Rexford Industrial Realty Inc (REXR) 2015 Q3 法說會逐字稿

Greetings, and welcome to the Rexford Industrial Realty, Inc., Third Quarter 2015 Earnings Call. (Operator instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Steve Swett, with ICR. Thank you, Mr. Swett, you may begin.

Good afternoon. We would like to thank you for joining us for Rexford Industrial's Third quarter 2015 Earnings Conference Call. In addition to the press release distributed today, 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 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.

Now, I will turn the call over to Michael.

Thank you, and welcome to Rexford Industrial's Third Quarter 2015 Earnings Call. I will begin with a 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 quarterly results, our balance sheet, and an update on our outlook for the remainder of 2015.

During the third quarter, Rexford again produced excellent results, with strong leasing activity, increased occupancy, and accelerating re-leasing spreads. These achievements are due to the strength of our operating platform and the hard work of our team, but they are also the result of the unique characteristics of our Southern California infill industrial markets. Even with concerns about global growth and the threat of rising interest rates, conditions within our infill markets continue to strengthen with record high occupancy and rising rents.

At this point in the cycle, we often hear commentators focused on the amount of new inventory or construction starts in a given market as a leading indicator for what may soon become over-supply and softening rental rates. This is where our target infill Southern California markets are truly differentiated from just about every other sizeable industrial market in the nation. Incredibly, within our core infill markets, and despite increasing long-term tenant demand, driven by dramatic growth in e-commerce and expanding population and business growth, among other factors, we are actually losing inventory year-over-year as industrial product is taken out of the market with inversion to other uses.

Since 2001, L.A. and Orange County alone have seen over 63 million square feet removed from the market, according to CoStar. During the first three quarters of this year alone, over 3.1 million square feet of product has been taken out of these infill markets. In other words, we are absorbing and losing more industrial product than is being delivered in Rexford's target infill markets. As a result, infill southern California's industrial market is not merely high-barrier, but might be better described as highly-barricaded, and extremely supply-constrained, and consequently we are building a fortress portfolio.

Conversely, and in stark contrast, the Inland Empire East, which is not a primary Rexford target market, has an abundance of land. While the Inland Empire East accounts for only 20% of Southern California's 2 billion square foot industrial base, this is ground zero for new construction, with about 70 million square feet of warehouse space available under construction and entitled for development, plus another 24 million square feet in the entitlement process, according to CBRE.

So, what does this mean for rental rates? While we have seen substantial rental rate growth, the average in-place rents in our infill markets are still about 13% below prior peak levels, according to CBRE. Second, judging by our ongoing leasing activity, we believe we still have a long runway of superior growth ahead of us.

Moving on to our third quarter results, we achieved recurring FFO of $11.2 million, 45% higher than the FFO recorded during the prior-year period. Recurring FFO per share was $0.20 for the third quarter. Our same-property NOI growth of 8.4% for the quarter was driven by a 5% increase in same-property rental revenue, and a 3.2% decrease in same-property expenses. Same-property portfolio cash NOI increased by 7.1%.

With a consolidated portfolio, we signed 107 leases, accounting for approximately 540,000 square feet during the third quarter. This included 38 new leases, for about 216,000 square feet, and 69 lease renewals for about 323,000 square feet. As a result, we ended the third quarter with 94.8% occupancy in our stabilized, same-property portfolio, which was up 360 basis points compared to 12 months earlier, and up 80 basis points from June 30, 2015. We generated strong leasing spreads of 16.3% on a GAAP basis, and 5.4% on a cash basis, for the quarter. The third quarter represents our eighth consecutive quarter of positive, double-digit GAAP re-leasing spreads.

Our tenant retention rate for the third quarter was 71%, and we achieved approximately 84,000 square feet of net positive absorption. Our new leases have an average term of four years, compared to an average term of two-and-a-half years for renewals.

On the investment front, we closed another $85 million in acquisitions since mid-year, which Howard will discuss shortly. We remain extremely excited about the strong yields we are achieving as we continue to leverage our extensive originations platform to grow in an accretive manner for 2015 and beyond.

Looking forward, we are well-positioned for favorable internal growth, capitalizing upon the ongoing supply-demand imbalance in our target markets. As our infill markets continue to tighten, market rents are rising, providing us with an ongoing opportunity to drive cash flow by rolling rents to market, by re-tenanting at higher rates, and by leasing repositioned space at premium rents.

With about 32% of our portfolio leases expiring through the end of 2016, and as our in-place rents today are estimated on average to be about 13% below current market asking rents, we believe we are well-positioned to capture strong NOI growth into future periods. And with that, I'm very pleased to turn the call over to Howard.

Thank you, Michael, and thank you everyone, for joining us today. As on past calls, I'll update you on our market, and review our recent transaction activity, which is producing extremely favorable returns.

The overall Southern California vacancy rate reported by CBRE when excluding the Inland Empire East, ended the third quarter at 1.95%, which most certainly represents a structural vacancy rate within a fully-occupied market. As Mike will discuss, the demand-supply imbalance within our infill market is putting a significant premium on available space, which continues to push rental rates higher. Following is additional perspective on our markets, primarily utilizing market data provided by CBRE.

In Los Angeles County, the market generated 1.6 million square feet of positive net absorption. This activity was concentrated in buildings smaller than 100,000 square feet, which accounted for 68% of the total. The vacancy rates are up 20 basis points since the last quarter, bringing the overall vacancy rate in the region down to 1.4%. To put this into perspective, there was just 2.5 million square feet of industrial product under construction across Los Angeles County, a 1 billion square foot industrial market, and most of the new product are buildings for sale to users as land, construction costs, and rents generally don't underwrite for new lease product. The average asking lease rate improved 3.2% over the prior quarter, and over the next 12 months, CBRE expects rent to further increase by 5.7%.

In the third quarter, Orange County posted 268,000 square feet of positive net absorption, with the overall vacancy rate unchanged since the last quarter of 1.9%. In Orange County, the vacancy rate has been less than 3% for nine consecutive quarters, with no significant development activity. This lack of supply has caused the average asking lease rate to increase 4% since the last quarter, but market rents are still 7% below the prior cyclical peak.

CBRE predicts that rates will gain more traction and increase 9.5% by the third quarter of 2016. In San Diego County, net absorption was positive for the 13th consecutive quarter, at 1.3 million square feet. Since the last quarter, overall vacancy decreased by 70 basis points to end at 4.4%, representing a 10-year record low, with low-finish industrial space outperforming the broader market at 3.3% vacancy.

The industrial market in Ventura County had 141,000 square feet positive net absorption in the quarter, and the vacancy rate dropped 30 basis points to end at 3.6%. The average asking lease rate stayed unchanged since the last quarter.

The Inland Empire generated 6.2 million square feet of positive net absorption, but due to new construction deliveries, the vacancy rate increased by 20 basis points to end the third quarter at 3.8%. I would note that 72% of Inland Empire construction activity is occurring in the Inland Empire East, which is not a Rexford target market. The Inland Empire West submarket, in which we do operate, is only 2.1% vacant. Since the prior quarter, the average asking lease rate has increased across this region by 2.4%, and CBRE forecasts the average asking lease rate to increase by 12.7% over the next 12 months, which may be tempered by the large pipeline of deliveries in the Inland Empire East.

Now moving on to our transaction activity, since the beginning of the third quarter, Rexford completed approximately $85 million of acquisition, adding 8 industrial properties to our portfolio. Five of the acquisitions were acquired through off-market or lightly-marketed transactions. As always, we have included the details of these transactions in our earnings release, but I'd like to provide a few highlights.

In July, we acquired Danielson Court, a 112,000 square foot industrial business park in Poway, for $16.9 million. The property is 100% occupied with several in-place, below-market leases, at a initial return of 6.1%. Also in July, Rexford acquired Lakeland, a 19,000 square foot industrial building in Santa Fe Springs, for $5 million. The property has 80,000 square feet of excess paved land, and is 100% occupied at an initial return of 6%.

In August, we acquired Port Hueneme, a two-building, 87,000 square foot industrial complex in Oxnard for $9.6 million. At 27% site coverage, the project has excess land and provides secure storage yards for small users. The property is 91.3% occupied, and in year two we expect to achieve a stabilized yield on total costs of 7%.

In September, the Company acquired Norwalk Boulevard, a two-building, 58,000 square foot industrial complex in Santa Fe Springs, for $7.2 million. The buildings are 100% leased, providing initial yield of 5.5%, increasing to a stabilized 6.4% yield on cost over the next three years as below-market rent expirations reset.

In late September, we acquired Sheila Street, a 71,000 square foot single-tenant, 36-foot clear height cold storage building located in the City of Commerce, for $12.2 million. During escrow, we executed a new 10-year triple-net lease with an existing Rexford tenant, providing a stabilized return on cost of about 7.5%.

In September, Rexford acquired 6th Street, a two-building industrial complex in Rancho Cucamonga, for $6.9 million. In-place rents are about 20% below market, and expire over the next two years. After completion of functional enhancements and cosmetic upgrades, we expect to achieve a stabilized return on total cost of 6%.

Subsequent to quarter-end, we purchased Arrow Highway, a three-building, 64,000 square foot industrial complex located in the San Gabriel Valley, for $8.1 million. The buildings are 100% leased to a single tenant, who uses the facility for its corporate headquarters, production and distribution. The initial stabilized return is approximately 7.4%. Additionally, in October, we purchased Midway, two prominent industrial buildings totaling 374,000 square feet, in the Central San Diego submarket, for $19.3 million. We are executing a two-phase repositioning plan, creating an industrial complex that will deliver high-quality industrial spaces in this severely supply-constrained submarket. Phase 1 delivers 229,000 square feet in 10,000 to 45,000 square foot spaces, and at stabilization the yield on costs is projected to be 6.5%. Upon stabilization of Phase 2, the return on total costs is expected to increase to approximately 8% or more.

As we look toward the end of the year, we continue to find attractive acquisition opportunities that meet our criteria. We closed $197 million in acquisitions so far this year, and have another $21 million under contract, with several other opportunities near final LOI. We remain comfortable with our full-year guidance for acquisitions of $250 million or more.

Given the underlying fundamentals within our infill markets, with low vacancy rates, strong absorption demand, and stable or even decreasing supply, we believe we are in an extended growth cycle providing support for higher real estate valuation. We remain comfortable pursuing acquisitions that meet our investment criteria, because of our focus on value creation and the unique growth drivers in our four infill Southern California markets.

Rexford's strategy is further differentiated by our originations method, and most of our properties have been acquired through off-market and lightly-marketed transactions with value-add opportunities allowing for stabilized returns far in excess of current market cap rates.

Let me walk you through a couple of examples that demonstrate the value Rexford is creating. In January 2014, in an off-market transaction, we purchased Rosecrans, located in the South Bay submarket of Los Angeles, a 72,000 square foot building that we converted into a two-tenant property. The seller leased back half of the building, and the remaining space was demised, totally repositioned, and leased in June of 2015. At acquisition, we projected a low 7% stabilized return, but we achieved a stabilized return close to 8% on total cost.

In November 2014, in another off-market transaction, we purchased 7900 Nelson Road, located in the San Fernando Valley submarket of Los Angeles. This best-in-class, 203,000 square foot, vacant building was demised into two spaces. We projected a stabilized yield of 5.9%, and with a final lease signed in October, a 6.6% yield will actually be achieved on total cost.

In closing, our track record of accretive acquisitions of infill properties in Southern California demonstrates the unique opportunity we have to deliver better-than-core returns in the most sought-after industrial market in the country. And now, I'll turn the call over to Adeel.

Thank you, Howard. In my comments today, I'll review our operating results. Then I will summarize our balance sheet and recent financing transaction. And finally, I'll update you on our outlook for 2015.

Starting with our operating results, for the three months ending September 30 2015, the company share of recurring FFO was $11.2 million, or $0.20 per fully diluted share. This compared to $7.7 million, or $0.23 per fully-diluted share, in the third quarter of 2014. Recurring FFO per share declined due to the impact of our equity offering in January of this year. Recurring FFO excludes the impact of approximately $500,000 of non-recurring acquisition expenses, and $88,000 of non-recurring legal reimbursement. Including these costs, company FFO was $10.8 million for the quarter, or $0.20 per fully-diluted share.

For the nine months ended September 30, 2015, Rexford Industrial reported company share recurring FFO of $32.4 million, or $0.60 per fully-diluted share. Recurring FFO excludes the impact of approximately $1.6 million of non-recurring acquisition expenses, and about $345,000 of non-recurring legal expenses. Including these costs, company FFO was $30.5 million, or $0.57 per fully-diluted share.

Same-property NOI was $10.2 million for the third quarter, as compared to $9.4 million for the same quarter in 2014, representing an increase of 8.4%. Same-property NOI was driven by a 5% increase in third-quarter rental revenue and 3.2% decrease in operating expenses.

Operating expenses during the quarter declined primarily due to a one-time adjustment to real estate taxes. On a cash basis, same-property NOI was 7.1% year-over-year.

Turning now to our balance sheet and financing activity, in total, our consolidated debt was approximately $335.9 million, which includes approximately $68 million of secured debt. During the third quarter, our total consolidated debt increased by $39.2 million, and we ended the quarter with $68 million outstanding on our revolving credit facility, primarily as a result of our acquisition activity. As part of our ongoing effort to optimize our capital structure and hedge against a rising interest rate environment, during the quarter we executed a private placement of $100 million of ten-year senior notes at a fixed rate of 4.29%. The proceeds were used primarily to pay down our secured debt. As a result, we increased our financial flexibility by reducing our secured debt exposure, and [staggering] our debt maturities.

We continue to optimize our capital structure and maintain maximum capacity and flexibility to support our internal and external growth strategies, utilizing a combination of sources including potential capital recycling.

Finally, I would like to provide an update on our outlook for 2015. We're increasing guidance for 2015 recurring FFO to a range of $0.79 to $0.81 per share. Our guidance for recurring FFO does not include acquisition costs or other costs that we typically eliminate when calculating this metric.

Our guidance is supported by several factors. For the 2015 same-property portfolio, we expect year-end occupancy within a range of 93% to 94%, and we're tightening our same-property NOI growth target for the year to a range of 6% to 7%. For recurring G&A, we're nearing our expectation for full-year expense to a range of $14.5 million to $15 million. Our full-year acquisition target remains $250 million or more. As a reminder, a significant portion of our transactions have a value-add component which we expect to add meaningful accretion in the medium- to long-term, but may have a near-term impact for redevelopment or re-tenanting initiatives.

With that, we'll open the line to take any questions. Thank you.

(Operator instructions) Our first question comes from the line of Juan Sanabria from Bank of America. Please proceed with your question.

Hi, good afternoon. Adeel, just -- you touched on a one-time tax benefit that positively impacted same-store NOI. Could you just quantify that, and give us a sense of what the numbers would be, excluding that benefit?

Hi, Juan. Yes, that's a great question. The net impact on the income statement is about $58,000, when you look at the recovery side from the income statement and also from the expense side. And just to add more color on that adjustment, this was due to the real estate tax assessments that we were accruing on our books since the IPO, and we're just now starting to receive some bills to offset that. So, that's essentially what we have seen. So, the net impact with the P&L is certainly that $58,000 on a net basis. And, if you take a look at the impact on the same-store basis on a full year, that would have led to about a 7.6% year-over-year growth, as opposed to the 7.4%, if you had excluded this impact.

Okay. And then, on the balance sheet, could you give us a sense of how much dry powder you have to debt fund acquisitions, kind of where you're comfortable taking leverage to, and maybe just comment on your view of issuing equity at these levels?

Right, another good question. I think the way I would say it, we ended the quarter very strong, again, on our balance sheet. And again, that continues to remain a strong core principle for the organization, but that said, you know, we have about $225 million to $250 million of runway in the short- to medium-term, here. And I think -- I'd say that with the fact that the capital sources that can potentially feed that growth, could come from this position, joint venture capital, or incremental debt or equity. But I think the more important thing is, that keeping our leverage ratios that we've always talked about in the back as the core principle of ours, you know, I think we have embedded growth in the portfolios coming down that helps with getting comfort with that runway that I just talked about.

Hey Juan, it's Michael, thanks for joining us today. Just a little more color on that. I think when Adeel mentions $225 million to $250 million of runway, that's really before we even in our view, begin to bump up against those debt-to-EBITDA ratios sort of that are consistent with the Fitch rating, and it's not to say that we can't exceed those, but we just know that that's the general guideline for us.

And what are the -- can you remind us what those numbers are, the debt-to-EBITDA ratios?

Juan, Adeel again. That's a soft target at 6.5, and I think we've always been on record stating that that's our soft target. And I think the size of the organization naturally, you know, some of these metrics, are going to be a little bouncy. So, I think if there was a more important thing to take away here is, that it's a soft target, but we have great embedded growth from an EBITDA perspective that we have been talking about consistently on some of the other meetings here that's going to help keep that in check in the long term.

And we also, Juan, we also have some opportunities to recycle some capital, so we feel like we're in a great position from a balance sheet perspective.

Okay. And with the capital recycling, is there any sort of dollar amount that you may look to dispose, or JV, that you'd be comfortable sharing?

Hi, Juan, it's Howard. We have -- I don't think we have any particular dollar amount as a target. I think, really, we're continuing to look at the assets we own and make those decisions on an asset-by-asset basis. That said, we have a property right now that's on the market for sale. We have several others that are finishing some underwriting with brokers and intend to bring to the market.

Okay. And just one last one for me, could you help us quantify, I guess, the upside from the portfolio that's expiring through 2016? If we just took in-place versus market rents today, excluding any kind of future growth, what does that represent on like a dollar-per-share basis? And does that include any upside from the re-devs that are ongoing today?

Hey, it's Michael. The repositioning that we see on the -- that we've described for instance in the supplemental, and that's about $0.12 a share approximately, plus or minus. We can come back to you with a finer number on the -- on the lease-up. We've got about 32% of the portfolio that's rolling over the next, through the end of 2016, including Q4 this year, so that's a substantial opportunity as well in terms of contribution. So, we can come back to an exact number on that, if you like.

Thanks, guys.

Juan, the only thing I'll add right away, I think we can definitely come back to you with a finer number, but I think the four-point-some-percent is the expiring for Q4 2015 here, and I think if you take a look at some of the re-leasing spreads that we've seen, at least for the last eight quarters, and there's been a consecutive trend there, ending with this quarter -- I think that can give you a little bit of a proxy as to what you can potentially estimate for Q4 coming online, on a consolidated basis. So, but again, I think we can kind of put that and give you something a little more finer, later.

Thanks, guys.

Our next question comes from the line of Manny Korchman from Citi, please proceed with your question.

Hey guys, good afternoon. Maybe Adeel or Michael, how do you guys think about the decision to sell or JV or raise equity? Sort of what are your goalposts on each of those activities, and how do you guys as an organization think about those funding sources?

Hey Manny, it's Michael. Thanks for joining us today. So, maybe I'll attack those a little bit in reverse order. We built Rexford, and we continue to operate Rexford, as an equity-driven platform. So, we never saw ourselves as a joint venture platform, per se. That having been said, we do operate in a favored market, within a favored asset class, and I think we have probably what I would consider to be some of the best joint venture capital on the planet, that was very interested in working with us. And we've done some joint ventures in the past as a private company, years ago. So, we see that as kind of an opportunity, but we're going to utilize that very selectively, and maybe it's during times where we perceive the cost of our equity to be exorbitant, or where certain opportunities might have to do with size or other factors, or maybe a portfolio contribution with a partner where that evolves into a joint venture, because the joint venture partner is the contributing partner of the asset. You know, that sort of strategic opportunity. I think that's where you might see us kind of thinking more about the JV opportunities. But, that -- we don't see that as being a major part of our business necessarily going forward.

And, with respect to how we think about raising equity, you know, we are -- as Adeel mentioned, the balance sheet's in a great position. I think our strategy is well-reflected in terms of what we did last January, raising equity at $16.00 a share, trying to make sure that at all points in the cycle, that we're maintaining a bulletproof balance sheet. And we're going to continue to do that going forward.

It having been said, yes, we continue to see very accretive opportunities. I think if you listened to Howard's description of our acquisition activity, these are yields that are very favorable, and that we're excited about, and that we think are driving both very, very strong NAV growth as well as FFO per share growth. So, we're just going to stay disciplined, and continue to do what we do.

Have you had any success using the equity currency in transactions? I don't think we've seen you do any OP in the deals, or anything like that?

You know, it depends how you define success. Although we don't see any consummated OP in the transactions, they had -- it's a tremendous discussion starter. It's a differentiator, and it opens the door to very interesting dialogues, and so it's been successful in terms of initiating some transaction opportunities that didn't end up in OP in a transaction, and some very successful transactions in our history.

That having been said, we have some very interesting portfolios that are in the hopper, in the works, that we think have the potential to be OP unit transactions, and we think that time is working in our favor. Because the issues on the ownership side, in those instances, that are driving them, or creating the opportunity and the value proposition for them with regard to the OP unit transaction, those opportunities are increasing over time. As the ownership continues to age, we hate to say that, and as their ownership side, whether it's an old-time partnership, or a family ownership, these are predominantly private owners. As they evolve over time, the OP unit transaction for those owners becomes even more compelling.

Great, thank you.

Our next question comes from the line of Brendan Maiorana from Wells Fargo. Please proceed with your question.

Hey, good afternoon, guys. So, year-end stabilized same-property portfolio occupancy range, 93% to 94%? Am I reading that it's 94.8% at September 30, and you're going to be down somewhere between 80 and 180 basis points at year-end? Or is that -- am I looking at that wrong?

Brendan, this is Adeel. The way you should look at that, if you take a look at our supplemental, at 93.7% is what the guidance is referring to. So, the 93% to 94% is referring to the 93.7%. We give you this additional color just so you can see if we were to take that 72,000 square feet of repositioning out, what would that number look like. So, the 93.7% is what you're talking to, in comparison to the guidance. So, we're about 30 bps away from really the upper end of the range that we have guided towards.

Okay, got it. Okay, so not the stabilized, but just the same property. Okay. That makes more sense. So, Adeel, I was trying to run the quick sort of back-of-the-envelope math. I can't get to 6.5 times at $200 million or $250 million of acquisitions. It looks like you've got, per guidance, $80 million of acquisitions, give or take, kind of relative to your 9/30 balance sheet. Because I think you did [$27 million] or something like that in October, and then you've got another [$55 million] or so to go. And I, the numbers I was looking at, it kind of takes you there, around 6.5 times if I add in the $6.8 million of NOI on the repositioning assets. What am I missing in terms of the debt-to-EBITDA calc?

Well, Brendan, I think one of the things that Michael has talked in a little bit more detail, obviously, you know, we have some recycling opportunities. So, you certainly don't, are not able to project that into your quick and dirty math, as you just did. So, I think there's other factors contributing to this, and in addition to that, you know, what we believe as far as coming from the repositioning aspects as to when those things are coming online -- so there are other angles to the story as far as giving us this dry powder, and the internal growth of course. You know, I think the releasing spreads, you know, as to timing of when those come in, and they continue at the pace that they have. So, the other factors to those things, and I think the 6.5, if you're using it as a soft, you know, it's not necessarily -- it might bounce around slightly more, but I think what we're saying is that I think we would be comfortable getting close to that range. But, I think there are other factors, primarily in the lieu of the capital recycling, that can potentially change that equation drastically from if you were just to do the back of [the back end math].

Okay, that's helpful. So, on the repositioning assets, I think Howard or Michael, you guys mentioned good returns. It looks like it's a mid-6's return, stabilized yield on those. How do you think that compares to the stabilized value of assets of that quality?

Yes, I think as we've shown time and time again, we're really outperforming the market in terms of what we're able to acquire in the yield, either on the inbound or at our stabilization, and this quarter was a great example of that. And you know, I think if you look at yields in the marketplace today for typical multi-tenant building, something that's stabilized, reasonable quality, those are somewhere around 5%. And you know, we've seen now some of the larger deals, even in the infill markets, right around 4%. And just a couple things -- even in the Inland Empire, I think that they've been falling a little below 4%. So, you know, when you compare the returns that we're able to achieve, to what's actually happening in the more actively-marketed deals, the secret sauce is really the off-market and lightly-marketed acquisitions we do, which are still over 70% of what we've been able to buy.

Okay, great. And Howard, last one. So, just if you look at kind of rents, how much do you think, if I was looking at space today versus maybe that same space six months ago, how much more do you think you guys are pushing rents now versus the beginning part of the year?

Yes, I think it's a great question, and rents are continuing to increase fairly dramatically. You know, what percentage would that be? I quoted earlier, some of the rent growth that we've seen, quarter-over-quarter through the CBRE data, but you just -- you just think about our market, where the infill markets splitting the Inland Empire East were under 2% vacancy. The amount of construction coming into our markets is nominal, so what's really astounding, as Michael alluded to in his comments, was the amount of product that's being taken out of our markets and converted now to other uses. And that, those factors are putting a tremendous amount of pressure on tenants to secure spaces. And to look around through -- if you look at what we've accomplished in our leasing, there's some incredibly strong rent spreads in there that average out, obviously, to the overall spreads we're quoting. But you know, we're really pleased, and we see this really moving forward on a sustainable basis over the next 12 or 18 months, in terms of how far we can even begin to project.

Okay, so that sounds like maybe high-single-digit market rent growth over 12-18 month period, is that sort of fair when you think about it?

I mean, we've certainly been surprised by those kind of numbers, and that they've occurred, but I don't think we -- I don't think we want you to project that in our GAAP, our GAAP leasing spreads, just north of 16 in cash, just over 5%. Yeah, I think in our conversations with people, we've really been directing them more toward using a 10% number in terms of, do you want to project that 32% of expiring leases that Michael's talking about, in terms of the GAAP rent spread lot.

Okay, great. Thanks.

Our next question comes from the line of Tayo Okusanya from Jefferies, please proceed with your question.

Yes, good afternoon. Just a couple from us, two quick ones. The same-store expenses deemed down year-over-year, could you just talk a little bit about what drove that? And also the slight reduction in the high-end of the G&A guidance?

Right. Hey Tayo, it's Adeel. That's a good question, and it's first, to the same-store question, the expenses were reduced or at least you have quarter-over-quarter and year-over year, slightly lower, because of the one-time tax accrual adjustment that I talked about initially, from another question. And just to add the same color again, we had a year cumulative tax true-up related to the tax assessments that we've accrued on our books since the IPO data, and we finally are starting to receive some bills. So, that's what the -- or that's what that's showing over there. It's a one-time adjustment, but I also earlier, correlated that expense reduction to an offset on the revenue side, so the next -- exposure to the P&L from a same-store perspective was about $58,000. And so, it's just a very minimal change, but it's a one-time thing. And that, so when you look at full-year same-store, that's more for relevant measure because that's a more normalized number.

And to your second question regarding the G&A, that's a byproduct of like, equity grants and things like that, and any delay in that can cause certain fluctuations in the guidance. So, that's essentially where we're adjusting to combine some other savings and some of the other professional areas that we're able to succeed and accelerate our benefit from. So, that's what you're seeing the $0.5 million reduction on the upper end of the range.

Okay, that's helpful. And then the second one from me, just in regards to the acquisition outlook, you guys still seem very bullish on your guidance numbers. I'm just curious, tell me, while you're kind of looking at the deals, are you basically just kind of -- you know what your cost of capital is right now, still kind of looking at these deals, being accretive, right from the jump? Or is the idea really with the value-added component of many of these transactions, they eventually, become accretive once you've kind of done all the value added? You kind of put all the value added initiatives into place for those assets?

Hi Tayo, it's Howard. You know, as we've mentioned in the past, we really buy a basket of properties. Some of them are value-add, some of them are even core, or core-plus, so we're really looking at what the blended return is on that total basket of properties we buy. And so, I think the goal, the goal is to achieve a stabilized return north of 6% and as we pointed out earlier on the calls, that's probably more in the 6.5%, if you look at the basket of deals this month. And the value-add, you know, that certainly has a range, too. I mean, sometimes, value-add is something we do during an escrow, where you saw us buy one asset that was vacant, that needed some capital to put it in decent operating shape, and we brought a tenant to the table, and we're able to achieve a 7.5% yield at the close of our escrow, practically. So, I hope that answers the question.

Tayo, it's Michael. I was just going to add another dimension to that analysis, which is that in terms of the contribution these investments are making, if you look at our margin and how it's been improving over time, year-over-year comparison on a quarterly basis, we grew rental income by about 33%. We only increased cash operating expenses by just over 22%. G&A only increased by 15.4%, and that's what's driving that 45.5% FFO growth year-over-year. So, we think those are really important measures to -- as a gut check on the accretive nature of the investment.

Okay, that's helpful. Thank you. Good quarter.

Thank you.

(Operator instructions) Our next question comes from the line of Tom Lesnick from Capital One Securities. Please proceed with your question.

Hey guys, good evening. My first question, this has to do with kind of backfilling the repositioning pipeline, and as you guys look at the completion schedule here, a lot of them are expected to complete in 4Q 2015 or 1Q 2016, and you've obviously got Anderson Street here in 4Q being added to the pipeline. But, as you look to 2016, and kind of your known move-outs, I was wondering if you could talk about kind of what other repositioning opportunities we might expect to see enter that pipeline? I think you guys have something at Avenue 32, but I was just wondering if there was anything else?

Well -- this is Howard, by the way. We just announced the acquisition of a sizeable project in San Diego on Midway, so that'd certainly be in our repositioning portfolio next quarter. And you know, what's great about those kind of properties is we're able to achieve stabilized returns. That one has the projected stabilized return in excess, around 8%. But in terms of anything else in the portfolio, there's -- we really try to list everything of any significance on this sheet in the supplemental, and what you have to keep in mind about our portfolio is that we're constantly looking at leases that are expiring, and repositioning doesn't necessarily take something offline for a great amount of time while we -- so, see us modernizing a space as a tenant rolls out and we're able to re-tenant it within a matter of weeks. And incidentally, we've already leased -- in terms of total space size, we've re-leased about 60% of what vacated in the third quarter. So, it's -- it's a tremendous amount of velocity and so, the repositioning side of it really is, it's probably better to just focus on what we've put into the supplementals, the larger, more relevant spaces.

Okay, thanks. And then on the subject of San Diego since you mentioned Midway, most of your infill markets are obviously very low supply, but as you kind of look out to 2016 and beyond, some of the real estate forecasting services project a slight uptick in terms of new supply. For San Diego, I was wondering what your general thoughts are on San Diego going forward?

Yes, that's actually a really great question to answer, and if you look at our -- if you think about our strategy in San Diego, we had owned some -- we'd owned assets in North County, and then as a public company you've seen us now buying only in Central San Diego, and the reason behind that is because Central San Diego performs a lot like some of the markets we have here in L.A., where it has the lowest vacancy in that San Diego region. There's no more land. And similar to L.A., the L.A. markets, even if you found a piece of land in Central San Diego, you can't build product with that land basis and construction costs, and have a viable project because the rents, the rents don't really match the cost of these buildings.

So, there's really an inability to introduce new supply product in Central San Diego, and you know, I don't know if you're familiar with San Diego at all, but it's an interesting market in that it's very hard to traverse that market on the regular streets. You have to use freeways, and tenants really love the Central San Diego market because of its proximity to freeways that enable them access to the entire San Diego region, and so, that's really the reason why it's the largest industrial market there. It kind of grew up to be that, and why we really are focused over there. And you know, we don't -- it's kind of the same, factoring -- when you talk about Ojai, Mesa, and stuff in the south, which is really a correlation to the Inland Empire in the Los Angeles market. There's just certain businesses that can work going out east, and then there's many others that typically are what we see servicing the population areas that are in these infill areas that have to locate there. And Central San Diego is really that market.

Got you, thank you. And then, you guys seem pretty confident in terms of being able to hit your $250 million target for 2015. I know you mentioned you had I think $21 million under contract, but I was wondering if you could talk at all about the dollar volume that's LOI right now, and what your overall, call it, universe, looks like in terms of opportunities?

I'd say our opportunity set is very robust, still. It's generally about $1 million worth of -- $1 billion or other worth of product. And you know, that really hasn't changed quarter-over-quarter. We have -- we're prolific LOI writers. We have quite a lot of activity right now, and fourth quarter is traditionally a very busy time in our markets. And we have quite a few LOIs that we're negotiating, and within the zone on, so that enables us to comfortably tell you that we feel we'll meet or exceed our acquisition goals for the year. But you know, I think if you really look at historically, most real estate markets you see a surge in activity in the fourth quarters, and then it drops down in the first quarter.

Got it, thank you. And then, Adeel, maybe a couple for you. I'm not asking you to give Fiscal 2016 guidance here, but as you think about kind of your increased Sarb-Ox compliance going forward, and potentially backfilling the general counsel slot, how should we think about the scalability of G&A relative to the size of your company going over the next couple years?

Hey Tom, good question. I think the scalability is great. I think this year was a pivotal year as we have been stating over the last couple of quarters. You know, Sarb-Ox costs certainly are a factor this year, and I think we're dealing with it this year, there's some non-recurring components to it. So, from a certain angle, we will get some benefit next year because it'll be our second year under that concept, under that direction. That being said, I think we are adjusting the guidance slightly lower from a G&A perspective, primarily due to timing of some equity grants and stuff. So, I think that's something that will come online, but I think from a scalability perspective, we're really, really well set.

Now, with the general counsel position, I think that will naturally have a great benefit to the organization because we are currently outsourcing certain parts of our functions, and there's going to be some inherent advantage of bringing that in-house. So, you will see some savings from a reliance on the outside counsel, so I think you will see some net benefit from that perspective. All in all, it's not going to be a very instrumental increase in G&A overall. So, I think scalability is certainly there. I think this was a pivotal year, and I think from this point forward, I think it should be very much incremental increases year-over-year without seeing anything major.

Obviously, you know, we eye all this caution, that discussion with any major large transformative deals for the organization, which are outside of the discussion, but having -- not including that in the discussion, I think you should be incremental going forward.

Got it, thanks. And then, finally, I know you've already kind of talked about the one-time tax benefit at [last year] but looking at the tenant expense reimbursement line, it looks like that ticked down fairly significantly, both sequentially and year-over-year. I was just wondering if there was anything driving that in particular?

No, great, good question. I'll try to add as much color as possible. So, definitely the tax rules or tax assessment that I talked about earlier are contributing to that. Also, Q2 is typically a quarter where you are billing back for the prior year CAM reconciliation, so you have the benefit of recording some income for part of your CAM reconciliation that are coming up in Q2, with no current quarter equivalent, so you have that trend happening as well. So, it's just a combination of both of those things, where when you compare one quarter next -- versus the next, you have incremental income in recording the prior quarter versus this quarter. So, that's what you're seeing.

Dollar-wise, it isn't that significant, but I think overall, I think tenant reimbursements could be a little choppy depending upon what time of year you look at it. But if you take a look at it just kind of on a [three-quarter] basis, that gives -- that should give you more of an indicative run rate. So, that's what you're seeing in that Q2 versus Q3.

Got it, thanks. Nice quarter.

There are no further questions in queue. I'd like to turn the call back over to management for closing comments.

Thank you, Operator, and many thanks to everyone for joining us today. We appreciate your interest in Rexford Industrial, and we look forward to speaking to you again when we report our 2015 year-end results. Thanks again.

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