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Edited Transcript of REXR earnings conference call or presentation 1-Nov-17 5:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Rexford Industrial Realty Inc Earnings Call

Los Angeles Nov 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Rexford Industrial Realty Inc earnings conference call or presentation Wednesday, November 1, 2017 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 and Director

* Kara Smyth

* Michael S. Frankel

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

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Conference Call Participants

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* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* John Richard Benda

National Securities Corporation, Research Division - Senior Equity Research Analyst

* John W. Guinee

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

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to Rexford Industrial Realty Third Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the call over to Kara Smyth with Investor Relations.

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Kara Smyth, [2]

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We would like to thank you for joining us for Rexford Industrial's Third Quarter 2017 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 anticipates, believes, estimates, expects, intends, may, plans, projects, seek, 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 measures 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 and Director [3]

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Thank you, and welcome to Rexford Industrial's Third Quarter 2017 Earnings Call. I will begin with a summary of our operating and financial results. Howard will then provide an overview of our markets and transaction activity. Adeel will follow with more details on our quarterly results, our balance sheet and our guidance for 2017.

We are very pleased with our third quarter results. The quality of our internal and external growth reflects the strength of our value-driven and value-add business model focused on the extremely supply-constrained infill Southern California industrial market.

We achieved same-property NOI growth of 9.8% on a GAAP basis and 11.3% on a cash basis. Our 18 million square-foot consolidated portfolio, which includes 790,000 square feet of space held vacant for value-add repositioning, was 92.9% occupied and 94.1% leased. Our stabilized portfolio is 97.2% occupied.

We signed approximately 1.3 million square feet of leases, which were evenly split between new and renewal leasing activity. We're very pleased to report that our leasing volume set another new record for Rexford's quarterly leasing activity, and we were once again able to achieve exceptional double-digit leasing spread.

On new leases, we achieved leasing spreads of 33.6% on a GAAP basis and 21.4% on a cash basis. And on renewal leases, we [drove]spreads of 21.2% on a GAAP basis and 13.4% on a cash basis.

So far this year, we have acquired 3.6 million square feet for approximately $534 million and expanded our footprint by 20%. To date, we've increased our portfolio square footage by 3.3x since our IPO, and we've increased our NOI by 4x over that same period.

As a result of this strong activity, company share of core FFO grew by 27% for the third quarter compared to the prior year quarter. We also generated a 13.6% year-over-year increase in core FFO per share for the quarter while maintaining a low leverage balance sheet with ample capacity.

On top of this strong growth, we still project about 18% or almost $23 million of internal NOI growth embedded within our in-place portfolio, assuming we never bought another asset. About half of this embedded NOI growth is derived from our major repositioning projects. Our in-place portfolio is also well positioned for NOI growth as we capitalize on about 3.3 million square feet expiring through the end of next year, with in-place rents that are currently estimated to be about 10% below market.

Our value-add repositioning expertise is a key differentiator. For example, with the recently announced 317,000 square feet of repositioning and lease-up at Valley Boulevard and Western Avenue project, we achieved unlevered yields on total investment of 6.9% and 5.9% respectively.

To put these strong yields into context, similar-quality products in these A+ infill locations leased to similar high-quality tenants is currently trading in the low 4% cap rate range. Our ability to generate substantially better than market or better than core yields is directly the result of our additional work through our intensive research, which allows us to source and close off-market and lending-marketed transactions. With over 1 billion square feet built prior to 1980 within our infill Southern California market, we are mining a nearly limitless wealth of value-add opportunity. Our singular focus as the expert sharpshooter in infill Southern California enables us to create value with substantial competitive advantage.

While national industrial trends remain positive in many locations, not all industrial markets are created equal, and we believe infill Southern California stands head and shoulders above the rest in terms of long-term supply-demand fundamentals.

Our markets continue to operate at well below 2% overall vacancy, with some major infill submarkets operating at below 1% vacancy. Port activity continues to reflect the unique position of Southern California as the nexus of trade between the United States and the Pacific Rim. After record volumes in 2016, the Port of Long Beach reported container volume increased 8.9% year-to-date through September 30 compared to the prior year, and the Port of Los Angeles reported an 8.2% increase over the same period.

And e-commerce continues to drive incremental demand as retail real estate pain is our gain. We continue to see a dramatic increase in the movement of boxes between our infill warehouses to end users that are increasingly bypassing the retail channel. No market will benefit from e-commerce with the same magnitude as infill Southern California as we're the largest zone of population and consumption in the United States, with over 40% of the entire nation's containerized imports traveling through our ports of Los Angeles and Long Beach.

Our leasing activity also reflects a growing impact from e-commerce, with about 30% of this year's new leasing activity driven in large part by e-commerce. And despite robust growth in demand, with rents that are a full 70% higher than the average for the next 5 largest markets in the nation, it is nearly impossible to build new core lease industrial products due to the scarcity of land and high cost of construction. In fact, we continue to lose industrial product as it is converted to alternative uses.

As we look ahead, we could not be more excited. Rexford is merely in the beginning stages of building the great and substantial business that we envisioned with our IPO. We owe a debt of gratitude to the entire Rexford team, which we believe to be the best in the business, for driving our outstanding performance and for making our future growth possible.

And with that, I'm very pleased to turn the call over to Howard.

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

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Thanks, Michael, and thank you, everyone, for joining us today. I'll start with a brief update on our markets, utilizing data from CBRE, and then discuss our recent acquisition, disposition and pipeline activity, which continues to be robust.

In the third quarter, market fundamentals remained strong in Rexford's Southern California infill market. Excluding the Inland Empire East, asking rents increased 6% on a weighted average basis versus 1 year ago, and occupancy ended at 98.3%, down 10 basis points from the prior quarter. All of our infill markets continue to experience strong rental growth, which CBRE suggests would continue over the next couple of years.

Moving on to our recent investment activity, we completed $293 million of acquisitions of core and value-add industrial properties in the third quarter. Our largest transaction in this core group was the acquisition of Rancho Pacifica Industrial Park, an institutional quality investor complex consisting of 6 buildings, totaling 1.17 million square feet on 56 acres for $210.5 million. As previously stated, this acquisition meaningfully increased Rexford's scale and operating margin in the low vacancy high-demand South Bay submarket. We just completed our first lease renewal in the project and are already outperforming rent projections where we estimated in-place rents to be over 25% below market. With 75% of square feet rolling over the next 3 years, we are well on our way to achieving a 5% or better stabilized yield on cost.

Additionally, we purchased Inland Empire Boulevard for $26.9 million. This 4-building fully leased 218,000 square-foot modern industrial complex is located in the Inland Empire West submarket and has over 500 feet of frontage on the Interstate 10 freeway. The project is leased infinite, with in-place rents estimated to be over 20% below market, enabling us to grow the initial yield of just under 4.5% to approximately 5.5%.

In an off-market transaction, we completed the acquisition of Kingsview, a 2-tenant 100% leased 100,000 square-foot warehouse building located in Carson, part of the South Bay submarket, for $14 million. The initial yield in this acquisition was just over 5% and is projected to stabilize at approximately 5.5%.

In a lending-marketed transaction, Rexford acquired a 201,000 square-foot single-tenant industrial property on White Birch Drive in the Inland Empire West for $19.8 million. In-place rents for this divisible 26-foot-clear building are estimated to be 16% below market today, enabling us to move the 5% initial yield to a projected 5.5% yield upon renewal or retenanting.

We acquired Azusa Canyon, an 87,000 square-foot newly constructed industrial property in the San Gabriel Valley submarket for $14.6 million. The building is fully leased to 2 tenants, though it was constructed as 4 units, which we expect to drive premium rental rates in a roll. The initial deal was just under 5%.

In September, we acquired a 25,000 square-foot single-tenant industrial property on Soto Street in Los Angeles, Central submarket, for $3.5 million. The initial yield was 5% and is projected to stabilize at approximately 6.3% due to below-market in-place rents.

And finally, in September, we purchased Susana Road, a fully leased 74,000 square-foot paved land site, with a 15,000 square-foot industrial building in the South Bay submarket, for $3.9 million. The initial yield on this acquisition is 5.9%.

Year-to-date, we have completed $534 million of acquisitions. We continue to uncover opportunities in our core infill markets and have approximately $98 million of deals under LOI or contracts, and our pipeline of new opportunities continues to be strong.

Though we are focused on growing our portfolio within our infill Southern California submarket, we've been able to crystalize value through the sale of certain assets.

Year-to-date, we have completed approximately $66 million in dispositions and we have an incremental $64 million of dispositions on the market today. Of this, $33 million is expected to close in the fourth quarter.

In addition to our acquisitions and disposition activity, we continue to unlock internal growth through successfully including repositioning projects in our pipeline.

During the third quarter, Rexford completed 2 value-add repositioning projects totaling 317,000 square feet. In August, we signed a 5-year triple-net lease to a luxury car company at Valley Boulevard of a single-tenant 109,000 square-foot industrial building located in the San Gabriel Valley submarket. We completed an extensive repositioning program, including a new building facade, renovation of office areas, 19 new dock-high loading positions and ESFR fire sprinklers, achieving a 6.9% yield on cost.

We also completed repositioning on Western Avenue, a 208,000 square-foot cross-dock industrial building in the Orange County submarket purchased in April 2016 as part of a portfolio transaction. After the original tenant vacated, we completed a full property renovation, including office areas, new ESFR sprinkler upgrade and other functional and cosmetic improvements.

We signed a 10-year lease in October with Southland Industries, a national engineering firm. This lease, which includes 3% annual rent increases, is expected to commence at year-end and will result in a 5.9% yield on total cost.

The scarcity of infill investor products within Southern California, increasing demand and virtually no ability to deliver core-leased continued supply, continues to drive the value of our portfolio. With $10.9 million of projected NOI growth yet to be realized in our existing repositioning pipeline and with $2 million already locked in with the few deals I just mentioned, we have a strong opportunity to drive further growth in our portfolio as we deliver and lease up investments.

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. In my comments today, I will review our operating results for the third quarter, and then I'll summarize our balance sheet and recent financing activity. And finally, I'll update you on our guidance for 2017.

Beginning with our operating results. For the third quarter 2017, net income attributable to common stockholders was approximately $586,000 or $0.01 per fully diluted share. This compares to $2.3 million or $0.03 per fully diluted share for the third quarter of 2016.

For the 3 months ending September 30, 2017, company share core FFO was $18 million or $0.25 per fully diluted share. This compares to $14.2 million or $0.22 per fully diluted share in the third quarter of 2016.

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 and higher diluted share count.

Same-property NOI was $21.5 million in the third quarter, which compares to $19.5 million for the same quarter in 2016, an increase of 9.8%. Our same-property NOI was driven by a 7.7% increase in total rental revenue and a 2.2% increase in operating expenses. On a cash basis, same-property NOI increased by 11.3% year-over-year.

Turning now to our balance sheet and financing activity. We continue to maintain a healthy and flexible balance sheet which supports our growth objective. In July, we issued $125 million in new senior guaranteed notes in a private placement which bear interest at 3.93% and mature in July of 2027.

Also during the quarter, we launched a new $300 million ATM program in September after exhausting our prior $150 million program. During the third quarter under both programs, we issued approximately 6.8 million shares of common stock at a weighted average price of $29.09 per share, providing net proceeds of approximately $195 million.

As a result of these and other activities, we ended the quarter with $13 million of available cash and $300 million of availability in our $315 million credit facility. We also have approximately $247 million of available capacity on our $300 million ATM program.

With minimal near-term debt maturities of just $5 million through 2018, we believe we're well positioned from a liquidity perspective to continue to fund our growth strategy.

With regard to our dividend, on October 30, our Board of Directors declared a cash dividend of $0.145 per share for the fourth quarter of 2017 payable on January 15, 2018, to common stock and unitholders of record on December 29, 2017. Additionally, our Board of Directors declared a cash dividend of approximately $0.37 per share for the fourth quarter of 2017, payable on December 29, 2017, to our preferred stockholders as of December 15, 2017.

Finally, I'd like to update our outlook for 2017. Our guidance refers only to our in-place portfolio as of today and does not include any assumptions for acquisitions, dispositions or capital transactions which have not yet been announced.

For 2017, we're increasing the low end and tightening our guidance for core FFO to a range of $0.94 to $0.96 per share from our previous range of $0.93 to $0.96. Please note that our guidance for core FFO does not include acquisition costs or other costs that we typically include when calculating this metric.

Our guidance is supported by several factors. We are tightening our expectations for year-end same-property occupancy to a range of 95% to 96%, which is an increase of 94% on the low end. We're also updating our other operating portfolio metrics. We are tightening our year-end stabilized same-property occupancy guidance to a range of 97% to 98%, which is an increase of 96% on the low end, and we're increasing guidance for same-property NOI growth for the year to 7.5% to 8.5% from our previous range of 6% to 8%.

For G&A, we're increasing our guidance to a range of $21.3 million to $21.7 million, including about $5 million of noncash company-wide equity compensation.

That completes our prepared remarks. With that, we'll open the lines to take any questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our 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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Just looking at that pace of acquisitions, it looks like you were really, really busy in July and then things slowed for the quarter, and it sounds like, looking at what you have under contract, it's picking up a little bit but still sort of slower than it was at the beginning of the year. Is there more to read into that or is that just sort of what's coming now and what's in your pipeline? Is that going to pick up again into next year?

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

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Manny, it's Michael. Thanks so much for joining us today. The acquisition activity has been very, very strong and robust through the year. We've acquired almost $540 million of product. And as you know, week-to-week, month-to-month, it's always hard to predict. But in no way does any weak slowdown in the last few weeks reflect a slowdown in our activity or pipeline. The pipeline looking forward is as robust as ever. And frankly, if you reflect on the activity, not only have we increased our footprint already this year by about 20%, but since the beginning of 2016, we have increased the footprint by a full 50%. And I think the most important thing about the growth is not only do we not see it abating, but remember, our -- what we call our information advantage in terms of our tracking of opportunities that have catalysts driving those opportunities is increasing. Each year, the research that we do is cumulative. And so the depth of our reach and our markets is increasing every single year. I think the most important thing about that growth is not just the magnitude but the quality. And you see NOI, you see portfolio growth having grown about 3x since our IPO, but NOI, I think, has grown about 4x. So that's really key to our business.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [4]

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And Adeel, just the G&A increase, it seems big sort of this time in the year. What's driving that specifically?

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

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Manny, so the G&A increase is a projected increase to potential max the cash bonus to payouts for the full year 2017. And we did that also last year. Again, we don't have much visibility early on in the year, but around this time, we can start to maybe see how the year might wrap up. So this is a projected true-up to max payouts, and this was all disclosed in the proxy as to what the underlying measurement mechanisms are. And obviously, the board still has to weigh in into this -- the comp committee still has to weigh in, but this is the initial true-up to those targets. And this involves obviously the named executive employees and then a few other key employees in the company.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [6]

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So is that what's providing the offset to sort of better fundamentals to maintain guidance? Am I thinking about that correctly?

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [7]

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That is a part of it. The guidance obviously is that there's a couple of things. We did issue a lot of the stock from the ATM this quarter, so you're going to see the full impact in the next quarter. So that obviously is keeping that at bay. But the fact that the FFO per share increased to $0.25 this quarter, prior quarter was $0.23. So even on the high end, right, we can still be at a $0.25, if we were just to maintain this quarter. So you're definitely seeing that piece of it. And the other part, obviously, you talked about the G&A, and the other piece that I think is worth noting is that we have 781,000 square feet of expiring leases between -- here in Q4. 58% or so is same-store, which we have already guided, and there's still another 42%. So naturally, we feel very optimistic and very -- that is going to be a very productive quarter, similar to what the last 3 quarters have been. But then, still, there's still some exposure there that we need to still think about and budget for. But we're staying very optimistic.

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Operator [8]

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

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [9]

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Is it always 72 degrees and sunny out there?

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Michael S. Frankel, Rexford Industrial Realty, Inc. - Co-CEO and Director [10]

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Only when the Dodgers are winning.

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [11]

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We've noticed in the last couple of quarters, big property tax increases, primarily Manhattan, a lot of multifamily portfolios. Refresh our memory as to how property taxes work in your part of the world with your assets.

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [12]

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John, it's Howard. We have something here called Prop 13, which essentially raises your taxes based on your sale price and only allows for a maximum of a 2% annual increase. So a lot of the older assets we have in our portfolio have a tax advantage of having more of the income flow to the bottom line versus some of the newer transactions that reflect current valuations on taxes.

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [13]

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Okay. So even if the property values are going up 10% a year, you're pretty much capped at a 2% property tax increase?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [14]

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That's correct.

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [15]

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And then the second question was I think I heard you say something about a land site with a current 5.9% yield. Can you expand on exactly what you can do to that land site, what it's going to cost you to build, what you'd build in this day and age, if I got that right?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [16]

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Yes, that's actually a site right in the South Bay off the Long Beach Freeway. So it has proximity to the ports. It's fully paved and has a small industrial building on it. So down the road, if the tenant that's in there would happen to leave, we would really just rent it for container storage or a light industrial that needs outside storage, that is. That tenant notably just actually renewed their lease, I think it was around a 5-year deal, so that 5.9% yield has increases in the lease and is locked in for several years.

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [17]

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But there's no additional FAR, et cetera?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [18]

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Well, there could be, but we don't -- sometimes, these land sites that are paved are actually worth more as land for container parking than they are to build a building on it in that market.

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [19]

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Not in Indianapolis.

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [20]

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That's why we're laser-focused in Southern California.

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Operator [21]

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The next question comes from the line of Jamie Feldman with Bank of America.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [22]

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Adeel, I want to focus on the Footnote 2 on Page 11, where you talk about same-store portfolio, excluding properties under repositioning. So it looks like this is 6.1%. Is that on a GAAP basis? And can you also talk about it on a cash basis? And then just remind us how you calculate this metric.

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [23]

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Sure, Jamie. So yes, that footnote is disclosing the GAAP number. And just to remind everybody that's on the call, our same-store definition is using the period of ownerships, so anything that was comparable in terms of ownership is part of the same-store pool. We have added that ancillary data point starting last couple of quarters ago to strip out any potential impact from repositioning efforts that have been going on in the comparable period, and that's what that number reflects. So the number in the footnote reflects 6.1% for the 3 months ending, and for the 9 months ending, it was 5.2%. What's not disclosed there, which I'll disclose right now, was on a cash basis. For 3 months ending, it was 7%, and for the 9 months ending, it was 6%. So that's the only thing that's not there.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [24]

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Okay. And then as Howard was talking about some of the stabilized yields on these redevelopments, can you maybe talk through the difference in cap rates across your submarkets? And should we start to see as cap rates continue to come in, maybe start to see you go to some of the more, the higher cap rate or higher-yielding submarkets? Just how do you think about the balance of quality versus yield versus location as you think about your pipeline?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [25]

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Yes. Sure, Jamie. It's interesting, I think the one thing we have seen over time now is a narrowing of those cap rate spreads between the markets and A- or B-quality buildings. But the market is extraordinarily tight. We're still seeing sales earning in that 4% range. We've seen a few larger Class A institutional deals go down sub-4%. But I think the key here is that there's just not enough product. Southern California today is the #1 choice, I think, from a lot of the polls we've seen in terms of where people want to buy product. And because of that demand, we're not really seeing anything on the horizon in terms of a change in cap rate, in terms of moving up, could be something pulling in on some of the Class A. But all in all, it's hard to say that there's one market that we would focus on more or less than the other. The smallest markets that we buy in are San Diego and Ventura County, where we really don't put much of a focus in terms of new acquisitions. When those come up, that really meet our strict guidelines, we will occasionally buy in those markets. And the cap rates there are a bit higher than the Orange County, Inland Empire and Greater L.A. markets.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [26]

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Okay. That's helpful. And then did you say what your current high-potential pipeline looks like as we're heading into '18?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [27]

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Well, we're typically monitoring plus or minus about $1 billion worth of product at any one time. I mentioned we had $98 million I think it was under contract or LOI right now. We've got quite a few other transactions we're circling right now, that some of which could fall out into Q1. But we're very optimistic about 2018. There's a lot of, as Michael mentioned earlier, a lot of the research work we're doing, that we have a lot of deals in the pipeline from. But we don't really expect any dramatic change going forward in terms of what we'll be able to buy on the yield and what might differ in the pipeline at the moment.

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Operator [28]

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Our next question is from the line of Michael Mueller with JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [29]

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I was just wondering, can you spend a minute just talking about the different types of properties that you're selling, what's making it into the disposition pool? Is it properties that are tapped out? Is it stuff you view as noncore? Just maybe just a little more color on that would be great.

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [30]

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Sure. Hi, Mike, it's Howard. It's interesting, a lot of the dispositions we've done in the past really were assets that significantly outperformed their cap rate values. You might recall, we sold a property in San Diego first quarter. And that was the Midway asset, where we're about to start redevelopment on, and we're able to sell it to a company that was going to convert it to a residential in [place] of office and had about a 47% IRR. So we take advantage of those type of opportunities. We've sold a couple of multitenant buildings in the portfolio, and we have a few smaller projects that we're eyeing so as well that are a little more management-intensive for us and a little off the periphery from where our management teams are located. And we're really taking advantage of the low cap rate and high demand for that product right now in the marketplace. A lot of the multitenant is selling for significantly below 5% cap rates. So those are quite opportunistic for us to be able to sell a multitenant building, let's say, with 40, 50 tenants in it and do a trade into a building that has one tenant or 2 tenants. It creates a lot of efficiencies in our management teams and our cost basis as well in terms of operating the assets. So next year, we'll continue to cull through the portfolio and probably expect to see a few more probably multitenant deals or nonessential assets that we might wind up selling.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [31]

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And is there a, like a ballpark cap rate on a blended basis that you can -- that you'd share?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [32]

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Well, it varies. I mean, typically, I think we've sold where the assets have been all sub-5% in terms of those yields. I'm just -- yes, I mean, which one? Well, we have Midway. I mean, obviously, it was vacant, so there really wasn't a cap rate associated with it. But the correlation that we could make to the rental value of the asset would have probably been more on the 3% range on that deal.

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Operator [33]

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Our next question is from the line of John Benda with National Securities.

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John Richard Benda, National Securities Corporation, Research Division - Senior Equity Research Analyst [34]

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So quickly, with repositioning, it leads to large, probably a driver of increases, NOI, et cetera, can you talk about what really drives the decision to put a property into repositioning either at acquisition or one that's currently operating, tenanted and then throwing it into the repositioning mix?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [35]

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Sure. Yes, it's Howard. It's not really a decision that's made late in the game. In other words, once we own a property. It's typically something we're buying upfront and we have a plan to create value in. As we continue to emphasize Rexford is not a cap rate buyer, we're typically thinking about how we can drive those rents and revenues and stabilize assets significantly higher than market cap rates. We gave you a couple of examples of that today on the call, mentioning the 6.9% and 5.9% yields on those 2 assets, the 100,000- and the 200,000-foot buildings that we stabilized. And those were buildings, from day 1, we knew what our plan was going to be, and it just took a while on one of them to get the tenant out, and create that value. So what we do in our marketplace is really look at a building upside, sideways, upside down, sideways, you name it, and we try to find that last bit of value that we can extract. We have a team of 7 people in our construction department here that are doing everything from our -- internally here, from space planning, the third-party managing, the construction process. And you're right, it is really a strong point with our business and one that we'll continue to focus on and bring a lot more asset into the portfolio.

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Michael S. Frankel, Rexford Industrial Realty, Inc. - Co-CEO and Director [36]

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John, it's Michael. I'll add just a little more -- I'll try to quantify a little bit of what we look for, what gets our excited about our repositioning activity. And for instance, if you look at the repositioning page in the supplemental, the aggregate yield on total cost, and that's not just acquisition, that's total cost to get to the yield, including subsequent CapEx and other investments, is about 6.6% yield on -- unlevered yield on total cost. And if you look at the return on the dollars we're investing, it's about a 24% return on incremental spending of about just under $40 million. And so that's a good use of capital. And I think the main thing to recall about our repositioning and the deals that Howard mentioned and the ones I just referenced is that beyond the few -- relatively few deals, and typically, there's anywhere from 8 to a dozen deals on our repositioning page in the supplemental, but to make it on that page, a space or property has to go vacant for at least 6 months. And I think a key takeaway for Rexford is that beyond those deals that make it to that page, we're consistently and extensively working on properties throughout the portfolio where the space doesn't go down for 6 months, but we're making substantial value-add improvements and driving value and increasing cash flow. And that's really the heart of our business. So I think -- hopefully, that helps in giving you a little more color. Thanks again for joining us today.

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John Richard Benda, National Securities Corporation, Research Division - Senior Equity Research Analyst [37]

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Yes, definitely. And then just quickly, second question, on the dividend front, it seems like you guys have been paying out below 65% of core FFO. And on the most recently announced dividend, it seems like there's likely room for $0.01 or $0.02 more to be under that ratio. So can you talk about, with all the increases that we've -- you've had in NOI and core FFO and FFO, et cetera, how you guys plan to do the dividend?

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [38]

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John, it's Adeel. A good question. And just to recall, for everybody, we increased the dividend in Q1 '17, and that was about a 7.4% increase from the prior level. So the board evaluates that each quarter, and obviously, we're in the fourth quarter at this current $0.145 per share. And yes, we've had a really productive year in FFO growth and NOI growth, and we'll evaluate that for next quarter. So we'll let the street know as soon as that's done. But thirdly, I think to going back to Michael's and Howard's point and to your earlier point, we're certainly making a very, very good use of that capital in terms of repositioning and what that does in terms of returns and yields coming back. So -- but again, the discussion is always live every quarter, and the board evaluates it based on all the factors and fundamentals that we present to them. And we'll let you know as soon as the next quarter's there and if there's going to be an increase.

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Operator [39]

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

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [40]

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This is Adeel. We'd like to thank everybody for joining the call and your focus on the company, and we'll be talking to you guys on the next quarter call. And go Dodgers.

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Operator [41]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation.