Rexford Industrial Realty Inc (REXR) 2013 Q3 法說會逐字稿

Greetings, and welcome to the Rexford Industrial Realty Trust third-quarter 2013 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Swett, of ICR. Thank you, Mr. Swett. You may begin.

Good morning. We would like to thank you for joining us today for Rexford Industrial Realty's third-quarter 2013 earnings conference call. In addition to the press release distributed this morning, 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, 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 this morning and are available on the Company's website, present reconciliations to the appropriate GAAP measures and provide explanations as to why the Company believes such non-GAAP financial measures are useful to investors.

This morning's conference call is hosted by Rexford Industrial Realty's Co-Chief Executive Officers, Michael Frankel and Howard Schwimmer, together with Chief Financial Officer, Adeel Khan. They will make some prepared remarks and then we will open the call for your questions. Now, I will turn the call over to Michael.

Thank you, and welcome to Rexford Industrial's third-quarter 2013 earnings conference call. I will begin with a brief review of our operating strategy and third-quarter portfolio results. Howard will then provide an overview of our markets and recent investment activity. And Adeel with then follow with more details on our third-quarter financial results and an update on our balance sheet.

Rexford Industrial is the only pure-play, publicly-traded industrial REIT focused solely on Southern California, the largest, most diverse industrial market in the nation. In addition to sheer size, Southern California combines a unique blend of strong, underlying demographic growth, a large and vibrant base of manufacturing- and distribution-driven businesses, and the nation's two busiest ports.

Our target Southern California in-fill markets have historically demonstrated among the highest occupancy and highest rental rates of any industrial market in the nation, with many of our primary target sub-markets in the greater Los Angeles and Orange County markets currently performing at 95% to 98% occupancy. Furthermore, our core markets are highly fragmented.

We continue to leverage our decades of experience and relationships, unique originations methods, and exclusive Southern California focus, augmented now with our flexible public company capital structure to originate accretive investments. Howard will elaborate on our deep and active pipeline, as demonstrated by our recent acquisitions, the most recent of which was announced earlier this morning.

Turning to our third-quarter 2013 operations, our portfolio continues to perform well. The total consolidated portfolio was 88% occupied at the end of the quarter. Our stabilized portfolio was 89.5% occupied, while two properties, representing approximately 140,000 square feet, that are still in lease-up or renovation stages, were 32.6% occupied in the aggregate.

On a same-property basis, we generated a 17% increase in third-quarter revenue, as compared to the prior-year period, which was driven primarily by an improvement in average occupancy. Same-property operating expenses increased 12%, driven by an increase in variable overhead expense due to our increased occupancy. As a result, same-property portfolio NOI increased 19% year over year. On a cash basis, our same-property portfolio NOI was up 15% year over year.

With regard to leasing, for the consolidated portfolio we signed 115 leases, accounting for approximately 339,000 square feet during the third quarter, including 57 new leases and 58 renewals. Year to date, Rexford Industrial has leased 1.5 million square feet. As a side note, at the end of the third quarter, we had leases representing about 101,000 square feet which have been signed, but for which the tenant is not yet in occupancy.

Along with the overall improvement in our leasing percentage and occupancy, we are seeing positive rent spreads, as well. GAAP rental rates on comparable new and renewal leases were 6.7% higher than expiring leases, as we continue to benefit from the gradual reduction in concessions that is occurring across our markets.

On a cash basis, rents rolled down 1.1%. Cash re-leasing spreads were impacted by a 20,000-square-foot lease renewal with Target in San Diego. Excluding this one lease, cash renewal spreads would have been positive 2.3%, and overall cash re-leasing spreads for new and renewal leases would have been positive 0.4%. Overall, 95% of our renewals were executed with cash re-leasing spreads that were flat to positive.

I'll now briefly address the recent filings related to our re-allocation of interest to our pre-IPO investors. This accommodation was designed to rebalance the allocation of Rexford equity at the IPO between management and our legacy investors. We are pleased to report that this accommodation has achieved the broad support of our pre-IPO investors.

As of today, 93% of our pre-IPO investors, representing over 94% of their aggregate committed capital, have signed on to the accommodation. As the accommodation remains available for pre-IPO investors through the end of November, we believe it is possible that the overall support for the accommodation may continue to increase. Overall -- and I believe I speak for our entire management team -- we are exceptionally excited at the operating and growth prospects as we head towards 2014.

And with that, I'd like to turn it over to Howard.

Thank you, Michael. And thank you, everyone, for joining us today. On the call today, I will update you on our markets and review our recent transaction activity.

Beginning with an update on Southern California markets, market dynamics overall are continuing to improve, and we believe our portfolio is well positioned to capture favorable internal NOI growth as the recovery continues. According to CBRE, in the third quarter, the Southern California industrial market recorded positive net absorption and occupancy gains across Los Angeles, Orange, and San Diego counties.

The improvement in net effective rents we are seeing across our markets is beginning to have an impact on our operating cash flows. And there should be further upside potential as rental rates in our in-fill markets remain approximately 15% below prior-peak levels. The potential for market rental-rate recovery going forward should continue to drive favorable internal growth metrics in our portfolio.

Moving on to our transaction activity, we continue to see a steady flow of opportunities within our core in-fill markets, from a variety of different sources. As we have discussed previously, we believe our unique sourcing methodologies and market relationships are truly what set us apart from others within our markets. These advantages have allowed us to both win marketed sales and to originate off-market investment opportunities from a wide variety of sources.

In fact, since our formation, almost 50% of our investments have been off-market transactions. We believe that the balance sheet and liquidity we have now as a publicly traded company only serve to increase our acquisition advantages.

With these factors in mind, let me review our recent transactions. In August, we acquired two properties, Tarzana and Orion, in the San Fernando Valley, in an off-market transaction from a seller who had inherited the properties but lacked a desire to actively operate them. These are representative of the opportunities arising from generational transitions in ownership that we see occurring across our in-fill markets.

The properties had been under-managed and were only 84% occupied. We have already made great progress implementing our management and operating programs to increase occupancy and address deferred maintenance.

More recently, subsequent to the end of the third quarter, we announced the acquisition of two Orange County properties. Two weeks ago, we acquired a four-building industrial complex containing 115,000 square feet located in Yorba Linda, California. And just this morning, we announced the acquisition of a six-building industrial park containing 120,000 square feet, located in Anaheim, California.

We acquired the Yorba Linda property for $12.7 million in a lender auction in which our ability to close quickly without a financing contingency were decided advantages. This property is currently 79% occupied, and we believe we have a significant opportunity to create value by improving occupancy and cash flow through implementation of our operating strategies.

The Anaheim property was purchased for $10.6 million in an off-market transaction, facilitating the dissolution of a partnership due to a generational change in ownership. This project was 85% occupied at closing and has significant upside through additional lease-up and rent growth as we reposition this property. Both Yorba Linda and Anaheim are located in north Orange County which is a core, highly sought after in-fill market.

Year to date we have acquired eight industrial properties for $111 million, including four properties for $37.3 million since our IPO in July. We continue to have a substantial pipeline of additional opportunities that are in active pursuit, including three properties currently in escrow. We remain on target to meet or exceed our near-term growth objectives.

As we move into 2014 and beyond, we remind you that there is more than 1.6 billion square feet of in-fill industrial space within our target in-fill Southern California markets. In addition to favorable macro demand drivers, these in-fill markets enjoy the dynamic of proximities to population concentrations and significant barriers to new construction. With our decades of experience and exclusive Southern California focus, combined with our unique originations capability and strong public company balance sheet, we expect that we will continue to be a significant consolidator within the highly fragmented in-fill industrial market for years to come.

In summary, we remain on track for another year of strong growth. And with our strong balance sheet, we are well positioned to continue to execute on our growth strategies going forward.

I'll now turn the call over to Adeel to discuss our third-quarter results, balance sheet, and financing activities.

Thank you, Howard. In my comments today, I will first review our operating results for the third quarter. Then I will review our balance sheet and recent financing transactions. As a reminder, the Company's IPO took place in the third quarter. So this quarter's result include a portion of the period which represents our predecessor business.

Starting with the third-quarter results, our results for the third-quarter 2013 include a period prior to completion of our IPO. And our results for the third-quarter 2012 are entirely the results of our predecessor entity. For the 59-day period from July 24, 2013, which was the effective date of our IPO, through the end of the quarter, Rexford Industrial reported Company share of FFO of $3 million, or $0.12 per fully diluted share, which is in line with expectations.

Our results included the benefit of lower interest expense due to reduced debt, combined with the impact of acquisitions during the quarter. These are partially offset by the public company costs associated with our initial public offering in July.

Turning now to our balance sheet and financing activities, at September 30, Rexford Industrial had total consolidated debt outstanding of approximately $122.8 million. Our consolidated debt includes approximately $107.9 million of secured property debt. Most of the debt is variable-rate financing, with an average current interest rate of 2.21%.

Our $200-million unsecured credit facility had a balance of $14.8 million at the end of the third quarter. And on a pro forma basis, including funding for the acquisition subsequent to the quarter end, which Howard detailed, the balance today is $35.4 million. As a reminder, our unsecured revolving credit facility has an accordion feature that allows the Company to increase the facility to $400 million, subject to certain requirements.

We believe our balance sheet remains a significant point of our strength for the Company, wIth a pro forma debt to market capitalization of 28%, and $94.8 million of commuted capacity on our revolving plan of credit. Going forward, we expect to maintain a strong balance sheet with ample capacity to support our growth strategies.

With that, we'll open the call to your questions. Operator?

(Operator Instructions)

Nikhil Bhalla with FBR.

Thank you and good morning, everyone. Michael, just wanted to ask you a little about -- you mentioned three properties in escrow right now. Anything you can share in terms of the value of these properties?

Hi, Nikhil, it's Howard Schwimmer. I'll answer your question. We generally don't like to go into too much detail on specific projects and escrows that we're still in due diligence period. We're really excited about the pipeline, though. We've never been busier in terms of underwriting deals, negotiating deals. And I think we're days or minutes away from some really interesting deals, even more than what we have in escrow coming together. But it's just been our policy to really announce acquisitions upon closing of escrows.

Sure, no problem. Just looking out to next year, you talked about your acquisition pipeline looking pretty strong. I think initially the way you'd modeled was you're thinking about $250 million of acquisitions for next year, at least somewhere in that ballpark. Does that still seem like a realistic range for you for next year?

Think about what we did this year so far, we've done $111 million. The year's not over and we've got a lot of things in the pipeline. And with our new balance sheet we're that much more competitive in the market, in terms of just the penetration we have and years of experience and relationships. The public company balance sheet really has made a tremendous difference in what we're seeing now. I think going forward we have great expectations of really performing significantly well in the market.

Okay. Just shifting gears to taxes, real estate taxes have been going up in many jurisdictions. Any specific thought on how you see tax increases going into next year?

In California, it's Prop 13. So we don't see annualized reassessments. We don't feel like there's any exposure perhaps in what you're referencing.

Okay. In many jurisdictions, even in California, I've seen property taxes have jumped actually 6%, 7% recently. Do you have a sense of the property taxes maybe starting to catch on to you, maybe going into next year?

I think maybe what you're referring to, if you look at data on the tax roll and collections, a lot of that has to do with property transactions in general where there's more product changing hands, and there has been a reset as to the basis of those properties which would then lead to the tax increases. But in terms of ourselves and our portfolio, I think what you're referencing is really something that wouldn't be an impact of ownership of existing assets.

Okay. A final question for Adeel. You talked about the credit facility balance right now. That's $34.4 million, correct?

$35.5 million.

Oh, $35.5 million. That's all I have. Thank you.

Jamie Feldman, Bank of America.

Hi, guys. This is actually Steven with Jamie Feldman. I just had two questions for you guys. The first was with the same-store pool, just looking at your press release and your supplemental, it looks like same store declined sequentially. But I wanted to confirm this was actually a sequential same store number, from 88.5% to 87.3% because it looked like the number of properties was changing from June 30 to September 30.

This is Adeel. The same-store pool changed by one property. We incorporated a Zenith property that was purchased in May 2012 of 37,992 square feet. So, very small property that rolled into the mix this quarter for the same store. The primary driver for the down-tick in the occupancy is due to one lease at Mulberry that we lost during the quarter of 97,000 square feet. And that was partially offset by great leasing in other portfolios. So, that's what you're seeing in the quarter-over-quarter comparison for the same store.

This is Howard. Another thing to point out on that is a lot of the leasing that we did would have been in some product that we own now that wasn't same store. So we did have a great quarter in terms of leasing but just not as much of it occurred in the same-store product.

Okay. And then the other question was on your retention rate. Could you just talk a little more about why your retention rate was -- it was at 59% versus the last couple of quarters was a much higher rate of 70%, in that area.

It's probably related to the same comment with that Mulberry lease.

If you look at retention for the quarter, and if you normalize, excluding the Mulberry lease, our retention was about 89% on square footage. And with the Mulberry lease it was 71% by tenant. So, again, that was the primary factor.

And the Mulberry property is in one of the highest occupied markets in Southern California, mid-counties. It's good space and we have tremendous activity on it. We're hoping to consummate a lease on it in the near term.

Okay. Thanks, guys. That's it from me.

Brendan Maiorana with Wells Fargo.

Good morning, guys. Probably Michael or Howard, if I think back to the occupancy progression that we had talked about around the time of the IPO, I believe that Q3 was expected to be somewhat of a volatile quarter for you. And maybe it was this Mulberry lease that was always anticipated to move out. But if I think about the occupancy targets that we had spoke about a couple of months ago, I think year-end 2013 was maybe expected to be, give or take, around 90% and then additional progression into the low the to mid-90%s by year-end 2014. Do you still think those are reasonable targets over the next five quarters or so?

It's Michael. Those are reasonable targets, generally speaking. And the one factor that's important to consider that's hard to anticipate, is it's hard to anticipate in the acquisition activity how that mix of new properties may settle in in terms of their occupancy. And obviously those properties that we're acquiring that have slightly lower occupancy than our overall portfolio represent opportunities for us in the value-add lease-up of those properties. But, at the same time, that's going to impact your reported results in the period. For example, we acquired Tarzana, which was a 75,288-square-foot property during Q3, which was only 81% occupied at the time of the acquisition. So naturally that's going to draw down your occupancy during the current period, whereas it represents a value-add opportunity going forward to increase cash flow through increased occupancy. So, I think we would confirm that we're comfortable with the projections with the one caveat that when we're buying opportunities with value-add or lease-up embedded in them, that you may see some variation depending on the acquisition activity.

And really, today, if you look at our uncommenced leases, we're 89.8% leased. And carrying Michael's example further, we just announced these two acquisitions in Orange County. But if you look at our Orange County portfolio today, I'd say at the end of the third quarter we reported 92.6% occupied. As of today, that portfolio is 95.7% occupied. Of course, excluding these two last acquisitions.

Sure. That's helpful. I'm solely speaking about the existing portfolio as it stood at 9-30. So, that's helpful color. It appeared that your cash rent spreads got a little bit better in the quarter but your GAAP rent spreads declined a little bit. If this were a large pool of sample leases, it would suggest that maybe the in-place rent bumps were a little bit lower this quarter than they had been in the past. Is this just more an effect of a small number of leases? Or are the bumps that were done in this quarter maybe a little bit lower than what they had been previously?

I'll take the first stab. This is Adeel. It's a combination of pretty much everything that you just described. I think quarter over quarter we're also seeing the market settling in a little bit. So, last quarter what you experienced in GAAP rent, it was a Q2 event, and a lot of the leases started coming out. So, you're starting to see that settle in a little bit from a GAAP rent perspective. I think the formula includes all the components as you just described, and we can certainly talk about specifics if you would like for us to drill down any further. But I think the key thing is that they're still trending positive from the expiring rents and then the cash is where you're starting to see improvement.

And how do you guys feel about how the market has progressed over the past three months or so? And are you actively trying to push rents a little bit more than maybe you were at the early part of this year?

We absolutely are pushing them. And the spreads are definitely moving in our favor. It's really market specific, submarket by submarket, and it's project by project. Some of them are moving faster than others. But I think the GAAP spreads are really a key indicator because concessions are substantially down. If you'll recall, the big box type product was earlier to recover. And today we're seeing rent growth really across the board. But if you look at -- CB puts out different projections and today they're still projecting that our markets, these in-fill markets, are about 15% under peak presently.

Okay. Great. And then last one, this is probably for Adeel again. The quarter obviously included the IPO so it's a little bit messy from a reported bottom-line number. But if the we just take the performance of the REIT from the July 24 IPO, is that a good run rate to use as we think about the earnings progression going forward? Or is there anything unusual that might have happened between July 24 and the stub period?

I think that's a great run rate. And I think if you pro forma that number strictly speaking just using the FFO that comes around $0.16 per fully diluted share diluted share. And I think the only caveat I will talk about, which we spoke about in some of our earlier press releases, we have about $200,000 legal fee that's nonrecurring. That's a nonrecurring thing, so it essentially its better that's number. But, other than that, I think that's a pretty good run rate to use going forward.

Okay. Great. Thanks for the color.

(Operator Instructions)

Michael Mueller of JPMorgan.

Thanks. A few questions here. Sticking with the G&A for a second, I think you said there's about $200,000 that was nonrecurring legal fee in the quarter. How much of that's going to be in Q4? And what's a good near-term recurring clean run rate ex legal fees, ex acquisition costs?

Acquisition costs -- this is Adeel -- acquisition costs could be lumpy, obviously, depending on the size of the acquisition, how many acquisitions we're doing within the quarter. So it's a little premature for me to talk about that. But from a G&A perspective, we believe the accommodation is going to come to a close here in November and we feel that's going to taper off within the current month. So I don't expect that number to be any higher than what it was in the previous quarter, for this quarter. So, essentially Q4 will be the last time we report any other legal fees on that relationship.

Okay. So, aside from the legal fees, what's a good recurring run rate for G&A then?

I think, as I previously stated, if you take the Q3 stub period that we reported, which is, as I stated, $200,000, call it, in legal fees, you can back that out essentially to get to a run rate.

Okay. And then can you just walk through what the exact share -- because I know there's a little bit of a change, the shares and units will be on a go-forward basis post the reclassification or reshuffling of units.

Sure. I can give you these numbers. These were as of most recent as of Friday. The common shares have changed to -- the current share count is 25,381,658. The common units are currently at 3,054,689. So, you can see the redistribution effect caused by the accommodation that have changed those mix.

Okay. On a fully diluted basis, though, the share count changed some, though, right? -- the fully diluted number will change?

Right, the fully --. And then the last component that I can add to that is the restricted stock unit count has changed to 244,938. So the total share count, 28,686,285. So that the percentage is 2.52% -- 2.37%, actually, on a fully diluted basis.

Got it. And last question, going back to the portfolio occupancy rate, on a same-store basis, just sticking with the same-store portfolio you're talking about here, what was the sequential change from Q2 to Q3? I apologize if you said that. I missed it. And then, on that basis, do you still expect the 87.3% to get close to the 90% by year end? I know that was partially a prior question but I just want to be a little more clear here.

Our same store end at the end of Q2 was 88.5%, end of Q3 was 87.3%.

And on the second part of your question, we carefully monitor our lease expirations. We're working with tenants with expirations that come up probably a couple quarters in advance. So, seeing through to the end of the year, we don't feel that we have really any significant risk in further vacancy. We've been doing pretty good on our leasing. We're net positive so far. So it's possible we'll be darn close or at the 90% end of the year. Okay. And what specifically drove the occupancy dip from Q2 to Q3? Was it one lease or just a handful? No, it was really this one lease. This property in Mulberry really, right just in the Santa Fe Springs. It was about 97,000 square feet. That size space in our portfolio is impactful. We've done a fantastic job, though, in gaining back bad occupancy through leasing of a lot of our multi-tenant projects. We're anticipating leasing the Mulberry space in the near future. As I mentioned of before, it's in a great market area and we do have a lot of activity on it. Okay. Great. Thanks.

Thank you. At this time we've come to the end of our question-and-answer session for today. I will now turn the floor back over to management for closing comments.

Thanks, everybody, for joining us today. We appreciate it.

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