Rexford Industrial Realty Inc (REXR) 2014 Q1 法說會逐字稿

Greetings and welcome to the Rexford Industrial Realty, Inc. first-quarter 2014 earnings conference call. (Operator Instructions). I would now like to turn the conference over to your host, Mr. Steve Swett. Thank you, sir, you may begin.

Good afternoon. We would like to thank you for joining us for Rexford Industrial's first-quarter 2014 earnings conference call. In addition to the press release distributed today, we have posted a quarterly supplemental package with additional details on our results and 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 variation 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, and 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 view 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 we will release this afternoon and are available on the Company's website, present reconciliations to the appropriate GAAP measure and an explanation of why the Company believes such non-GAAP financial measures are useful to investors.

This afternoon'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.

And now I will turn the call over to Michael.

Thank you and welcome to Rexford Industrial's first-quarter 2014 earnings conference call. I will begin with a brief summary of our operating and financial results for the quarter. Howard will then provide an overview of our markets and recent investment activity and Adeel will then follow with more details on our first-quarter financial results, balance sheet, and our outlook for the remainder of the year.

The first quarter of 2014 was a strong start to the year. Within our portfolio, we continued to record strong leasing activity, produced gains and leased percentage and occupancy with positive releasing spreads and reported positive same-store cash NOI growth.

Also during the quarter and through April, we acquired six industrial properties totaling about 571,000 square feet for an aggregate cost of $54 million.

Since our IPO we have acquired 15 industrial properties totaling about 1.5 million square feet for an aggregate cost of approximately $137.7 million. As a result, we have reported FFO of $4.94 million and FFO per share of $0.19. This represents an improvement of approximately 12% compared to our results in the fourth quarter.

Stepping back for a moment, let me review our portfolio and strategy. As most of you know, Rexford Industrial is the only pure play publicly traded industrial REIT focused solely on Southern California. And we enjoy a combination of benefits that are truly unique for our sector.

Our market is the largest, most diverse and most fragmented industrial market in the nation demonstrating a unique combination of underlying drivers of increasing long-term tenant demand. Our strategy is to focus on Southern California's infill submarkets comprised of 1.6 billion square feet of industrial buildings, which represents 80% of the 2 billion square foot overall industrial market in Southern California.

Located in and among higher density population, business, and consumer trade areas, our target submarkets represent an economic area larger than most countries. Southern California also serves as the primary distribution artery between the world's largest single economy, the United States, and the world's largest and fastest growing regional economy, the Pacific Rim.

As a result, our infill markets are experiencing increasing tenant demand driven by a variety of long-term trends including increasing population in consumption and expanding regional economy and dramatic growth in e-commerce. Combined with these demand drivers, our target infill markets are also characterized by scarcity of supply and, despite increasing demand, there is a severe limitation on the ability to introduce new product due to the lack of developable land, natural barriers such as mountains and ocean that limit market expansion, economic barriers whereby land and development costs limit new construction of for-lease products and restrictive, municipal, and regulatory constraints limiting infill industrial development.

As a result of these factors, our infill markets have historically demonstrated among the highest occupancy, highest rental rates and highest per square foot industrial property values in the nation.

With this exceptional target market, our mandate is to combine favorable internal growth demonstrated by our operating results with strong external growth by leveraging our uniquely focused originations platform to deliver consistent, better than core returns and cash yields as demonstrated by our recent and ongoing investments.

Turning to our first-quarter 2014 operations, our portfolio continues to perform well. Our total consolidated portfolio was 90.2% occupied at the end of the first quarter. Occupancy on a Same Property Portfolio basis was 89.1% at the end of the first quarter, an increase of 140 basis points compared to the first quarter of 2013.

On a Same Property basis we generated a 3.4% increase in first-quarter revenue as compared to the prior year period which was driven primarily by increased occupancy and positive releasing spreads. With operating expenses up 15%, Same Property Portfolio NOIs decreased 1.1% year over year. On a cash basis our Same Property Portfolio NOI was up 1% year over year.

We have made great progress building our operating platform and teams since the IPO and are well-positioned for substantial growth with improving operating efficiencies as we move forward. With regard to leasing, for the consolidated portfolio we sign 94 leases accounting for approximately 659,100 square feet during the first quarter. We signed 41 new leases for about 307,000 square feet and we recorded another quarter of net positive absorption of nearly 41,000 square feet.

We signed 53 lease renewals for about 352,000 square feet, evidencing continue strong demand from our tendency to renew. Our tenant retention was 57% in the quarter, reflecting our strategy to selectively replace certain tenants where we see opportunities to reposition or transition high demand space to higher rents.

Due to the relatively small size of our portfolio, execution of these strategies may impact occupancy or retention metrics on a short-term basis. However, these strategies are also expected to deliver accretive near and longer term benefits to our occupancy, cash flow, and asset value. These efforts reflect the unique opportunities associated with our Southern California infill locations and smaller midsize multitenant focus to create incremental value and cash flow growth for shareholders.

Along with continued improvement in our lease percentage and occupancy, we continue to see signs of strengthening fundamentals across our infill markets as evidenced by our positive releasing spreads. For our new and renewal leases combined in the first quarter of 2014, we recorded average GAAP rental rate increases of 11.5% and cash rental rate increases of 3.6%.

With that, I will turn the call over to Howard.

Thank you, Michael, and thank everyone for joining us today. I will update you on our markets and review our recent transactions which continue to run at an active pace in 2014.

Let me start by providing perspective on our markets, primarily utilizing market data according to CPRE. Fundamentals in Rexford's core Southern California infill investor markets exhibited further improvement during the first quarter of 2014 as leasing demand accelerated with increasing landlord pricing power, well located and functional investor properties as contained in our portfolio.

In Los Angeles County, overall vacancy remained extremely tight for the first quarter at 2.4%. Absorption stayed strong and asking rents are up 9% year over year.

It is also forecasted that rents can grow approximately 6% to 7% over the next 12 months in the greater Los Angeles area to finally reach prerecession levels.

In Orange County, the economy has expanded at a faster rate than both the nation and California with net absorption over the past year at the highest level since 2006 with vacancy reported at 2.6%. With falling industrial vacancy and increasing demand, Orange County is well-positioned for further rental increases. In San Diego County, vacancies have declined for 11 consecutive quarters and have now reached prerecession levels at 7.6% set in the fourth quarter of 2006.

While rents were flat over the quarter, availability is expected to continue to decline and landlord pricing power strengthened. In Ventura County, vacancy declined slightly to 6% and rental rates moved upward, increasing 3.4% over the previous quarter.

In the first quarter, the Inland Empire experienced 3.1 million square feet of net absorption. Now with 100,000 square foot and below size range showing the strongest increase in mid-demand. This represents the 21st straight quarter of positive net absorption in the Inland Empire. It is also being reported that the market has a 4% overall vacancy rate, unchanged from Q4 2013 and down 160 basis points year over year. With the majority of Inland Empire construction being above 100,000 square feet of space, rent growth is expected to be slower for big-box buildings as compared to higher rent growth projected for smaller product which is Rexford's focus.

Based on these trends, we believe we are particularly well-positioned within our infill portfolio to capture the benefits of further strength -- of a further strengthening market to drive occupancy and rent growth on a sustainable basis.

Now moving on to our acquisition -- our transaction activity. So far in 2014, we have acquired six properties totaling approximately 571,000 square feet for an aggregate cost of $54 million. Typically, the first quarter is a slower quarter for acquisitions after the rush to close transactions in the fourth quarter. So we were extremely pleased with the volume of closings so far this year. And our pipeline of potential transactions continues to be robust.

Let me provide a quick summary of these 2014 acquisitions. In January, we acquired Rosecrans, a 72,000 square foot investor building located in the South Bay submarket for $5 million or about $59 per square foot. The seller is consolidating into half of the building under a five-year leaseback enabling value added improvements to modernize and demise the building to increase its rental value. We expect it to achieve a stabilized yield on total cost in the mid-7% range.

In January we purchased Oxnard Street located in Van Nuys for $8.9 million or $114 per square foot. The 78,000 square foot six building business park is currently 98% occupied and we plan modernization and cosmetic improvements which we expect to facilitate accelerated rent growth. Once these investments are completed, we expect stabilized yields in the mid-7% range.

In February, we acquired Ontario Airport Business Park, a 114,000 square foot five-building multi-tenant complex for $8.6 million or about $75 per square foot. The project is currently 95% occupied at rents which we believe are well below market. Upon re-leasing and/or renewals, we expect a stabilized yields in the mid- to low 7% range.

In February the Company acquired 228th Street, an 88,000 square foot six building industrial complex located within the South Bay submarket for $6.6 million or about $75 per square foot. The complex is currently 98% occupied at significantly below market rents. And after completing value-added programs, we anticipate a stabilized yield of just over 8%.

In March, the Company acquired Frampton Avenue, a 48,000 square foot industrial building for $3.9 million or $82 per square foot. The Frampton industrial building is located within the South Bay submarket and is 100% leased. This investment is projected to provide a yield in the 7% range.

And finally, in April, Rexford acquired Saturn Way, a 171,000 square foot industrial building for $21.1 million or $123 per square foot. The Saturn industrial building is located in Seal Beach in the Orange County West submarket and is 100% leased on a long-term basis. This investment is projected to provide a yield in the low 6% range.

In the first quarter of 2014, the Company also completed two dispositions for $14.5 million. Looking ahead, we continue to see a substantial pipeline of additional opportunities. With our comprehensive sourcing methodology and the market relationships, we believe we are uniquely positioned to mine accretive opportunities within our target Southern California markets. We remain comfortable with a full-year acquisition goal of $200 million or more of new investments.

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

Thank you, Howard. In my comments I will first review our operating results. Then I will review our balance sheet and recent financial transactions and finally I will provide some comments on our outlook for 2014.

Starting with our operating results, for the three months ending March 31, 2014, Rexford Industrial reported Company shares of $4.94 million, or $0.19 per fully diluted share. This was our second full quarter as a public company and per-share earnings and applicable comparisons to any period prior to July 2013 include results of our (inaudible) [remedies] and may not be comparable for the current quarter results.

For the first quarter 2014, our results include the impact of increases in portfolio occupancy and positive releasing spreads. In addition, there is the impact of acquisitions completed during 2013 combined with the first-quarter effect of acquisitions completed during the first quarter of 2014.

On the same property basis, we generated a 3.4% increase in first-quarter rental revenue as compared to the prior period. Same property operating expenses increased 15% primarily driven by higher repair and maintenance costs and higher overhead allocations associated with the substantial growth of our portfolio as well as the relative increase in property taxes due to [repo] growth in the comparable quarter.

Same Property Portfolio NOI was $6.2 million for the first quarter as compared to $6.3 million for the same quarter in 2013. On a cash listed, our same property portfolio NOI was up 1% year over year.

Turning now to our balance sheet and financing activity. At March 31, Rexford Industrial had total consolidated debt outstanding of approximately $212.9 million. Our consolidated debt includes approximately $111.1 million of secured property debts. Most of this debt is variable rate financing with its average current interest rate of 2.34%.

During the first quarter we executed two forward interest rate swaps to effectively fix the interest rate on our $60 million term loan. The swap includes $30 million of swaps to the forward start date in approximately 9 months and $30 million of swaps through the forward start date in approximately 15 months with respective effective fixed rates of 3.726% and 3.91% and both have terms through February of 2019.

Our $200 million unsecured credit facility had a balance of $101.9 million at the end of the first quarter. On a pro forma basis, reflecting the impact of the acquisition we completed in April, our credit facility balance is approximately $123 million. As a reminder, our unsecured revolving credit facility has an accordion feature that allows the Company to increase the capacity to $400 million, subject to certain requirements.

Our balance sheet continues to remain a significant point of strength for the Company with a pro forma debt to market capitalization of 35.2%. We have approximated $277 million of available capacity on our balance sheet, reflecting a current and potential availability on our revolving line of credit including the accordion feature.

Going forward, we intend to maintain a strong balance sheet with sufficient capacity to support our growth objective. We have a variety of potential available liquidity source at our disposal and we will consider our options depending on the pace of the investment opportunity that we see moving ahead.

Moving on, I would like to review several metrics that contribute to our outlook for 2014. We are projecting year-end 2014 occupancy of about 93%. We anticipate acquisitions for the full year of $200 million or more. For G&A we still anticipate a full-year expense of $10 million to $11 million. As we move through the year, we look forward to updating our outlook and we will continue to look at providing additional disclosure over time.

With that, we will open the call for your questions. Operator?

(Operator Instructions). Brendan Maiorana, Wells Fargo.

Good afternoon. The same-store expenses were up in the quarter and it seemed like that had a little more of an impact this quarter then maybe it has in past quarters or maybe it was just the revenue line wasn't up as much this quarter. But is there -- what do you think the outlook is for the expenses on the same-store? Do you think you may be able to curve that or is it just a market environment that you are in and expenses we should expect to be up the way they have been over the past couple of quarters?

I will answer that question for you. So as far as your questions are going, how can we curve that, I think what you are comparing hear from the same-store perspective, you are comparing the predecessor, the prior company. So we have already seen the impact of the expenses as we built them out.

So as we move forward in the next few quarters, you will see that comparison become a lot more normalized. So to answer the question that has already been built and you are just comparing the period that drastically different than where we are now today. So that takes care of the expense perspective and what you saw from the same store from a revenue perspective, that was a byproduct of our ability to execute the value-added opportunity where we -- we were in the process of replacing tenants with higher rents unit from our expiring rents. And that and the timing of those tenants and their start costs the timing from Q1 revenue perspective. And that is what you are seeing in the same store.

Okay, that's helpful. And maybe if I could drill into the revenue lines a little bit more. I think it was Michael or Howard, I forget, one of you guys mentioned that your retention ratio is 57% this quarter, which is maybe a little bit lower than you otherwise might have had. But I think you indicated that you were looking to move some of the tenants out to push rents a little bit higher and generate higher rent.

So how should we think about maybe your -- the outlook of occupancy and occupancy growth for the remainder of the year, relative to rent growth? Are you pushing rents pretty high and do you think maybe that means an occupancy growth may not be as high or do you think that you can move occupancy meaningfully higher as you get throughout the remainder of 2014?

Appreciate the question. So we are still very comfortable with our year end occupancy goals of about 93% but it is not a linear path so as you see some of the activity it is a little lumpy from period to period. Because we are starting from a relatively small base and we do see opportunities to roll tenants from time to time to higher rents. And anecdotally, maybe, I think Howard probably has some really good examples of how we have been able to do that.

Thanks, Michael. We will give you just broader picture. In LA County during the quarter, we had 69,000 square feet that was vacated and not backfilled. Already in and Q2 we see 53,000 feet of that space already with new sign leases or deals in hand that look like they are going to lead to completed leases and to drill down a little further, Brendan, I will give you an example of one project in the San (inaudible) Road Valley where we had three expirations of 38,000 square feet. We had an 11,000 foot lease we completed in March and rent commences there in June and we saw 23% growth in the cash rental spread.

We had another 11,000 square foot lease in the same project and we leased in February with rent commencing in April. That has an 8.6% debt to cash growth to it. So those are just an example of what we see throughout the portfolio.

Yes and, Howard, I know it is early in the year, but do you feel like you are getting more aggressive pushing rents to -- given what the overall market net absorption numbers have done and where vacancy levels are?

Oh, absolutely. Take Orange County, for instance. That is a market where, as a landlord, we have extreme pricing power. Our occupancy in the Orange County properties is 98.5%. We are up from 95.7% in Q4 and our mandates, all our property managers is to push rents.

Okay, great. I will get back in the queue. Thanks.

Michael Mueller, JPMorgan.

First of all on the occupancy side, the year in guidance of about 93%, does that compare to the 89% same store or the 90% for the consolidated portfolio?

Consolidated.

Okay. And then just on the disposition side, you had a couple in the first quarter. Can you talk about what you think the full-year expectation is for dispositions? You talked about 200 on the acquisition side.

Yes. We really don't have any plans for anything large scale in terms of dispositions. There may be an asset or two that we would consider selling just --. That's not really accretive in terms of its revenue growth. But nothing substantive.

Okay, that was it. Thanks.

Nikhil Bhalla, FBR Capital Markets.

Good afternoon to you on the West Coast. A question on the guidance that you are talking about. So 93% on a consolidated basis for occupancy. Any way to think about what the rent was going to look like by the end of the year?

Yes. Interesting question. We don't typically look at the consolidated portfolio on a rent per square foot just because of the vast differentials and the geography of the assets and the rents in different markets as well as size of spaces. Now obviously the smaller spaces command higher rent per square foot than the larger.

I think that we were at about [857] annualized for the quarter and with what is happening, it has going to be up, but I couldn't give you any specifics off the top of my head right now.

Okay, no worries. And just in terms of the run rate property expenses, I think you mentioned there were some special items in here in 1Q and you were saying that that might normalize. Could you give us some level of sensitivity how we should think about second quarter, third quarter, and fourth quarter?

Right. I think as I mentioned earlier so the one-time extraordinary items were a small fraction of that change this quarter. I think the key concept there again is that you are comparing this quarter versus last year's quarter when we were a drastically different company. So for the most part you are going to see a very consistent normalized pattern as we move forward into the year when we do a Q2 versus Q2 and Q3 and Q3 comparison. You will start to say that start to become (technical difficulty) normalized. So the one-time charges were very small component this quarter and they worked the lion's share so you are not going to see the kind -- the more important thing to note here is that has been moved forward in year from 2013. We are getting into the public company settings which is the investment we have made into the platform. That is what you are seeing.

Okay. Moving onto acquisitions that may be out there. How are you thinking in terms of leverage levels? At what point would you say, you know what, we have done enough acquisitions on the balance sheet here. We need to think about another strategy here. Where is the hard stop if you don't mind giving us some sense of that?

Well, I will never mention a hard stop. I think that all that is a fluid situation based on where we are, keeping the balance sheet flexible as you can see and so far we have delivered pretty much on a lot of key metrics that we have been talking about. So I think we are going to continue to monitor our current facility which gives us a decent run rate to keep moving forward; and in addition we still have the accordion feature, which is certainly we can tap into subject to requirements that we kind of talked about. So I think as I said the situations there's no real hard percentage.

I think it all it is going to be on a deal by deal basis and we will continue to determine what the balance sheet is at that point in time and how much business it has to make for us to keep following one dimension. But, again, the balance sheet being flexible, it still gives us a multitude of opportunities to pursue. But I won't put a hard number out there.

Okay. Thank you.

(Operator Instructions). At this time, there are no further questions. I would like to turn the floor back over to management for any closing remarks.

Thank you, operator, and thank you again, everybody, for joining us today we appreciate your interest in Rexford Industrial. We hope you all had a great Mother's Day weekend, and we look forward to speaking with you again after the second quarter.

Thank you. Ladies and gentlemen, this does end today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful day.