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Edited Transcript of REXR earnings conference call or presentation 2-Aug-17 5:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Rexford Industrial Realty Inc Earnings Call

Los Angeles Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Rexford Industrial Realty Inc earnings conference call or presentation Wednesday, August 2, 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

* Michael S. Frankel

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

* Stephen C. Swett

ICR, LLC - MD

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Conference Call Participants

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* Blaine Matthew Heck

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* 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 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 the Rexford Industrial Realty Second Quarter 2017 Earnings Call. (Operator Instructions)

As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Steve Swett. Thank you, Mr. Swett, you may now begin.

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Stephen C. Swett, ICR, LLC - MD [2]

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We would like to thank you for joining us for Rexford Industrial's second 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, seeks, should, will, potential, predicts and variations of such words or similar expression.

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 statement 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 second 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 then follow with more details on our quarterly results, our balance sheet and our guidance for 2017.

We are very pleased with our second quarter results as we continue to achieve strong internal and external growth. We achieved same property NOI growth of 6.6% on a GAAP basis and 5.1% on a cash basis.

Our consolidated portfolio, which includes 864,000 square feet of space held vacant for value-add repositioning, was 91.4% occupied in the quarter. Our stabilized portfolio is 96.5% occupied.

During the second quarter, we acquired 1.7 million square feet of product for $224 million. So far year-to-date, we've acquired 3.5 million square feet for $527 million, representing a 20% increase in consolidated square footage. As a result of these factors, we are pleased to increase our FFO guidance for the year, which Adeel will discuss in greater detail.

Turning to leasing activity during the second quarter. We signed 781,000 square feet of leases, again achieving extremely attractive spreads. On new leases, we achieved leasing spreads of 31.3% on a GAAP basis, and 24.2% on a cash basis. In our renewal leases, we grew spreads of 16.5% on a GAAP basis and 5.9% on a cash basis.

Company share of core FFO for the second quarter was $15.9 million, a 14% increase over the prior year, driven by our strong internal growth, our accretive deployment of capital and our increasing scale and operating efficiency.

With regard to market condition, robust tenant demand continues unabated. Our Southern California economy continues to outperform, with activity at the ports of Los Angeles and Long Beach, the 2 largest ports in the nation, up almost 7% over last year and on track to exceed the previous record for container volume set [in 2006].

As we are positioned within the nation's largest first and last mile distribution, incremental demand from our portfolio continues to be driven by e-commerce, with about 30% of our second quarter leasing activity driven by e-commerce-related tenants.

Despite growing tenant demand, our markets continue to experience [a dearth] of available product, with virtually no ability to increase supply of core leased products. In fact, we continue to experience a net reduction in supply over time, with over 100 million square feet of industrial-use product removed from the market since 2001 alone.

As a result, the 1.8 billion square foot Southern California infill industrial market continues to operate at below 2% overall vacancy. And our portfolio is favorably positioned for sustained demand and revenue growth.

From an external growth perspective, we believe our opportunity set is increasing and improving as we achieve greater scale. Each year, we benefit from a deeper well of identified opportunities as compared to the prior year as we leverage our research and growing information advantage, enabling us to continue to be an effective consolidator of infill product in the nation's strongest, largest and most fragmented industrial market.

Consequently, we have the opportunity to capture extraordinary growth going forward with over 30% embedded NOI growth over the next 12 to 24 months. This projected growth is driven by the following: about $18.6 million of NOI growth from the full impact of our acquisitions completed since the start of the second quarter; about $10 million of NOI growth from our repositioning projects in process; approximately $3.7 million of NOI growth derived from recurring contractual rent increases; and finally, about $3 million of projected NOI growth with conservatively projected releasing spreads from our 4.6 million square feet of expiring space over the next 24 months.

With regard to the company's strong performance, we'd like to thank our entire Rexford team, which remains focused on Rexford's singular mission: to be the best in our industry, delivering substantially better than core cash yield and strong accretive growth in the nation's most sought-after industrial market in infill Southern California.

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 market, utilizing data from CBRE, and discuss our recent acquisition, disposition and pipeline activity, which has been robust.

In the second quarter, strong market fundamentals continued in Rexford's Southern California infill market. Excluding the Inland Empire East, which is not our focus, asking rents increased in all of our submarkets by 7.2% on a weighted average basis versus one year ago. And occupancy ended at 98.4%, up 10 basis points from the prior quarter.

Moving on to our recent acquisition activity, which totaled about $224 million in the second quarter, in April, we purchased Ward Avenue in Simi Valley, a 139,000 square foot, 2-tenant industrial building in the Ventura County market for $16.5 million.

This high quality property is a 100% leased, 2 tenants, at below market rates and was acquired in an off-market transaction. The initial yield on cost is approximately 5.8%.

In May, the company acquired Safari Business Center in a 16-building industrial park, containing 1.14 million square feet on 52 acres located in Ontario in the Inland Empire West submarket for $141.2 million. This property was 97% leased at closing and in-place rent is estimated approximately 17% below market. This high-image property is the largest and considered to be the best industrial park in the submarket with an average tenant size of about 15,000 square feet.

The acquisition is immediately [accretive] to cash flow and operating margin, with an initial yield just below 5% and with a projected stabilized yield on cost of 5.4%. However, we are outperforming a new and renewal rate already, so the stabilized yield may be higher.

In June, Rexford completed the acquisition of Conant Street in Long Beach, a newly constructed, 100% leased industrial building containing approximately 143,000 square feet for $30.6 million. This 32-foot clear and LEED-certified building is in the Los Angeles South Bay submarket, adjacent to the Long Beach Airport, with new retail, office and hotel development adjacent to the property. The initial yield is approximately 6.2%.

In June, in an off-market transaction, we purchased Argosy Avenue, a 35,000 square foot, single-tenant industrial building located in the Orange County West submarket for $5.3 million. The property is 100% leased to a single, high-quality tenant. The initial yield is approximately 5.7%.

Also in June, in a lightly marketed transaction, we acquired 198,000 square foot, 3-building, 100% leased property at Carmenita Road in Excelsior Drive for $30.7 million. This property consists of a 30-foot clear, 2-tenant building and 2 single-tenant buildings, each with excess land, located in, Norwalk, part of the Los Angeles mid-county submarket, which leads the greater L.A. region with 20.3% year-over-year rent growth. The property had in-place rents estimated to be approximately 17% below market, with value-add repositioning opportunities upon lease expirations. The initial yield on the acquisition is just below 5% with a projected stabilized yield on cost of approximately 5.4%.

We completed 2 dispositions in the second quarter for a total of $58.8 million, which provided a portion of the funding for acquisitions. Year-to-date, our dispositions totaled approximately $66 million.

In May, we sold Midway, comprising 2 vacant buildings, totaling 374,000 square feet in the Central San Diego submarket for approximately $40.1 million. This property was purchased in October 2015 for $19.3 million and sold just prior to commencing redevelopment to an unsolicited buyer planning to convert the property to office and residential use. We achieved an IRR of 48% and utilized the capital toward our purchase of Safari Business Center, which provides immediate cash flow.

Additionally in June, we sold South Harbor Boulevard, a single-tenant building containing 127,000 square feet in the Orange County Airport submarket. The property was sold to the in-place tenant, who exercised the purchase option for $18.7 million.

Subsequent to quarter end, in July, Rexford completed an additional $286 million of acquisitions. We acquired a 4-building, 100% leased, 218,000 square-foot industrial complex located in the Inland Empire West submarket for $26.9 million. In-place rents are estimated to be over 20% below market, enabling us to take an in-place yield of just under 4.5% to approximately 5.5%.

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

Also, we acquired a 201,000 square-foot, single-tenant industrial building on White Birch Drive in the Inland Empire West for $19.8 million. In-place rents are estimated to be 16% below market today, enabling us to move the initial 5% yield to a projected yield upon renewal or re-tenanting of 5.5%.

We acquired Azusa Canyon, a 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 [at roll]. The initial yield is just under 5% percent.

Finally, we acquired Rancho Pacifica Industrial Park, a rare opportunity to acquire a core institutional quality industrial complex approximately 6 miles from the Los Angeles and Long Beach ports.

Rancho Pacifica consists of 6 high-quality buildings totaling 1.17 million square feet on 56 acres, located in the South Bay submarket for $210.5 million. With in-place rents estimated to be approximately 25% below market and with 75% of leases rolling over the next 3 years, we expect to move the initial 3.5% yield to approximately 5%. This acquisition is accretive day one by enabling us to achieve greater scale and operating margins in the South Bay submarket, which at 220 million square feet is the largest submarket in the Los Angeles County, and at 0.6% vacancy is also its strongest.

With $527 million of acquisitions completed year-to-date, we have had a strong year growing our portfolio of high-quality industrial assets. Our team's deep local knowledge and our research-driven origination efforts enabled approximately 60% off-market or lightly-marketed acquisitions this quarter.

Looking ahead, we have approximately $28 million of deals under LOI or contract. The volume and relative mix of core and value-add opportunities in future periods will vary as we continue to combine immediate cash flow growth and long-term value creation.

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'll review our operating results for the second quarter. 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 second quarter 2017, net income attributable to common stockholders was $17.9 million or $0.26 per fully diluted share. This compares to $12.3 million or $0.19 for fully diluted share for the second quarter of 2016. Net income for the second quarter of 2017 included $16.6 million of gains from sale of real estate as compared to $11.6 million for the second quarter of 2016.

For the 3 months ending June 30, 2017, company share of core FFO was $15.9 million or $0.23 per fully diluted share. This compares to $13.9 million or $0.22 per fully diluted share in the second quarter of 2016.

Net income and 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 increased interest expense before dividend and higher diluted share count.

Same property NOI was $20.8 million in the second quarter, which compares to $19.5 million for the same quarter in 2016, an increase of 6.6%.

Our same property NOI was driven by an 8.2% increase in total rental revenue, and a 12.7% increase in property [operating] expenses.

On a cash basis, same property NOI increased by 5.1% year-over-year. Netting out approximately $300,000 of nonrecurring costs related to historic range, expenses would have been up only 8.2%, and our GAAP NOI would have been up 8.1%.

Turning now to our balance sheet and financing activity. During the second quarter, we used cash, sale proceeds, line of credit capacity and proceeds from our ATM issuance to fund our acquisition activity. We ended the quarter with $13 million of available cash and $278 million of [availability on our $350 million credit facility].

During the quarter, we were active in utilizing our ATM program. We exhausted our prior $125 million program and launched a new $150 million program.

During the quarter, under both programs, we issued approximately 4.4 million shares of common stock at a weighted average price of $26.52 per share, providing net proceeds of approximately $114.9 million.

Also, subsequent to quarter end, on July 13, we issued a 10-year $125 million note, which bears interest at 3.93%, and matures in July 2027. The proceeds were used in part to fund the Rancho Pacifica Industrial Park acquisition.

Pro forma to reflect this capital activity and the acquisitions completed in July, we had approximately $13 million of cash, $116 million available on our credit facility and $145.2 million of potential issuance remaining under our current $150 million ATM program.

With regard to our dividend, on July 31, our Board of Directors declared a cash dividend of $0.145 for the third quarter of 2017, payable on October 16, 2017 to common stock and unitholders of record on September 29, 2017.

Additionally, our Board of Directors declared a cash dividend of approximately $0.37 per share for the third quarter of 2017, payable on September 29, 2017 to our preferred stockholders as of September 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 our guidance for core FFO to a range of $0.93 to $0.96 per share from our previous range of $0.91 to $0.94. Please note that our guidance (inaudible) does not include acquisition costs or other costs that we typically eliminate when calculating this metric.

Our guidance is supported by several factors. We're increasing our expectations for year-end same property occupancies within a range of 94% to 96% to reflect the Midway sale. We're maintaining the other operating portfolio metrics. Year-end stabilized same property occupancy within a range of 96% to 98%, and same property NOI growth for the year of 6% of 8%.

For G&A, we're maintaining a full year range from $20 million to $20.5 million, including about $5 million of noncash company-wide equity compensation. 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) Our first question is coming 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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Maybe I'll start with the deal for the first [one]. How do you think about sort of funding, especially for the larger deals in between the mix of debt, unsecured debt, equity as sort of a larger issuance and then ATM equity? How do you sort of weigh each of those?

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [3]

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Manny, thanks for the question. In our opening remarks, we disclosed the fact that we have $145 million available on the ATM program. Furthermore, we also disclosed as to how we transacted on the program during Q2 '17. So that should hopefully give you an idea on our general thought process about equity and generally funding the acquisition volume for the year. Additionally, the other thing that we want to talk about, and Michael disclosed this as well, in terms of just embedded NOI growth that we have in the portfolio. So that also kind of takes into consideration how we essentially de-lever the balance sheet over the next upcoming quarters. So that's also very important point to talk about. And just generally talking about the capital sources, holistically speaking, you've seen us expand the spectrum of the capital sources that we have done over the last couple of years. To give you an example, last year, we did a preferred. So that is also something that we are certainly able to transact on if the opportunity presents itself. So again, we have a few options at our disposal. And just maintaining a strong balance sheet ultimately is a key part of the strategy, and that's how we kind of look at everything when we focus on the future.

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

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Great. And then it sounded like at least one of your dispositions was related to a purchase option. Are you including purchase options in your new leases? And if so, how do you think about the valuations that you structure those at?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [5]

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Manny, it's Howard. We don't offer any purchase options. We never do. And this one, in particular, happened to be a legacy lease when we had bought that 1.5 million square-foot portfolio last year, and we had counted on this tenant exercising the option. So it was not unexpected. It was underwritten that way.

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

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Great. And last one for me. It looks like acquisition costs were actually really low in 2Q. Is that just a timing thing? And they'll be really high in 3Q? I was just surprised given the amount of activity you guys had.

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

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Manny, it's Adeel. So I think we talked about this probably in the first quarter until end of last year. There was an accounting pronouncement that changed the rules, where we're able to capitalize some of those acquisition costs. So that's what you're seeing now. And on a go-forward basis, you are not going to see a lot of noise coming through that line item. So what you did see this quarter, which was about 20,000, which is essentially [related] to some [debt] deal cost. So you're going to see the gap between the newly defined FFO versus the core FFO at close pretty dramatically because of that accounting pronouncements and how we were able to capitalize those costs.

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Operator [8]

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The next question is 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 [9]

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It looks like the same-store portfolio had a 12.7% increase in expenses year-over-year. Can you just talk about the key drivers of that? And is this something that's going to sustain or is this something you're going to see better margins going forward?

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [10]

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Jamie, it's Adeel. Thanks for the question. And I think what we did for the closing -- for the opening remarks, we did call out about a $300,000 nonrecurring charge. It's not a one charge. It's across the portfolio by 11.2 million square feet. So that's the anomaly this quarter. But more importantly, our guidance is focused on full year. So we still have a 6% to 8% guidance, and we're still seeing -- we're still very comfortable with that guidance. So typically, we don't give you a quarter-over-quarter guidance because of this choppiness that can happen. We also had something similar last year. But we remain comfortable with our full year guidance. And on a go-forward basis, I think this anomaly, more than likely, will not exist and we will see more efficiencies in just -- in terms of the cost on a go-forward basis. So I think you'll see that kind of go away. But the confidence on the full-year guidance remains here, which is still 6% to 8%. And right now for the full year, it's 7.4%. So it's still coming on a higher end of the range.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [11]

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Okay. But I guess I'm asking outside the charge, when you think about your taxes or your operating expenses, any room to make things even better or do you feel like this a pretty good margin on a normal run rate?

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [12]

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No, there is a actually room to make things better. So basically, I think one of the key things that is very important for us to focus on, these acquisitions that we have done, that actually gives us some scalability and that gives us more scale. So we should see some of those costs spread out and the same pool will benefit from it. So hopefully, on a go-forward basis, some of the deals that we have done so far, because of the fact that the cost to maintain those projects [is special] at best, you will see the benefit across our entire portfolio and the same store will benefit. So you will see some of those metrics improve on a go-forward basis.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [13]

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Okay. And then I guess for Howard or Michael, just the deal seems to be getting -- the average deal size seems to be getting larger. Do you have a thought in terms of like how large a deal you could actually do or what you have the appetite for as you're starting to see more out there?

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Michael S. Frankel, Rexford Industrial Realty, Inc. - Co-CEO and Director [14]

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Jamie, it's Michael. Thanks again for your question. Thanks for joining today. So we've always tried to describe the growth -- external growth side of our business. It's hard to predict. From quarter-to-quarter, even year-to-year, the size of the transactions, the volume of the transactions and the mix of core versus value-add. It seems that every year, we seem to do at least one larger or medium-sized portfolio. So for our first half this year, we acquired 2 of them. But we don't see that as unusual. We do have in our pipeline, a similarly large or even larger opportunities on the horizon. But it's just hard to say when those will come to fruition, or if they'll come to fruition. I think the way we've always described our business is that we're going to do a lot of onesies, twosies, threesies; small, medium-sized transactions; and from time to time, we'll do a much larger transaction. And frankly, we do think that from time to time we'll do -- we'll see acquisition opportunities that are substantially larger, potentially than the portfolios that you saw us buy earlier this year. But again, just very difficult to predict. But just to give you a sense of it, we have many discussions ongoing with private owners, who own many millions of square feet of product in these markets. And so -- we see a lot of opportunity. But just hard or impossible to predict the timing.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [15]

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Okay. That's helpful. And then finally from me, if you could talk about some of the 0-percent leased buildings in the repositioning pipeline? And just leasing prospects?

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

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Sure, sure. We've got a -- there is a 100,000-foot building in the San Gabriel Valley that we're just, I think, completing repositioning on probably in the next week or 2, and we have some strong leasing activity. We're optimistic that we'll have that building leased this quarter. We have a 150,000-foot building in the San Fernando Valley that has actually been empty a little longer than we had expected, but we continue to have very strong leasing activity on it. We're now also offering that building on a [divisional] basis. And so we've seen a couple more potential tenants show up that we're in -- actually in negotiations with right now. So fairly optimistic on that one leasing as well. And that -- I think that's really it for the vacants right now that have any near-term delivery in terms of the space. Yes, I mean the only other one is Avenue Paine, but that one, 111,000 feet and we're still under repositioning. And that won't be delivered until -- towards the latter part of the year.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [17]

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And then what about the De Soto Avenue?

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

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No, I mentioned that one. That was the one I was mentioning in the San Fernando Valley.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [19]

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Oh, that's the one you mentioned. Okay.

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

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Yes. But all in all, the market is still very, very strong. We have multiple offers, generally on space. And in fact, the one I mentioned in the San Gabriel Valley may, in fact, even lease higher than our asking price with the bidding that's occurring on that space.

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Operator [21]

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(Operator Instructions) 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 [22]

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A couple of questions. Is there any -- where are you in these various markets in the possible going vertical with any of your buildings or your sites? And then second, do you have any developable land in your portfolio, whether it's vacant land or up zone -- ability to up zone or increase density?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [23]

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John, it's Howard. Yes, as far as vertical, it's certainly something that we talk about here in Southern California. But when you really drill down, look at the land cost and those exceptionally high construction costs, it doesn't seem likely that we'll see anything in the near future. We certainly know that there is a 2-story or a 3-story building being built in Seattle. There's talk of something in the San Francisco area, but there's just -- the numbers just don't work in our markets right now. You'd sooner see somebody tearing down existing buildings here to build new product. The economics, believe or not, would probably -- as bad as they might be, it would probably be better than building a multi-story in this market. And then as far as opportunities, I think what you're talking about is a higher and better use for our sites than potentially industrial. You saw us actually transact a sale in the past quarter where we sold the Midway property right before we commenced our redeveloping of that, where we sold to a developer going to convert the property to office and residential, multifamily. It happens once in a while, but if you're looking for our ability to outperform, there is another avenue that we've talked about in the past that happens more frequently and that's selling some of our single-tenant buildings to owner users which tend [a bit] to pay the equivalent of exceptionally low cap rates. And we've mentioned a few of those over the past quarters where we've transacted. So you might see more frequency in our portfolio with that type of sale as opposed to that converter type value.

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Operator [24]

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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 [25]

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A few questions. First for Adeel, when you're talking about funding sources, you rattled off a bunch of options and I think one was preferred. Just curious, I mean, how do you think about what's the right level of preferred to have on a capital stack?

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [26]

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Mike, thanks for the question. I think when we -- what we did last year was a very well-executed preferred tranche, I think. So I think that kind of gives you perspective from what we think. But more importantly, that equation changes each year. So we have the ability to forward look at our model and how the preferred plays into the overall equation in terms of the FFO [equation] on the go-forward quarters and just how that translates into any of the value. So we'll look at that in a holistically speaking with all of those components factored in. But what we did last year certainly was a good example of what we felt comfortable. So I think that's how we're looking at it but more importantly, we're also looking to break a little bit of boundaries in terms of the dividend, the coupon rate from that perspective, which we executed pretty well. So all of those things factor in. I think a little sprinkling of preferred certainly helps, especially when you take a long-term view of the organization and just the company and the market itself. So that's how we kind of think about it, but we definitely believe preferred has a place in our capital stack on a go-forward basis.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [27]

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Okay. And then 2 other ones, and I apologize if I missed these if they were during the call. But did you comment on -- for the 2Q acquisitions as well as the 3Q what the split was between the core and the value-add? And then is there any anything else sizable that's under contract or LOI today?

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Howard Schwimmer, Rexford Industrial Realty, Inc. - Co-CEO and Director [28]

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Mike, it's Howard. No actually we didn't comment on the split between core and value-add, but clearly with the 2 larger transactions we did, we did a bit more on the core side in the quarter. And I think as Michael commented earlier, we don't -- we can't really predict quarter-to-quarter whether there'll be more value-add or core at any one particular time. We've always said that core is a part of what we'll buy, but it's really a question of the right core transactions when they come along and really work for the portfolio. And I guess what I'm referring to is the 2 deals we did. One had in-place rents that were about 16% below market. The other had rents that were 25% below market. So there was an opportunity in the near future to really drive increased rents and create value in those assets.

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

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Got it. Okay. So Q2 was a little more core than value-add. What about Q3?

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

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We really haven't commented on any of the numbers yet in terms of those acquisitions. We'll be able to do that next quarter, and we could probably get back to you off-line even maybe talk about it, if you want.

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

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And the quarter is not over.

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

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That's true.

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Operator [33]

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The next question comes from the line of Blaine Heck with Well Fargo.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Associate Analyst [34]

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Just wanted touch on same-store guidance. Appreciate the additional disclosure of same-store, excluding the repositioning properties. That number came down a bit this quarter and I think the last quarter, Adeel, you mentioned 5% of the target for the year. And you have the footnote on that, that didn't change. But I just wanted to make sure that 5% target hasn't changed? And I guess the implication there is do you expect that metric to pop back up in the second half?

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [35]

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Blaine, yes. That's absolutely correct. That's exactly what I was stating earlier, is that Q2 is a bit of an anomaly. That's why we kind of focus on the full year guidance and we do expect that number to pop up and get right back in the range [there]. So when you take at the 6 months, 7.4% growth, I think that's more relative to where the year-end is going to fall into. So Q2 is anomaly, which is essentially the $300,000 nonrecurring charge that took place. But again, that's not a common theme. But again, we're going to see more efficiencies across the board and we feel comfortable with that 6% to 8% (inaudible) on the high end. And if you take away some of the repositioning components of that, the 5% is still a very good number.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Associate Analyst [36]

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Okay, great. And then secondly, Adeel, I'll stick with you. Can you talk about how you think about and calculate your cost of capital? Obviously, you've been heavily using the ATM. So do you look at kind of your implied cap rate versus yields on what you're buying? Or I guess, how do you become kind of comfortable consistently buying and kind of the 4s and even dipping into the 3s on an initial cap rate basis? Is it as simple as it's pretty heavily based on your ability to add value and increase those initial yields?

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Adeel Khan, Rexford Industrial Realty, Inc. - CFO [37]

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Well, I think we try not a focus on the spot value because I think that value can change at a unit -- on a month-to-month basis, quarter-to-quarter basis. We do look at our long-term cost of capital. I think that's the best and most prudent way of looking at our cost of capital. We, obviously, don't disclose that but that's how we think about it internally. But I think the profile of the acquisitions that took place this quarter, there's something unique about them, right? The kind of cash flow, the core kind of deals that these guys -- that these properties are, that allows you to add scale to your portfolio, which is something that I talked about in terms of how that's going to flow into our numbers on a go-forward basis. So we do look at that and because we are focusing on not just a one-dimension unit, we have a bucket of projects that we focus on, value-add to [core to core plus]. And you never can predict as to which project is going to fall into your bucket that quarter, but if you have an opportunity to add something like this to the portfolio in a great location with a great cash flow stream and that also allows you to improve your scalability across the portfolio in terms of cost and overhead, then you [certainly] take a look at that. But I think our execution of the ATM market was certainly -- was indicative of how the stock is performing. But again, we look at it on a long-term view in terms of cost of capital and what that does to our -- on a go-forward basis years out in terms of just the FFO accretion and what that does to NAV.

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Michael S. Frankel, Rexford Industrial Realty, Inc. - Co-CEO and Director [38]

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And Blaine, it's Michael. Thanks for joining the call. I'll just add a little bit of thought on that. We've always sort of described our acquisitions business as being less focused on the initial cap rate, because sometimes we'll buy a property that might be baked in. So we really look to [destabilize] and value we're able to create in the medium -- in the near to medium term. And I think if you look at the numbers, the business model is really proving out, in many ways, exceeding our expectations through the mix of properties we're buying. And if you just look at the completed repositionings, for instance, that I think are detailed in the supplemental and prior disclosure, those are solving to and have achieved -- they're approaching mid-7% yield on total cost. And if you look at the repositionings and process, with our estimated NOI into stabilization period, you've got about $44 million of incremental CapEx in those, generating just a hair under $10 million of incremental NOI. And so that's about over 22% return on go-forward expenditures on a dollar-for-dollar basis. So we just see that as a great [lift] in terms of creating NAV in the portfolio, generating cash flow in the business and really demonstrates what this business is all about. And we've run those with the occasional core deal and at the end of the deal -- at the end of the day, we're delivering on our mandate, which is to deliver substantially better-than-core yields and probably the best and generally for most the buying public but is otherwise the lowest yield market in the country. So that's really the unique value proposition that the company is delivering on to the market.

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Operator [39]

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We have reached the end of our question-and-answer session. I'll turn the floor back to management for closing remarks.

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Michael S. Frankel, Rexford Industrial Realty, Inc. - Co-CEO and Director [40]

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Thanks, everybody, for joining us today. We'll see you in 90 days. I hope everybody is enjoying a great summer.

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Operator [41]

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