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Edited Transcript of REXR earnings conference call or presentation 31-Oct-18 5:00pm GMT

Q3 2018 Rexford Industrial Realty Inc Earnings Call

Los Angeles Nov 8, 2018 (Thomson StreetEvents) -- Edited Transcript of Rexford Industrial Realty Inc earnings conference call or presentation Wednesday, October 31, 2018 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adeel Khan

Rexford Industrial Realty, Inc. - CFO

* Howard Schwimmer

Rexford Industrial Realty, Inc. - Co-CEO & Director

* Michael S. Frankel

Rexford Industrial Realty, Inc. - Co-CEO & Director

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Conference Call Participants

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* Blaine Matthew Heck

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Christopher Ronald Lucas

Capital One Securities, Inc., Research Division - Senior VP& Lead Equity Research Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Joshua Dennerlein

BofA Merrill Lynch, Research Division - Research Analyst

* Kara Smith

ICR, LLC - SVP

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Presentation

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Operator [1]

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Greetings, and welcome to the Rexford Industrial Realty Third Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Investor Relations.

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Kara Smith, ICR, LLC - SVP [2]

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We would like to thank you for joining us for Rexford Industrial's Third Quarter 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.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 anticipate, believe, estimate, expect, intend, may, plan, project, seek, should, will, potential, predict 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.

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Michael S. Frankel, Rexford Industrial Realty, Inc. - Co-CEO & Director [3]

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Thank you, and welcome to Rexford Industrial's Third Quarter 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 project.

Adeel 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% topline revenue growth and $504 million 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 remained 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 in 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 for selling directly to consumers, businesses and retailers within the largest regional zone of consumption in the nation.

In fact, California is now the fifth largest economy in the world measured by GDP, surpassed only by the entire United States, China, Japan and Germany.

California's share of the national economy grew from 12.8% to 14.2% in -- from 2012 to 2017.

Southern California accounts for over half of our states' GDP. Further, infill Southern California industrial valuation metrics are in a class by themselves. Rental rates are over 90% higher on average in the next 10 largest market, and market cap rates are comparatively low, reflecting superior long-term tenant demand fundamental.

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 four folds since our July 2013 IPO, with sector leading total shareholder returns of 163%, our 20.6 million 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 investment, we're also deploying our extensive team of construction, leasing and asset management specialists to create value at every stage of the ownership life cycle on a space-by-space, property-by-property basis throughout our portfolio. The above-market cash yields achieved on our value-add repositioning project and our sector-leading re-leasing spreads demonstrate our capacity for value creation and our ability to capitalize upon the 3.4 million square feet of expiring leases through the end of 2019, which are estimated to be about 15% below market.

Further, with over 1 billion square feet within 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 the emerging market opportunities with a potent low-leverage balance sheet comprising a debt-to-EBITDA ratio of 3.8x and a net debt to enterprise value of 15.3%.

Our capital structure represents our long-term commitment to maintaining 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.

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO & Director [4]

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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 third quarter at 98.2% 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 rent 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 billion 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 third quarter, we've completed 4 acquisitions of high-quality industrial product for a total of $43.8 million, bringing year-to-date acquisitions to $371 million, adding approximately 2.3 million square feet to our portfolio.

2/3 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-Counties submarket for $10.8 million. 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 $9.5 million. A 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 cost. Also, we acquired Carmenita Road in the mid-Counties submarket for $13.3 million in an off-market transaction. The 109,000 square-foot building is currently leased by one 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 that 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 $10.2 million. 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 million. These acquisitions are subject to completion of due diligence and satisfaction of customary closing conditions, and we'll provide more details as transactions are completed.

Regarding our disposition activity, we sold $38 million 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 million. 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 have achieved 100% 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've preleased the 112,000 square-foot, single-tenant Avenue Pane building in the San Fernando Valley submarket. The repositioned 30-foot clear building was stabilized at a 6.1% yield on cost.

We are also pleased to report that our 57,000 square-foot Surveyor Avenue new development project in Ventura County was 100% preleased to an e-commerce tenant, with delivery expected in January of 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 acquisitions 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.

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [5]

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Thank you, Howard. Beginning with our operating results. For the third quarter 2018, net income attributable to common stockholders was approximately $6.3 million or $0.07 per fully diluted share. This compares to $600,000 or $0.01 per fully diluted share for the third quarter of 2017.

For the 3 months ended September 30, 2018, company share of core FFO was $26.1 million as compared to $18 million for the 3 months ended September 30, 2017.

On a per share basis, company share of core FFO was $0.28 per fully diluted share, representing a 12% increase year-over-year.

Core FFO per share increased toward 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 $28.8 million in the third quarter, which compares with $25.6 million for the same quarter in 2017, an increase of 12.6%.

Our same property NOI was driven by a 10.3% increase from 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 third 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 source, optimize our cost of capital and maintain balance sheet flexibility as we grow our business over the long term.

During the third quarter, we issued approximately 1.5 million 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 $46.7 million.

We utilized these funds to fund our acquisitions, for working capital and other corporate purposes. At the end of the quarter, we had $183.9 million of cash, full availability on our $350 million credit facility and approximately $194.1 million available under the $400 million ATM program.

We have no debt maturities through 2021, with our next maturity being our $100 million 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 fourth quarter 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 fourth quarter of 2018 payable on 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 a 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 strong acquisition activity as well as better-than-expected portfolio NOI 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 the range of 7% to 8%, up from our previous range of 5.5% to 7%.

For G&A, we're tightening our guidance to a range of $24.8 million to $25 million, including about $8.5 million of noncash 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?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Manny Korchman with Citigroup.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [2]

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You mentioned the $194 million near-term pipeline. Over what time period do you expect or could we expect for that all close?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO & Director [3]

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Manny, it's Howard. We had mentioned we had $194 million 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 and months to close. That's not typically how we've reported on the pipeline. So I can't say it specifically, but hopefully that info will help.

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [4]

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Manny, it's Adeel. Just to add one further comment, obviously, with the capital that we have on the books, we further -- all of us 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.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [5]

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Got it. And then in terms of given the tight leasing market, just wondering if there's been any changes in lease terms or bumps or anything else sort of lease economics that you've been able to push tenants on given the lack of other options.

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO & Director [6]

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Well, I think our example of mentioning some of the updates on our repositioning projects are really the most telling about the market. And we're preleasing buildings before they're done. We leased-up that Nelson project 85% in only 4 months. In that particular project, we're pushing rents. In terms of the increases, we're 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's still tight as a drum. There's not a lot of quality product out there. And the results we're showing are really emblematic of what's happening throughout the market.

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Operator [7]

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Our next question is from the line of Blaine Heck with Wells Fargo.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [8]

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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?

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Michael S. Frankel, Rexford Industrial Realty, Inc. - Co-CEO & Director [9]

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Yes, thanks for the question. And look generally speaking, I think our focus remains consistent. We're going to stay focused in the same way as 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's 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 accelerating fashion since we've been 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.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [10]

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Great. Very helpful. And then just looking at the repositioned properties that have stabilized over the past few years. They've stabilized at a 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 that 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?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO & Director [11]

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Well, it's Howard. Yes, 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 an aggregate blended yield of about 6.6%. And new opportunities that we're looking at today, I think, fit into the range you were describing earlier on that 5.5% and well north of 6%, 7% cap rates.

Just -- it's the timing and so forth in the markets and what we happened on earth in any one quarter. But the pipeline's 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-end that with some core and then on the other side, obviously, the value-add transactions. The pipeline, in terms of [it feels] under contract or LOI seems to mirror those percentages.

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Michael S. Frankel, Rexford Industrial Realty, Inc. - Co-CEO & Director [12]

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And Blaine, it's Michael. I'll just add to that and -- 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 -- 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, 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 differentiates Rexford in an even greater way as we move forward.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [13]

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Okay. Very helpful. Then Adeel, 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?

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [14]

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Yes, Blaine. So as of right now we have $150 million term loan that is not swapped, and that puts us at about 80-20 swap per fix to variable. And I think we monitor the yield curve consistently. I think that's not a bad percentage to have in the portfolio, and obviously, it allows us some flexibility after a couple of years with $150 million term loan. So we're constantly monitoring it. I think that 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 after 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.

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Operator [15]

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The next question is from the line of John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [16]

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Adeel, does Rexford remind you of your days at Maguire?

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [17]

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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 up. So...

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [18]

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Talk about 2020, Prop 13 likely gets on the ballots, split roll, all that sort of thing, how does that work for you guys?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO & Director [19]

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John, it's Howard. There are actually more than enough signatures already seen, 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 million feet. We're over 20 million feet today. So the majority of the assets were bought within the past couple of years. So the mark to market, we 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 -- we could 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 the 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.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [20]

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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%?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO & Director [21]

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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's -- the land comps, you're going to start see better -- well above $60 a square foot. And so you marry in that the construction costs that are going to be in, say, $40 to $60-plus square foot range and your land basis is well over 50% of the building cost.

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Operator [22]

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The next question is from the line of Joshua Dennerlein with Bank of America Merrill Lynch.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [23]

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Turning to the big picture, what's the latest on-the-ground feedback from leasing brokers or tenants getting nervous at all from tariffs being an impact to their kind of business?

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Michael S. Frankel, Rexford Industrial Realty, Inc. - Co-CEO & Director [24]

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Josh, it's Michael. Thanks for connecting with us today. Good question. Today, we have really not seen any indication from our tenants whatsoever that they 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 ports shut down in 2002, slowdown 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 tenant. 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 info location, it's less so the key premise is less where the goods come from, it's more about their ability to deliver in a timely fashion and of course delivery times are shortening pretty dramatically. So the space in terms of value to these business is pretty dramatically increasing despite the possibility for tariffs. We just haven't seen any indication whatsoever from the tenant.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [25]

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Got it. And then maybe, I thought the retention ratio fell this quarter. Any thoughts on how that might beat into like your ability to push rents going forward in the next few quarters?

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Michael S. Frankel, Rexford Industrial Realty, Inc. - Co-CEO & Director [26]

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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 one 100,000 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, updated to ESFR sprinklers, did some work on the office to modernized 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 leased 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 had 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 the value. And by the way, the incremental investment in that space relative to -- is a substantial return on capital. So payback in about 2 years but a 42% annual return on the incremental investment. So that -- we love that math, and so I think the story behind that retention is really fundamentally our ability to drive rents.

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Operator [27]

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(Operator Instructions) The question is coming from the line of Chris Lucas with Capital One.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP& Lead Equity Research Analyst [28]

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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?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO & Director [29]

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Again, we haven't really. It might be early yet, but we haven't really 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.

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Operator [30]

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At this time, I'll turn the call back to management for closing remarks.

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Michael S. Frankel, Rexford Industrial Realty, Inc. - Co-CEO & Director [31]

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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.

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Operator [32]

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Thank you. This will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.