100,000 in the 2nd quarter, which compares with $25,400,000 for the same quarter in 2017, an increase of 10.5%. Our same property NOI was driven by a 9.3% increase in total rental revenue and a 5.6% increase in property operating expenses.
On a cash basis, same property NOI increased by 9.9% year over year. Stabilized same property NOI growth, net of the impact of repositioning was 7.7% in the 2nd quarter on a GAAP basis and 9.5% on a cash basis. Turning now to our balance sheet and financing activity. We continue to make great progress as we optimize our cost of capital while maintaining a strong flexible balance sheet with ample liquidity to support our growth objectives. During the Q2, we issued approximately 10,200,000 shares of common stock to our ATM at a weighted average price of $31.17 per share, which resulted in net proceeds to Rexford of approximately $312,000,000 We utilize these funds to fund our acquisitions, repay borrowing on our credit facility and for other corporate purposes.
At the end of the second quarter, we had $162,700,000 of cash, full availability on our $350,000,000 credit facility and approximately $242,000,000 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 July 30, our Board of Directors declared a cash dividend of $0.16 per share for the Q3 of 2018, payable on October 15, 2018, to common stock and unitholders on record on September 28, 2018. Additionally, our Board of Directors declared a preferred stock cash dividend of approximately $0.37 per share for the Q3 of 2018, payable on September 28, 2018 to our preferred stockholders as of September 14, 2018. Finally, we're increasing our full year 2018 guidance for company share core FFO to a range of $1.05 to $1.07 per share from our previous range of $1.02 to $1.05 per share.
This was driven by a strong acquisition activity as well as better than expected portfolio NOI growth so far this year. Specifically, we now expect same property portfolio NOI growth to range from 8% to 9.5%, up from our previous range of 6.5% to 8.5%. And we expect stabilized same property NOI growth in a range of 5.5% to 7%, up from our previous range of 4.5% to 6%. For G and A, we're tightening our guidance to a range of $24,500,000 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 transactions or capital market activities that have not yet been announced, nor acquisition costs or other costs that typically eliminate when calculating this metric.
That completes our prepared remarks. With that, we'll open the line to take any questions. Operator?
Thank you. We will now be conducting a question and answer Our first question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Thanks. Good morning out there. Michael, I appreciate your remarks on tariffs, but they've been a pretty big topic in industrial recently. I guess, where you guys think the biggest risk is to your business? Is it specific tenants that are involved with goods that might fall under the tariffs?
Is it increasing material costs or construction or maybe just the general effect on GDP and or consumption?
Hey, Blaine. Thanks for joining us today. Appreciate the question. And by design, our business model is to focus on extremely diversified tenant base. Again, that's why we focus on generic industrial space.
And so we're able to feel the widest, deepest possible universe of tenants. And we really don't have any segment of concentration dedicated to any particular industry or function. So I think to your point, the latter point, which is just to the extent there's a general reduction in GDP, that's going to affect everybody. But we really don't see particular concentration in industries or tenants that would be specifically affected to the degree it would materially impact on their own our portfolio or performance.
Okay. That's helpful. And then, Howard, you mentioned $85,000,000 of properties under LOI or contract. I think that's meaningfully below what you were where you were last quarter when you talked about $200,000,000 Is there anything to read into that, whether it be related to your appetite for deals or the amount of attractive deals on the market?
No, I really don't think there's a correlation to that. First of all, our team was exceedingly busy trying to close deals this past quarter. We've never had a quarter where we've done 13 transactions. In fact, we've had years where we've done 13 transactions. So tremendous amount of our focus was on closing deals.
We of course have a focus on sourcing new acquisitions and the team is very busy. And I think the $85,000,000 is really just indication of really what we're working on and are the deals that are obviously either under contract or LOI and are more imminent. But behind that is quite a bit of activity. So really not an indication of any change in the activity level for us.
Okay. That's fair. And then we noticed your top 10 at Unified Grocers was not on the top 10 for last quarter. Is this a new tenant to your portfolio? Did you sign an expansion lease during the quarter?
I guess what's going on there?
Unified Grocers is the tenant that was in the 695,000 foot building we acquired on Shiela Street. And so that is a new tenant and that's the reason why you're seeing them for the first time. And interesting story behind them, Maybe, Michael, you want to speak to what happened with Unify in the last week? Yes. Actually, there was
a recent announcement they were acquired by a larger firm that is the largest distributor to Whole Foods. And so, obviously, we think that that may expand the opportunity for the tenant as Amazon is expanding the business driven by Whole Foods, not just from their in store purchases, but also direct to consumer.
All right. Sounds good. Thanks guys.
Our next question comes from the line of Manny Korchman from Citi. Please proceed with your question. Hey, guys. How are you? A deal question for you.
If we look at sort of the trajectory of FFO, feel like we've got flat guidance from an FFO perspective, not a dip into year end. Is that simply a function of the increased share count from doing equity here? Is there something else we should be thinking about?
Manny, thanks for joining the call and thanks for the question. So first of all, I think just to reiterate, we did move the guidance up both on the high end and the low end from 102 to 105 from 1 0 2 to 105 to 105 to 107. So I think clearly there's a lot of good organic growth that's come through the year. Also it shows up in the releasing spreads and just the leasing and the where the occupancy levels have been for the year and how they compare to last year. So clearly, great trajectory there.
We did have acquisitions during the quarter, which we disclosed already. So there is balance sheet cash sitting there, which is going to get deployed in the not too distant future. We did a couple of deals right after the quarter. And then Howard disclosed the what's under LOI and escrow. So a lot of that is just going to be timing based, right.
So it's more timing than anything, but I think from a I think not putting any acquisitions to our guidance clearly is the other of right. So I think if you've seen the path that we've taken over the last two quarters, we have progressively improved that. So I think if that stays true to what we've done, then we should be in good shape.
Thanks for that. And just in terms of the acquisition market, what are you seeing in terms of larger portfolios out there right now?
There's some things floating around and we hear that there'll be some other opportunities coming to market. Most of them are not purely Southern California based portfolios. They're more national. And there's some interesting opportunities that we might be able to participate in. So we have some focus on a couple of things right now that we are working on and trying to peel out some assets or work with other people to split up
some of the portfolio.
Manny, I think it's Michael. Thanks again for joining the call. If you put our business in perspective, the key to our business also is we are focused on such a large fragmented marketplace and we will see some larger transactions we think in the not too distant future. But to put in perspective, about year to date, we have issued about 170 LOIs and we have transacted on about, what, 15, 16 transactions this year. And those LOIs that we put out offers on represent about $3,700,000,000 of opportunity.
So it doesn't necessarily take the big transactions to move the needle at Rexford. And the opportunity set of Rexford today is we couldn't be more excited and frankly continues to improve for us over time as we benefit from the cumulative impacts of all the research and lead generation that we are doing.
Thanks
you guys can talk more about what you're seeing in terms of market rent growth. Just kind of where do you think it's been year to date and where do you think how do you think it trends for the rest of the year and even into next year?
Hi, Jamie, it's Howard. It's interesting, I think what we're achieving in market rent growth, in other words, in our rental spreads is substantially greater than the overall blended market, which includes obviously bigger and smaller sized spaces. In terms of growth, it looks like Orange County probably is projected to have the largest rent growth this year. If you look at some of the CPRE numbers, I think year to date Orange County lease rates have increased about 2.2% and CBRE is projecting to be over 5% end of the year. Inland Empire, we've had some outstanding rent growth in our portfolio.
In fact, one of our higher GAAP and cash rent spreads we captured was on 100,000 foot renewal of property we bought late last year. I think we had an 85% GAAP rent spread on it. But surprisingly, the overall market in Inland Empire is really going to have anemic rent growth, which is being dragged down by a lot of the larger spec buildings that are in the Eastern Inland Empire, which as you know Rexford doesn't focus in. But because there's so much product out there, they're not really able to push those rents and those large buildings have a big impact. But what's more interesting I find is if you look at our business strategy where we go out and target undervalued, under rented, mismanaged type properties, Rexford is really set up well going forward to be able to demonstrate large rent growth in our portfolio because we're not reliant just on market rent growth in terms of the momentum in the market to create growth in our same store pool.
That one deal I mentioned is a great example. If you look at what we bought in the last quarter, that $275,000,000 worth of acquisitions, in aggregate in place rents in just those acquisitions were 16.6% below market. So for Rexford, I think we're in a different position really because of our business strategy as opposed to many others who might be more just momentum players in the market.
Okay, that's helpful. And then as
you think about your expirations for next year, looks like your in place rents of $909,000,000 How does that compare to where you think market is?
Market, we estimate on a mark to market basis, we look at our expiring leases over the next year and a half, about 15% below market. That's on our expiring leases. And if you look at overall the entire portfolio, we're probably a bit less than that naturally because a portion of that's already rolled.
Okay. And then any large expirations we should be thinking about either back half of this year into next year? And then also, can you talk about Dendreon, which looks like it's one of your largest tenants, just with their I
think they expire at the
end of next year, just any conversations you're having with them?
Sure. Well, as we mentioned on the last call, really this year was really about blocking and tackling. Really early on were some of the larger leases that we're able to renew and through the balance of this year, we really don't have anything of any impact at all. In fact, there's only one building that's even close to 50,000 fees and then it drops off pretty quickly in terms of expiring leases for remainder of the year. And from the list I'm looking at right now, most of the people that even 20,000 to 50,000 feet we're already talking to about renewals.
So it's really more of the small space occupiers that are a little less easy to predict because they wait really to the last minute sometimes on staying or leaving in terms of those decisions. And as far as looking into the first half of twenty nineteen, the largest building we have with an expiring lease is about 100,000 feet. We're already in discussions with that tenant on a renewal. And the reason being there's nowhere to move in the market. That building is in mid counties.
So next year really looks pretty decent as well. There's no real large buildings. It's really looking like it's going to be blocking a tack line. As far as Dendreon, that comes up, I think, the end of next year. And to be honest with you, whether they stay or leave, the building is dramatically below value right now.
And the current owner of the Dendron business has been making an investment in that company. And from what I read, they've really turned around the business. And I expect that they're going to want to stay in the building. I don't know if you recall, but that building actually had about $60 plus 1,000,000 of specialized improvements made in there that the tenants obligated to remove and restore to a high clear, low finish distribution building on the exit. But the current owner of that business bought the company and took over that lease, finding value in those improvements.
So I expect that they probably will stay and we'll have significant rent growth in the building.
Okay. And
Jamie just to add to that, it kind of feels like the questions are around what are the internal growth prospects for the company based on the forward lease expirations and major tenant prospects. And generally, we see about 17.3% embedded NOI growth in the portfolio as of the end of the quarter, assuming we never bought another asset. And about 39% of that or $10,500,000 is contributed by the repositioning. And as excited as we are with the market rent growth and certainly we don't see any let up in tenant demand whatsoever, But we are really focused on the value add side of our business because that's going to continue to deliver NOI growth through cycle and it's a key element of our business model.
So I guess an early read on same store for next year? Are you able to you just gave some numbers around it?
We'd love to, but not yet.
All right. Thanks for the color. I appreciate
it. Thank you. Nick.
There are no further questions in the queue. I'd like to hand the call back to management for closing comments.
Many thanks everybody for joining today and we look forward to reconnecting in about 3 months.
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