Welcome to the Rexford Industrial Realty Inc. first quarter 2018 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Steve Swett with ICR. Please proceed.
We would like to thank you for joining us for Rexford Industrial's first quarter 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 words such as anticipate, believe, estimate, expects, intend, may, plan, 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, then we will open the call for your questions. I will turn the call over to Michael.
Thank you, welcome to Rexford Industrial's first quarter 2018 earnings call. I will begin with a summary of our operating and financial results. Howard will provide an overview of our recent transaction activity. Adeel will follow with more detail on our financial results and guidance, we will open the call for your questions. Our target infill Southern California industrial market continues to operate with exceptionally strong fundamentals. Available product remains scarce, with less than 2% vacancy across our infill markets. Despite this extreme scarcity of available space, we continue to see more industrial product converted to other uses than can be delivered due to the extreme scarcity of available land. This extensive supply-demand imbalance and favorable landlord fundamentals appear entrenched for the foreseeable future as the dramatic growth of e-commerce fuels additional tenant demand.
Beyond these strong market fundamentals, we believe Rexford's focused business model is also well-positioned relative to some of today's macro trends, including higher interest rates and rising tariffs. To the extent higher interest rates reflect healthy economic growth, and as our tenants represent an exceptionally diversified proxy for the general economy, these factors should continue to support our ability to drive higher rental rates. Further, the fact that we principally compete for acquisitions against levered private buyers, our superior access to capital, and low levered balance sheet may translate into greater competitive advantages as rates rise. Finally, almost all of our leases contain contractual 3% annual rental rate increases. As an integral part of our business model, we focus on extensive value add work to increase our cash flow throughout our portfolio, both of which help mitigate the impact of rising interest rates.
With regard to concerns over rising tariffs, our infill industrial space is primarily driven by regional consumption. Our markets operate differently from non-infill big box markets, which are disproportionately driven by global trade and logistics. Conversely, demand for our product is primarily driven by local consumption. To that end, our regional economy is not only substantially larger and more diverse than the vast majority of countries, but is driven by a combination of innovation, higher education, research, demographic, and entrepreneurial growth that differentiates this region from any other in the nation. Turning to our recent results, it was another exceptionally strong quarter for Rexford. Our team increased company share of Core FFO by 42% compared to the prior year quarter. We increased Core FFO per share by 17% to $0.27 per share over the prior year quarter.
We increased same property NOI by 9.3% on a GAAP basis and 8.3% on a cash basis, driven by a 7.8% increase in same property portfolio rental revenue and 110 basis point increase in occupancy in our stabilized same property portfolio to 97.5%. Net of repositioning space, our stabilized same property NOI growth was a full 7.4% on a GAAP basis and 8% on a cash basis. Our leasing activity continues to contribute strongly to our cash flow and NOI growth. During the first quarter, we signed 117 leases for approximately 850,000 sq ft. Our leasing spreads were 25.3% on a GAAP basis and 14.9% on a cash basis. On new leases, GAAP spreads were a full 32% and cash spreads were 18.1%. Further, we've had a great start to the year on the acquisition front.
Year-to-date, we have acquired approximately $108 million of property, and Howard will provide additional details on these acquisitions as well as our current pipeline. As a result of the company's strong performance, we increased our common dividend by just over 10% during the first quarter, and we are now increasing our 2018 FFO and NOI guidance, which Adeel will detail shortly. I'd also like to take this opportunity to thank the entire Rexford team for your exceptional focus and results, which are enabling us to build this great company. With that, I'm very pleased to turn the call over to Howard.
Thanks, Michael, and thank you everyone for joining us today. Fundamentals in our markets remain extremely strong. Our target infill Southern California industrial markets, which excludes the Eastern Inland Empire, closed the first quarter with near capacity occupancy of 98.2%, and asking rents increased 5.9% on a weighted average basis. As Michael mentioned, demand for industrial space in our markets continues to grow while the overall inventory continues to shrink as space is removed for other uses. With regard to recent investment activity, year-to-date, we have completed 8 acquisitions totaling approximately $108 million. We continue to take advantage of the vast consolidation opportunity in our markets with our research-driven originations platform delivering a substantial advantage. Year-to-date, 75% of our transactions were off-market opportunities where our differentiated platform continues to generate a strong volume of investments in prime infill locations at better than core stabilized yields.
In January, we acquired Norton Avenue, a 100% leased 103,000 sq ft building located in Chino, part of the Inland Empire West submarket, for $11.4 million. The 24-foot clear building has 16 dock positions with current rent estimated to be more than 30% below market. The initial yield is 3.6%, and after completing cosmetic and functional renovations, we expect to achieve a 5.2% stabilized yield on total costs. In February, we acquired Ontario Commerce Center, a 3-building multi-tenant industrial complex located in the Inland Empire West submarket for $24.1 million. The 214,000 sq ft property is comprised of a modern 100% occupied 135,000 sq ft dock-high multi-tenant building, and 2 adjacent flex buildings that we are in the process of selling. In-place rents are estimated to be 20% below market, and the weighted average lease term is less than 2 years.
We plan to implement cosmetic and functional upgrades and expect to drive rents to market as leases roll. The initial yield is 4.7%, and we expect to achieve a 5.5% yield on cost once improvements and re-leasing are completed. In March, we acquired Shoemaker Avenue, located in Cerritos in the Los Angeles Mid-Counties submarket, for $17.2 million. The 24-foot clear building contains 116,000 sq ft with 12 dock positions. The property is 100% leased to a single tenant at approximately 18% below market rent with a near-term lease expiration. After minor improvements, we expect to move the initial yield of 4.5% to a stabilized yield on cost of 5.3% upon renewal or retenanting of the facility. Subsequent to quarter end, in April, we acquired Lawrence Drive, located in the Ventura County submarket, for $6.6 million.
The property contains a vacant 50,000 sq ft building on just under 5 acres of land, and we are targeting a stabilized yield on cost of approximately 6% or more. We acquired North Main Street, located in the Orange County North submarket, for $7.2 million. It's a 100% leased 40,000 sq ft building with 24-foot clear with 10 dock positions, and we project a stabilized yield of just over 5%. We acquired Calle Platino in North San Diego submarket for $20 million. It's a 143,000 sq ft building. It's 100% leased, and we expect to drive the initial 4.3% yield to a stabilized yield on cost of 6.2%. We also acquired North Twin Oaks Valley Road in the North San Diego County submarket for $14 million. The property contains 2 buildings with a total of 97,000 sq ft with an initial yield of 6.1%.
Finally, we acquired West Carson Street, located in the Los Angeles South Bay submarket, for $7.5 million. The property contains a vacant 44,000-square-foot building, and we expect to achieve a stabilized yield of 5.7%. We are extremely pleased with our pace of acquisition so far in 2018, and we remain excited about our active go-forward pipeline. Currently, we have more than $200 million of new investments under contract or LOI, subject to completion of due diligence and satisfaction of customary closing conditions. We will provide more details as transactions are completed. Turning to our repositioning activity, I would like to update you on a couple of our projects. At our renovated 134,000-square-foot Figueroa project in the South Bay, we have completed all exterior renovations, are over 80% complete for interior work, and are 75% leased today, achieving rents 6% higher than our original underwriting.
We now project a stabilized yield of 7.4% compared to a 6.7% initial projected yield. Also, with regard to our 200,000-square-foot Nelson project in the San Gabriel Valley, we expect to complete repositioning of the existing buildings in the coming weeks and sign leases and LOIs at rates well above our underwriting. These higher lease rates have more than compensated for expansions in scope. We have made great progress in construction of 64,000 square feet of new building and have increased the overall project yield on cost from 6.4% originally to 7.4% currently. Finally, we continue to sell properties where significant value can be harvested in order to recycle capital into new growth opportunities. Year-to-date, we sold four properties for aggregate proceeds of $28.5 million. In total, these dispositions generated a weighted average unlevered IRR of 16.9%, and proceeds were all efficiently reinvested through tax-deferred exchanges.
I will now turn the call over to Adeel.
Thank you, Howard. Beginning with our operating results. For the first quarter 2018, net income attributable to common stockholders was approximately $12.2 million, or $0.15 per fully diluted share. This compares to $4.2 million, or $0.06 per fully diluted share for the first quarter of 2017. For the three months ended March 31, 2018, company share of Core FFO was $21.4 million as compared to $15.1 million for the three months ended March 31, 2017. On a per share basis, company share of Core FFO was $0.27 per fully diluted share, representing increase of 17% 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 $27.4 million in the first quarter, which compares to $25.1 million for the same quarter in 2017, an increase of 9.3%. Our same property NOI was driven by a 7.8% increase in total rental revenue and a 3.7% increase in property operating expenses. On a cash basis, same property NOI increased by 8.3% year-over-year. Turning now to our balance sheet and financing activity. We continue to work to lower our cost of capital and believe our strong, flexible balance sheet is well-suited to support our growth plan. During the first quarter, we issued approximately 2.5 million shares of common stock through our ATM at a weighted average price of $28.16 per share. This resulted in net proceeds to Rexford of approximately $69.3 million.
At the end of the first quarter, we had $20 million of cash, $299 million of availability on our $350 million credit facility, and approximately $159 million available under the $300 million ATM program. We have no debt maturities in 2018 and just $59 million in 2019. We remain in a very strong liquidity position. With regard to our dividend, on April 30th, our board of directors declared a cash dividend of $0.16 per share for the second quarter of 2018, payable on July 16, 2018, to common stock and unit holders of record on June 29, 2018. Additionally, our board of directors declared a preferred stock cash dividend of approximately $0.37 per share for the second quarter of 2018, payable on June 29, 2018, to our preferred stockholders as of June 15, 2018.
Finally, we're raising our full-year 2018 guidance for company share of Core FFO from a range of $1.01-$1.04 per share to a range of $1.02-$1.05 per share. This was driven by changes in our expectations for our portfolio NOI growth this year, specifically, we now expect same property portfolio NOI growth to range from 6.5%-8.5%, up from our previous range of 6%-8%. We expect stabilized same-property portfolio NOI growth within a range of 4.5%-6%, up from our previous range of 4%-5.5%. 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 we 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. At this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. One moment, please, while we poll for questions. Our first question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Great. Thank you. Nice quarter, guys. Michael, I want to go to your comment about higher rates and how it might impact levered buyers in your market. Can you just talk about, maybe give some more color around that, and have you seen it already this cycle? If not, maybe talk about what happened in prior cycles.
Hey, Jamie. Thanks for your question. Appreciate you joining us today. We have seen similar scenarios in prior cycles. A lot of these private buyers are typically would be incurring more leverage. Number one, higher interest rates just from a percentage of their capital stack are going to have a disproportionate impact. Also, they have a tougher time controlling their overall rate exposure. From the business model perspective whereas we're more adroit with swaps and longer-term debt structures, that's a little less common with a typical private buyer that we'd be competing with.
Jamie, I might add to that, too. This is Howard Schwimmer. Typically, I think Rexford Industrial has done a good job of training the brokers and everyone to ask for all cash and faster closes. It's not that right now we've got a lot of private buyers that have been out-competing us. It's just that sometimes they drive pricing if we wind up competing with them a little bit because of the lower interest rates. With interest rates increasing, the offers that the sellers still aren't going to accept because they can't close quickly are going to wind up coming in at lower pricing, and that's really what's going to help us also.
Have you seen that at all so far this cycle?
With interest rates have gone up nominally from a historical perspective, in our markets, we haven't seen any impact so far on the transaction side.
By the way, Jamie, don't forget we were a private company for over 10 years, before we took the company public. We've lived that life intimately, we have a pretty good sense for how rising rate environments impact those types of buyers.
Okay. Thank you. Then can you just talk about rent growth? What are you seeing? What do you expect to see across your major sub-markets?
Well, as I pointed out in the prepared comments, rent growth was, I think I said 5.-
5.9
9% in our infill markets in aggregate over the year-over-year for the first quarter. If you look and drill down, the largest market in Southern California is Greater Los Angeles, representing about half the square footage in our market. Year-over-year through the last quarter, we saw rent growth of about 7%. If you drill down even further, the strongest of the markets in that central market was the South Bay, that had 10.4% rent growth year-over-year followed by Mid-Counties with 8% year-over-year rent growth. The markets are still functioning at extraordinarily high levels of demand. What we're also seeing is from an e-commerce standpoint and last mile delivery, people are really trying to solve more for transportation costs, which are growing significantly faster than rents and represent typically a larger impact on people's income statements.
really feeding into our strategy of focusing on those infill markets, where we're seeing more and more demand, which enables them to be closer and closer to the ports to be able to lower those transportation costs.
Hey, Jamie, one more thought on rental rate growth. One thing the statistics don't drill down into is how rental rate growth varies across product quality and specific location. These are extremely large and deep markets and diverse markets with a tremendous amount of product that is highly functional and also a tremendous amount of product that is not well located, that is not functional. When you drill down and look at product quality, our mandate is to own the best product in the market and the best locations, and if it's not that way when we buy it, we proactively make it so. Our ability to command premium rents driven by our higher quality product and locations, is one of the key attributes to our business model, where we look to out-compete.
Look, it's easy when the market's as strong as it is today, but we strive to out-compete when the market is not as strong. I think that's something that it's really important to think about with respect to these very large, diverse markets.
Okay. All right. Thank you.
Our next question comes from the line of Manny Korchman with Citigroup. Please proceed with your question.
Thanks. Howard Schwimmer, can you talk a little bit more about the $200 million of assets you spoke about having under contract or expectations of closing, more specifically timing and if there are any portfolio deals within that mix?
Sure, Manny. Nice to hear from your voice. Yeah, a bit over $200 million, and it's really representative of what you see us continuing to buy. It's a combination of core plus and value-add assets. As far as closing, we'll continue to close assets in the near term, and some of the deals have some rights for extensions with the sellers so that we can allow for their accommodation for 1031 trades as well. As usual, we'll continue to keep everyone abreast of the closings as they occur, and we work through the stages of diligence on a lot of the properties.
Great. Adeel Khan, a couple for you. You mentioned that you don't have any forward activity in your guidance, which is typical. How much of the closings are in guidance? Are the April deals included in the guidance figures as is?
Hey, Manny. Yes. Essentially the last press release that we sent out, everything included up to that point is included in the guidance, and naturally any ATM activity that took place in Q1 and that we already have reported is included. Typically the guidance includes everything up to the earnings date, which is today or yesterday. Everything is included in there.
From a modeling perspective, you gave some of the initial yields and some of the stabilized yields. I don't know if this call is the right venue, but maybe could you provide the initial yields for all of the acquisition activity? Or maybe you could provide that on a go-forward basis just to aid in modeling?
Yeah. Manny, it's Howard. I believe we really gave most all of the yields. If you saw one we missed, we're happy to catch up with you offline and make sure that it's clear.
Great. Thanks, guys.
As a reminder, if you'd like to ask a question, please press star zero on your telephone keypad. As a reminder, if you would like to ask a question, please press star zero on your telephone keypad. One moment, please. Our next question comes from the line of John Benda with National Securities. Please proceed with your question.
Hey, good afternoon, guys. How are you today?
Great. Well, thanks.
Quickly, on the new and renewal leases where you saw the nice increases, can you speak to which industry they're operating in that you're getting the highest renewal rates from, or is it really across all industries in your portfolio?
This is Howard. It's really across all industries. We have a very deep market, very diversified in terms of the tenancies and uses. No one particular large lease drove those spreads this quarter. This year was really a year of just blocking and tackling. We didn't have any large leases that were coming up, and most all of everything's been handled at this point. In fact, our largest lease remaining for the year expiring is only 111,000 feet, and after that particular lease, it drops down to about 50,000 feet. It's really, I think, evidence of the strength of our overall portfolio, these leasing spreads, and not any one particular market or property.
Okay. Then on the repositioning portfolio, can you talk about common themes that you guys initiate in repositioning? Is there a standard across the properties? Is it unique to each property? Are there things that you put in place across all of them to bring them up to your standards?
Well, as Michael mentioned, when we buy a property, if it's not the best quality and most functional in its particular sub-market, we're proactively renovating it to make it so. Sometimes there's a lease encumbering it, so we're not able to do that work right away. Typically, I'll give you an example. When I mentioned a few buildings we bought this quarter that had significant dock-high loading and were 24-foot clear and so forth. What you typically see us doing is going in and upgrading the sprinkler calibrations to make sure that we're able to utilize the full cubic capacity of the space, modernizing offices, and really rebranding the product on the outside in terms of consistency to paint, landscape, signage, and so forth. Then the projects, they have a pretty wide range.
The Nelson Avenue project I updated on, that's a very involved project where we're demising down to smaller increments of space and adding some new buildings. It's really all about getting to the same place, though. It's delivering that consistent quality of low-finish industrial product that we can move tenants in and out of with very low frictional costs.
Hey, John, it's Michael. I'll just add to that a little bit, give you another sense for what that repositioning capacity does for us. Again, if you take that Nelson property as an example, when we were competing for that product, the other buyers were actually looking at that property with the idea of removing all the existing buildings, almost 140,000 square feet of improvements, and building a brand-new building on the site. They were probably going to solve to something in the order of a sub five cap on their total development cost. We looked at that property, and we saw about $140,000 of existing improvements that we could completely reinvent and reposition. Then we were going to remove a little small structure and build a brand-new 64,000-square-foot building, which we're in process on.
Not only are we solving for substantially better yields, our yield, we're solving to about a 7.4% unlevered yield on total cost, which is pretty dramatic compared to the competitors that we're going to solve to somewhere probably below a 5% yield. Not only are we driving better economics for the company and for shareholders, but also it enables us to out-compete in the market. The reposition activity is just key to our business model, and we couldn't be more excited about what we continue to see in the market.
John, I'm going to add one last point to what Howard and Michael added. This is Adeel. This quarter, we added a little additional disclosure on the CapEx page. Besides the repositioning page that we talked about just now, we also have other smaller repositioning that takes place across our portfolio, which is very important and meaningful. It doesn't meet the definition of the downtime that we have defined in the supplemental, but it's very meaningful and very accretive for the company. Take a look at that disclosure where we have bifurcated those costs, and that will give you some more perspective in terms of how we think about this stuff.
All right, great. Thank you very much.
Our next question comes from the line of Michael Mueller with J.P. Morgan. Please proceed with your question.
Thanks. Hi. Quick question. Looking at the stabilized same property portfolio and Ventura County, it looks like sequentially from the fourth quarter, there's about a 400 basis point occupancy dip. I know repositionings are out of this, so I was just curious what drove that.
Hi, Mike. It's Howard. Again, it was just blocking and tackling. We had a space that vacated the end of the year. There was 80,000 feet. We were able to lease 57,000 feet of it. We had a couple other spaces that were 20 ±1,000 square feet here and there that we leased up.
That market's actually performing very well right now. We had another tenant in our Mission Oaks project that was in 37,000 feet that had run into financial problems. We negotiated an exit for them and were able to actually re-lease the space. I think it was either in the quarter, or it was in the same quarter. The market is performing real well right now for us.
Got it. Okay. That was it. Thank you.
Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Hey, guys. Good morning out there. You talked a little bit about the impact of rising interest rates on the market, which was helpful, but I also wanted to ask if you've seen any impact from the tax reform on your markets or tenants.
Hey, Blaine. Good to hear from you. We really haven't seen any noticeable impact, and we haven't really heard any anecdotal comments from tenants, whether new tenants or renewals.
Okay. That's fair. A quick one for Adeel. Was the increase in same-store NOI guidance driven entirely by maybe a Q1 that was a little above your expectations, or is it a higher expectation for the entire year?
Well, it's a little bit of both, Blaine. Typically what you saw us do last year, as we get more perspective as to how the year is trending. With each day that passes, we have a little bit more visibility in terms of how the upcoming renewals or the expirations that are coming up, how they're going to perform and behave. We can be a little bit more specific. It's a little bit of both. Clearly, we're seeing very strong trends, which are witnessed by what we reported in Q1. That trajectory is certainly something we're looking to follow forward. It's a combination of both in terms of that. Just to give a little bit more perspective, 1.1 million of the expiring square footage that we have in the supplemental is due to the same store.
That also puts some color in terms of what we've got coming up from April 1 all the way to December. Putting that in perspective, that essentially and what's been renewed and so forth, is a combination of both of those factors that allows us to kind of raise that up by 50 basis points. At the same time, just to fill in the last bit of piece of color is that you still have three quarters of the year left. You do have that little bit of area that we still need to kind of sort for.
Sure. That's fair. Thanks for the color.
Blaine, just to add to that, when you think about our business, it's not just that the market's performing well, it's that this team is extremely focused and working very hard. Because we run a very tenant-intensive business. A lot has to go right for us to drive these kind of numbers, and that's well beyond just what the market delivers to us. Just to give you a sense for how sensitive things are, overall, 45,000 sq ft equates on average to a half a penny of FFO. That's not a lot of square footage. You could easily have an unexpected change in one or two tenants that easily gets you to those levels. This team is staying extremely focused, and not just on the renewals, but the overall customer service and experience for our tenants.
If you drill down to the same store pool, that impact is that much more magnified. We just look forward, and we're going to stay focused and try the best we can. I think that gives a little more color to Adeel's perspective.
Great. Appreciate the comments.
Our next question is a follow-up from John Benda with National Securities. Please proceed with your question.
Just real quick, guys. In the K, you had disclosed that in 2019, there's another 15% of our rentable square feet coming up for renewal. Given that we're almost halfway into 2018, have you started having any of those conversations yet? Would you expect similar performance on the 2019 renewals that you're getting on the current renewals?
Yeah. We're always trying to stay ahead of things as much as we can, John. If you look at the expirations, I'll give you an example that we have the remainder of this year, 1.1 million feet, as I mentioned, the largest is 111,000 feet, then it drops to 50, then it really starts dropping even quicker. Those tenants don't have a lot of visibility in terms of whether they're staying or leaving until it gets a lot closer to their expiration dates. 2019, there's a lot of those type tenants. Some of the larger ones we do get in front of and have those early conversations. Frankly, we were real successful at doing a lot of those renewals early for 2018 and during the first quarter. We do, as a philosophy of the company, try and push on early renewals.
It's the right time in terms of the cycle to do that as well.
Great. Thank you.
Thank you. That completes our question and answer session. I will now turn the call back to management for closing remarks.
We want to thank everybody for joining us today and your support, and we look forward to reconnecting in about three months.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.