Rexford Industrial Realty Inc (REXR) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Rexford Industrial Realty Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation (Operator Instructions). Please note this conference is being recorded.

I'll now turn the conference over to ICR. Thank you. You may begin.

Good afternoon. We would like to thank you for joining us for Rexford Industrial's third quarter 2016 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 represent 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 measures 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 Officer, Michael Frankel and Howard Schwimmer together with the Chief Financial Officer Adeel Khan. They will make some prepared remarks and then we will open up the call to your questions.

Now, I will turn the call over to Michael.

Thank you, and welcome to Rexford Industrial's third quarter 2016 earnings call. I will begin with a summary of our operating and financial results. Howard will then provide an overview of our markets and our recent transaction activity. Adeel will then follow with more detail on our quarterly results and our balance sheet with an update on our guidance for 2016.

Our third quarter results continue to demonstrate the strength of our business model and ability to drive accretive growth across our platform. We achieved same-property NOI growth of 8.2% over the third quarter of 2015, driven by a 530 basis point increase in stabilized same-property occupancy to 96.3%. We signed approximately 837,000 square feet of new and renewal leases, achieving weighted average lease spreads of 15.6% on a GAAP basis and 7% on a cash basis.

Company's share of core FFO for the third quarter was $14.2 million, representing a 27.1% increase from third quarter 2015 and core FFO per share was $0.22, a 10% increase from the prior-year quarter. During the third quarter, we acquired approximately 949,000 square feet of primarily value-add industrial assets within our core in-fill Southern California markets, for an aggregate purchase price of $80.8 million.

Year-to-date, including acquisitions closed after quarter end, we have acquired a total of $319 million of assets adding 2.9 million square feet, equal to a 24% increase to our portfolio. We also bolstered our balance sheet and access to new capital source with our inaugural preferred equity 5.875% coupon Series A offering in August. We raised net proceeds of approximately $87 million in an offering that was well timed and exceptionally well supported by a wide array of institutional investors.

As we look towards the end of the year, we'd like to recognize our entire Rexford team for their tremendous efforts and exceptional results. It's also a great time to reflect that at Rexford the measure of a great business is not merely the ownership of buildings, rather our commitment to having a truly great business starts with our strategy, focus, and above all else, our ability to attract and to develop the best talent in our industry.

Our strategy is to focus on creating value exclusively in infill Southern California. This market has the economic size of about the next four to five largest US markets combined. It is the nation's strongest market measured by tightest occupancy; rental rates that are about 60% higher than the next largest markets, and per square foot values that are the highest in the nation.

Our infill markets have almost no land for development and there is virtually no threat of new supply emerging for lease. In fact, nearly 70 million square feet of product has been removed from the market since 2001, converted to non-competing uses. This is an incredibly fragmented and relatively inefficient market with over 1 billion square feet of industrial space build prior to 1980. We believe we have a practically limitless well of opportunities to acquire existing buildings where we can increase cash flow and value throughout the real estate cycle

At Rexford, we do the extra work required to identify and execute on accretive investments that are often not available to competing buyers. Consequently, about 70% of our acquisitions have been achieved through off market and lightly marketed transaction. We also outcompete with the most effective industrial leasing and asset management capability in our region, ensuring our ability to maximize cash flow and value through cycles.

Our markets continue to demonstrate historically strong fundamentals which Howard will highlight shortly. However, we are most excited about the accretive, secular growth embedded in our business as we move forward. This is a business that has increased rental revenues by 41% over the prior year, representing an increase in revenue that is 3.5 times greater than the increase in operating expenses over just the prior 12 months. Our performance demonstrates our commitment to deliver on our corporate mandate which is to provide substantially better cash yields and typical core or institutional yield in the nation's most favorable industrial market, infill Southern California.

As we look forward, we see exciting opportunities to continue the strong organic growth of our in-place portfolio. Our properties in value-add repositioning are expected to contribute over $15 million of incremental NOI, mostly through the next 12 months to 24 months. We continue to capitalize on our ability to roll rents higher with 2.5 million square feet of generally below market leases expiring next year. We also see an opportunity to continue to drive occupancy gains as tenants simply have very few relocation options and robust growth in E-commerce continues to intensify demand.

The growth in E-commerce is well known. However, its impact on our target markets is just beginning to accelerate and we believe Southern California's infill markets will disproportionally benefited from the continued growth of E-commerce compared to other national markets. To begin with, Southern California is the nation's largest regional population, adds largest zone of consumption. We are therefore the largest endpoint for E-commerce distribution. Much of the product delivered via E-commerce enters the nation's two largest ports of LA and Long Beach with about 50% of imports distributed locally and Southern California is a leading center for the growth of E-commerce enabled businesses.

Each dollar spent via E-commerce is driving an exponential increase in the movement of packages locally as compared to traditional bricks-and-mortar retail, driven by free returns and intense competition to satisfy compressed, same-day delivery timeframes. Rexford's infill portfolio benefits from its position in the supply chain's last-mile, supporting both consumer and business deliveries in a regional economy larger than most countries.

Our external growth also continues to be a strong contributor of FFO per-share growth. And that was a great segue, as I'm very pleased to turn the call over to Howard who would detail our transaction activity and sub-market operating conditions.

Thanks Michael and thank you everyone for joining us today. As on past calls, I'll first update you on our markets, primarily utilizing market data from CBRE, and then review our recent acquisition and disposition activity. Southern California, excluding Eastern Inland Empire, maintained a record low industrial vacancy rate of 1.6%, unchanged from last quarter.

Greater Los Angeles County, a 1 billion square foot industrial market maintained historic 99% occupancy during the quarter. Asking lease rates were up marginally quarter-over-quarter. Rents have grown 2.9% since the start of the year and CBRE projects rent growth of 5.9% by the end of 2017. New development is limited by almost no land availability and land values have increased 30% year-over-year.

Ventura County reported significant improvement with vacancy declining from 2% to 1.5% during the quarter, as tenants migrated into the market, attracted by larger available spaces and lower rents. Asking rates were unchanged during the quarter and there were no new deliveries in Q3 and no new space is currently under construction.

Orange County reported a 20 basis point decrease in vacancy from the last quarter to 1.4%. Asking rents continued their upward trend increasing 6.3% over the prior quarter. Industrial development remains low with only 260,000 square feet under construction, representing just 0.1% of market inventory. The lack of available industrial land for development in the region is exacerbate by increasing rezoning to residential or mixed use of industrial land.

In the Inland Empire, activity during Q3 was heavily slanted to the Inland Empire West, which is a part of Rexford's focus, as demand for mid and smaller sized tenants remained strong. By contrast, the Inland Empire East, where we do not focus had a slow quarter as gross leasing activity decreased 85% compared to the second quarter. Asking rates in the Inland Empire West increased 7.5% in Q3 or a two-quarter increase of almost 19%. However, vacancy increased from 1.8% to 2.3%, due to an increased amount of 300,000 square foot in larger building deliveries which generally do not impact our portfolio.

In San Diego, asking rents increased 8.1% year-over-year to a record high and vacancy decreased slightly to end the quarter at 4.3%. There were no new construction deliveries in Q3, and 910,000 square feet representing 0.5% of the market inventory is currently under construction.

Now moving on to our transaction activity; year-to-date, we acquired 17 industrial properties in our target Southern California infill markets for an aggregate cost of about $319 million. 75% of the assets were acquired off market or lightly marketed, 45% have value-add components and all are expected to achieve stabilize returns in excess of market cap rates.

In July, we completed the acquisition of the 85% interest that we did not own in our Mission Oaks Boulevard JV for $21.8 million or approximately $56 per square foot at total value. The recently repositioned 458,000 square foot project is located in Camarillo within Ventura County and the 32 acre land parcel has excess land for future expansion. The project's leased occupancy has recently increased from 66% to 80%, putting us on track to exceed the previously disclosed 7.5% yield on cost that was projected for next year, based on achieving only 75% occupancy.

In August, the Company acquired 1600 Orangethorpe, a 346,000 square foot, five-building industrial complex located in Fullerton in the Orange County North submarket for $40.1 million or $116 per square foot. This high-image complex is 97% leased to eight tenants at rates that are over 20% below market, on average. Additionally, the property has a value-add component with the repositioning of vacant frontage building, previously used as office, to an industrial use and approximately 40,000 square feet of raw land.

The initial return is approximately 5.3% and we expect to achieve a stabilized return on cost of 5.7%. In September, we purchased two buildings on Nelson Avenue located in the City of Industry within the San Gabriel Valley submarket for $15 million or approximately a $103 per square foot. The 146,000 square foot vacant industrial buildings are over nine acres and were effectively purchased at land value.

Value-add redevelopment includes constructing 54,000 square feet on excess land, modernizing and demising the existing buildings, and delivering 7,000 to 22,000 square foot dock high spaces in a modern industrial complex. After repositioning, we expect to achieve a stabilized return on cost of 6.4%. Subsequent to quarter-end, we purchased a high quality 55,000 square foot distribution building in Oceanside in North San Diego for $7.2 million or $132 per square foot. The property was purchased as a short-term sale leaseback and we expect to achieve a stabilized return of over 6% on cost.

We continue to see stabilized and value-add opportunities as we just closed out 2016, and currently have $37 million of new investments under contract or letter of intent. We completed $21.7 million of asset sales year-to-date in 2016, and have another $19 million of dispositions under contract. We continue to consider additional dispositions, and we expect to realize significant value creation on these sales and to accretively recycle the capital.

Before turning the call over to Adeel, I'd like to take a moment to discuss two of our repositioning projects, which we completed this quarter and produced stabilized yields in excess of original targets. As Michael noted earlier, the core of Rexford strategy is our deep value-add expertise, which allows us to acquire and reposition industrial assets, producing yields well in excess of market cap rates augmenting strong internal growth as we drive cash flow at value creation for shareholders going forward.

During the quarter, work was completed and we subsequently leased our Frampton Avenue asset in Torrance in a supply constrained South Bay market. The asset was acquired in April of 2014 for approximately $3.9 million and upon expiration of a lease; the building, office areas, and site were renovated to like-new condition, investing an incremental $1.7 million. We achieved a stabilized yield on cost of 7%.

Additionally, Lakeland Road, located in Santa Fe Springs in the Mid-Counties submarket was completed and leased during the third quarter. We purchased this vacant single-tenant building with excess land in the fourth quarter of 2015 for $4.3 million, and immediately modernized the building, adding dock high loading and resolving deferred maintenance issues. We realized a stabilized yield on cost of 6.4%.

Looking ahead, we have three completed projects in lease-up phase and five more currently under repositioning, representing over 900,000 square feet. There is significant embedded growth in our portfolio as we lease and complete repositioning projects through mid-2018 and we have robust acquisition opportunities that should continue to feed projects into this pipeline as we move forward.

I'll now turn the call over to Adeel.

Thank you, Howard. In my comments today, I'll review our operating results; then I'll summarize our balance sheet and recent financing transactions; and finally, I'll review our outlook for 2016.

Beginning with our operating results; for the three months ending September 30, 2016, Company's share of core FFO was $14.2 million or $0.22 per fully diluted share. This compares to $11.2 million or $0.20 per fully diluted share in the third quarter of 2015.

Core FFO per share increased due to our strong acquisition activity completed in the past 12 months and same property portfolio growth, which was partially offset by increased interest expense and higher diluted share count. Core FFO excludes the impact of acquisition expense, which was approximately $380,000 this quarter. Including this cost, Company's share of FFO was $13.9 million for the quarter or $0.21 per fully diluted share.

For the nine months ending September 30, 2016, Rexford reported Company's share of core FFO of $40.1 million or $0.65 per fully diluted share. Core FFO excludes the impact of approximately $1.5 million of non-recurring acquisition expenses and about $643,000 of non-recurring legal reimbursements. Including these costs, Company's share of FFO was $39.3 million for the nine months ending September 30, 2016 or $0.64 per fully diluted share.

Within our portfolio, we continue to capture strong growth in income. Same-property NOI was $16.3 million for the third quarter as compared to $15.1 million for the same quarter in 2015, representing an increase of 8.2%. Our same-property NOI was driven by an 8.4% increase in rental revenues and an 8.9% increase in property operating expenses. On a cash basis, same-property NOI was up 6.8% year-over-year.

Turning now to our balance sheet and financing activity. During the third quarter, we continued to augment our balance sheet and access a new capital source with our inaugural offering of 5.875% Series A cumulative redeemable preferred stock. At completion of this offering, we raised net proceeds of approximately $87 million, which were utilized to fund our acquisition pipeline and for general corporate purposes.

We believe our balance sheet is now better positioned than ever with zero debt maturities through 2017 and only about $5 million due in 2018. Additionally, we have approximately $55 million of available cash and nothing drawn on our $200 million line of credit, leaving us with ample liquidity for acquisitions.

Finally, with regard to guidance for 2016, we're increasing our guidance for core FFO to a range of $0.87 to $0.89 per share. Please note that our guidance does not include the impact of any transaction or capital market activities that have not yet been announced nor acquisition costs or other costs we've typically eliminate when calculating this metric. Otherwise, our guidance is supported by several factors.

For the 2016 same-property portfolio, we expect year-end occupancy within a range of 94% to 95%; and expect to achieve GAAP same-property NOI growth for the year within a range of 7% to 8%; and for G&A, we anticipate a full-year range from $17.5 million to $17.8 million, including about $4 million in non-cash company-wide equity compensation.

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

(Operator Instructions) Manny Korchman, Citigroup.

Hey guys, good afternoon. Maybe if we just go back to your comments on alternate uses, we haven't seen you sell a lot of assets for those types of uses, is that something you're exploring more now than you have in the past and if not, why?

Hi Manny, it's Howard. We look at our portfolio monthly, quarterly, weekly to really understand what opportunities might exist to sell for pricing that really is above cap rate type sales and It's not really a core focus of ours. And I think we've explained in the past that we really achieve the same result when we sell buildings to owner users, if not even better.

A great example of that was the sale of the asset we had on Mulberry in the Mid-Counties area where we achieved literally the equivalent of a 4.1% cap rate for a building that was 15,000 feet 17 foot clear built in the 1960s. That clearly would not being 4.1% cap rate where we see Class A buildings that have been selling for those type of numbers lately.

So really I think the best thing to think about is the opportunity that is abundant in our portfolio to capture that type of upside rather from that type of a sale versus the sale for an alternative use. But you will see us every once in a while sell something that could be used and developed for something other than industrial.

There was a recent article that PLD is building a multistory distribution facility in Seattle. Is that something you guys have explored or has anyone else explored that in your markets, what do you think of that?

Well, I think we're certainly headed in that direction. Right now, in terms of development we've seen -- bigger boxes really are the only thing that have made sense in terms of industrial development on a for-lease basis, especially when you think about it in the infill markets, where you have to build and they'll have economies of scale to amortize out the cost of land.

It's something maybe we would see in the periphery of downtown or some of the other very high land priced markets. But it sounds very expensive to build those and to make the rents work within the confines of really what market rents are. It's also a little challenging, because if you look at some of the buildings you are referring to, they typically are built to accommodate smaller trucks than the type of trucks that are typically used in Southern California and for most large distribution type uses. But I agree, I mean, it's headed there and it's something that we look at and ask our architects about and concrete contractors every once in a while to check in and see when they might make some sense.

And last one from me, can you comment on where your pipeline currently sits of just acquisitions?

Sure. Yes, we're very, very busy right now, and in the past, we've typically commented that we have about a $1 billion worth of product that we're monitoring in our own database, which is typically mostly lightly marketed or truly off-market opportunities. It's been a great year for us so far. We're still busy in terms of some closings that remain this year.

We have close to $38 million under contract for LOI, and we have quite a few LOI's under negotiation still. So I think what you're asking is, looking forward to 2017, what do we expect? Although we don't offer guidance on our acquisitions, we're optimistic about our ability to continue to buy property that meets or exceeds our return profiles we've described to you in the past.

Jamie Feldman, Bank of America.

Great. Thank you. I think you had said in your earlier comments a $157 million of acquisitions under contract and then you just said $38 million. Can you just tie those two and maybe talk more about what's under contract versus LOI or maybe I heard it wrong?

Yes, I don't recall any of our comments referring to a $157 million of under contract acquisitions. It's about $38 million. So there is nothing else I can point to that clarify what you heard.

Okay. And then, would you quantify what's under LOI?

I think for us, I think it's simple enough to just tell you that there's a lot -- we're always negotiating LOIs, right. I mean for every 10 or 20 LOIs we send out, we make one or two deals. So, we have to have a lot of negotiation under LOI that's occurring, but we don't normally talk about them unless we have signed and accepted LOI, which was referenced in that $38 million.

Okay. Alright, sorry for my confusion. And then, I guess, Adeel going back to your comments on the capital available. So, how much could you buy before you needed to raise more capital?

Yes Jamie, this is a good question and you asked this question last time, so I recall it. I think this quarter is definitely better in the sense that we have $55 million on the books in cash. Obviously the preferred helped a lot from that perspective. That leaves the facility completely available at $200 million, and then, I also remind the audience here we still have the ATM and of course we have the accordion now.

It's hard to project as to when you will need more equity, because it's a byproduct of a few factors, right, but deals we're looking at and it's never just going to be one dimensional where we're just going to place debt. So it's going to be a triangulated effort between some equity and some debt. So I think we feel really, really comfortable. I think our debt-to-EBITDA ratio is pretty healthy at the end of the quarter. And again, that is going to stay as part of our strategy. That's always been a discipline. So we'll always manage that to the best of our ability.

So, the answer is that we can go pretty far in the current available facility that we have right now, which is about $200 million before we have to really start getting nervous on that ratio perspective. And like I said, you'll have to (inaudible) -- the ATM is all there, so that can help mitigate that impact. So it's a hard number for me to just put a mile marker for the audience here, because there's a lot of factors involved, but at least you have the building blocks as to how we can look at this going forward.

And as you guys think about your 2017 expirations, where do you think the mark-to-market is, or even across the portfolio?

Hey Jamie, it's Michael. Good to hear from you. We have about 2.5 million square feet expiring next year. I think it's about 17% of total revenue expiring next year and the mark-to-market is probably in the 5% to 10% range, plus or minus.

That's on a cash basis?

On a cash basis.

Okay, and then my final question, I guess, for you Michael is, you commented at the beginning of the call about E-commerce just beginning in your markets. Can you maybe give some examples of leases you've seen signed that are specifically E-commerce and give you the indication that there is a lot more to come?

Yes, I mean anecdotally, we've talked about the fact that Amazon has become a customer of ours, for instance, and that's distributing their fresh product, the perishable consumables, food product is a great example. And we have a wide range of 3PL-type providers that are servicing the E-commerce industry. And I think, frankly, that's one of the reasons that the E-commerce impact is hard to quantify because when you have a 3PL out there who is just processing orders and whether they're distributing single boxes to a consumer, whether they're sending stuff to a retail outlet or do a business, they don't necessarily correlate which orders were originally placed via E-commerce or not.

And what we do see is a pretty dramatic impact in terms of the package flow. There is a big difference between a consumer ordering a toothpaste or some very small item in a single package as compared to going down to the near Staples or Rexall or supermarket and buying all their goods in one (inaudible). It's very interesting. Leasing activity this quarter is probably was 15% in terms of tenants who indicated that their business is in some part materially driven by E-commerce but that really underestimates the true activity, because again at 3PL, and again the majority of our space is distribution and warehouse oriented.

So we work to quantify the impacts, but it's pretty darn exciting for us. In particular, given our location in these infill markets as really the last mile, because it's not just the volume of goods but it's that intense competition to deliver in the one to two hour timeframe, same-day delivery timeframes.

And the last comment on that is, I think we're seeing another wave of E-commerce growth driven not just by business-to-business and business-to-consumer, but by manufacturer-to-consumer where manufacturers are bypassing the entire distribution channel, not just retail, to deliver direct-to-consumers through their E-commerce purchases and their web presence.

That's interesting. So that last group is -- they're also looking for your type of product as opposed to larger--?

Yes, they still have to hand -- yes, because we're still talking about tight timeframes. So I'll give you a really interesting example, personal example. Couple of weeks ago, our incinerator our garbage disposal at home, and forgive the diversion but it's relevant, it expired, stopped working and I noticed there was a label on the garbage disposal under the sink with a phone number for the manufacturer and it said 24 hours, seven days a week.

So I called the number. This is a Sunday morning, by the way. Sure enough, the manufacturer answer the phone and he said, yes he diagnosed it; you need a new garbage disposal. So I said, great. And he said you have two options, you can go online or go to the nearest store, go to Home Depot or Lowe's and you can pick up a replacement or here is a code, you can go on to our website and we'll give you 50% off on any new garbage disposal.

So here is a manufacturer -- the dollars to them is probably still the same or better as compared to distributing via their retail or distribution channels and by the way, next day delivery. And this was a Sunday. So they can't satisfy that if they don't have that warehousing presence in the market. And I think that's a really interesting trend, because it wouldn't have been very long ago that that manufacturer would have been protecting those channels, not bypassing them.

Okay. Yes, that is interesting. Good luck with the new garbage disposal.

You know it's working well. So, I appreciate that. I installed it myself.

(multiple speakers) It's such a good story.

Give me a call, I'll get you a new one.

Paul Roantree, J.P. Morgan.

Hey guys. Just two quick ones from me. What were the cap rates on the acquisitions for the quarter and what was sequential occupancy outside of the impact from those acquisitions? Thanks.

Hi Paul, it's Howard. Well we've bought one building that had no occupancy. It's a 145,000 feet on Nelson Avenue in the City of Industry and that was a project we plan for repositioning. Additionally, we've mentioned the Mission Oaks JV that we'd bought out the 85% we didn't own. And that one, we projected a cap rate next year of about 7.5% based on 75% occupancy. When we bought it, we had about 66% occupancy and we're already at about 80%. So, we're ahead of the game on that one.

And then, the other asset we bought was in Orange County that was industrial complex about 346,000 feet and that one came in at a 5.3% yield and we expect to stabilize that next year at 5.7% yield on total cost. And by the way, that Nelson project I mentioned that we bought vacant, we expect to stabilize that one at a 6.4% yield on cost.

And do you guys have any idea of what kind of the, I guess, the impact on sequential occupancy those acquisitions have?

Well, if you look at Nelson and Mission Oaks, both of those came in with quite a bit of vacancy obviously. So Mission Oaks had, I think it was over a 100,000 feet of vacancy, maybe more and then the 145,000 feet on Nelson and if you look at the quarter-over-quarter portfolio-wide occupancy. It declined a little bit, but it was mainly attributable or solely attributable to us buying these value-add projects.

Got it. Okay, thanks.

By the way, in the sup, you'll find some stats. This is Michael, where you'll see that stabilized pro forma occupancy, this is including uncommenced leases gets you to about 96.7% on a consolidated basis. So that gives you also some indication.

Tom Lesnick, Capital One.

Hi. Good afternoon, guys. I guess first, with respect to occupancy improvement, clearly it's been quite a bit year-over-year and has been a significant tailwind to same-store growth. But as you look forward to 2017 and beyond, how should we be thinking about the potential deceleration in same-store given the presumably lower occupancy improvement potential?

So you're asking with respect to expectations for same-store occupancy going forward, is there a deceleration?

Yes, because I mean, obviously you guys have posted really strong same-store occupancy improvement year-over-year and that's been a huge tailwind for your same-store growth, and I would just expect that given the year-over-year improvement that your improvement potential going forward would be less and therefore would obviously be less of a boon for same-store growth. So how should we be thinking about that going forward?

Well, I think you can think about a bunch of different ways. First of all, occupancy is just one of our various drivers of NOI growth and profitability growth. And we do see room for occupancy growth in the same-store pool that you see this year, although we wouldn't encourage people to underwrite to where the submarkets are.

But if you look at the data, the sub-markets are, right now operating around a 2%, vacancy factor on a weighted-average basis. So theoretically, in the market, there is room to grow that occupancy, although again, we wouldn't encourage people to underwrite to those occupancy levels, because you do naturally have some structural occupancy in the multi-tenant portfolio, such as ours.

And the other thing to think about next year is that the same-store pool will shift and that's going to incorporate some assets that we acquired with some value-add opportunities, some vacancy. So you're going to see a shift there. And in terms of looking at the growth and the economics for the business next year, I think it's more important to think of this a little more broadly, we will get some lift in occupancy, we're going to get some very meaningful lift through the re-leasing activity

Don't forget that in addition to these very healthy re-leasing spreads we've been driving, we have contract 3% annualized run rate bumps embedded in almost all of our leases. And then you've got the repositioning's that are going to start to flow in incremental economics and cash flow, most or much of which is going to flow right down of the FFO line and that's pretty substantial.

And just to give you an indication, we have about over $14.5 million of NOI contribution coming in from the major repositioning projects that we list on our repositioning page in the supplemental. And what's really interesting about that is that represents about $67 million of incremental investment going forward and dollar for dollar return on that investment is just over 20%. So that's pretty darn accretive use of investment dollars going forward.

If you bundle all that together, by the way, we're looking at probably a 25% plus or minus growth potential in NOI, if we look out to the next 24 plus or minus month. So those are pretty darn exciting and that's assuming we don't buy another asset as of the end of the quarter. So -- and of course, we are going to buy some very nice assets going forward with a lot of value add potential on growth.

So we're sitting very, very well from an economic and FFO per share growth perspective going forward. And I think that occupancy piece is going to play a role, but it's just one of several roles.

Tom, this is Adeel. Just to add a little bit more color to what Michael just talked about. On the repositioning page, we have bifurcated for you guys a column where we designate which projects are labeled as same-store or not. So you're able to get a little more granular from that uptick and projected NOI that's going to come through these value add projects, how much of those are same-store. So you're able to get a little more granular if you choose to.

No, that's very helpful. Appreciate that insight. Adeel, a follow-up for you on same-store, the range is still 7% to 8% for the year -- three quarters into the year; that feels kind of light to me given that the first three comps are known. So by my math, you would have to basically post a 4Q figure close to 5% to break below the low-end of the range and north of 9% to eclipse 8% for the year. Is there anything in 4Q that's that variable? Are there property tax appeals or anything else that's just kind of hanging out there that's leaving that range as wide as it is?

Right. Tom and I think the answer lies in the fact that our pool continues to change. So what's happening in Q4, one of the projects that was under repositioning last year was repositioned at the middle of Q3. So for Q4, 2015 and Q4, 2016, you're seeing a very comparable results from a comparison perspective. So the growth that you would have seen in the prior quarters, you are not seeing that in Q4 because the comparability is there now.

Furthermore, one of the other caveats, one of the other nuances that we have in our same pool that's always going to be there because we continue to change the pool because our growth trajectory has been so significant is that if we do have a value add play, you are able to capitalize certain expenses like taxes and insurance, while those projects are being repositioned.

So you're not seeing those from a prior period comparison perspective. When you compare that for this year, you are seeing those expenses slightly higher. So for Q4, one of the larger projects that we had in 2015 last year was stabilized fully for the fourth quarter, so that's why you're going to see that growth slow down somewhat. So that's why you're able to still get yourself up to that 7% to 8% that we guided to, because of those couple of major reasons.

Got it. That makes sense. And then just regarding your G&A guidance, I mean, ex legal recoveries you guys have G&A of roughly $13.8 million year-to-date, implying again roughly [37, 38] for fourth quarter, which seems kind of low to me, how should we be thinking about G&A as a whole for fourth quarter? And was there anything that drove elevated G&A for this quarter?

Yes. So let me add some color as far as some of the key components that were in this quarter and how you should be thinking about Q4 2016 roughly. So we've had a good year so far in a lot of fronts, leasing and so on and so forth. So based on that we did a full year nine-month adjustment to certain bonuses that was built into the Q3 2016 G&A. So the $5.1 million of G&A that you're seeing includes a year-to-date cumulative true-up of $535,000 to be approximately around that. So you're seeing that.

Excluding that, you would have seen a number, $4.5 million, which is very comparable to what you saw in Q2. Again, this is the byproduct of what we've seen and this is a projection, right? This is not something that has been awarded. This is just a projection from our best estimates. Obviously, the Board still has to weigh in the best thing. So that's what you're seeing in Q3.

Now based on that comment and that number that we adjusted for Q3, Q4, could come in slightly higher than that. So if you were at a run rate of $4.5 million, [$4.4 million] over the last two quarters, that could be slightly higher, maybe in the range of $4.7 million, $4.8 million. But that's based on what we know today. Obviously, we're still going through -- project for 2017 once we have better data as far as what the Board decides from an equity comp and there is other factors that can change that. But as of right now, where we sit how do we get to that, $17.5 million to $17.8 million of guidance? That's how we get there.

Got it. That's really helpful. And then last one from me. I guess this is for Michael or Howard. You guys spoke at length about the opportunity in the redevelopment portfolio for further accretion. For projects that are not yet outwardly identified to us on the Street, what is the opportunity that's currently embedded within the portfolio that just hasn't been listed in that roster yet? Is there a portion of the portfolio maybe 10%, 25% whatever that's in the queue for redevelopment at a later point in time?

Hey Tom, it's Howard. No, I don't think we've identified anything that's meaningful for the most part. We've tried to talk about them as we buy them, and on this call, we mentioned some of the redevelopment opportunities. But during the lifecycle of any of our assets, what we find is there is always an opportunity to do some sort of repositioning work to create more value, maybe it's functionality or just modernization of the space and it's hard to predict sometimes when those leases might roll, where we take advantage of those opportunities or not.

But we have a couple of things that will pop up next year. I mean, one that I'm thinking about is a 100,000 foot building that's in the San Gabriel Valley that we know was a vacate and we're going to do some substantive work on that. It will be a cross dock facility with excess land in the market, but that's really the largest one I believe we really haven't put yet onto the repositioning page. And then, there is just the smaller spaces, probably 60%-plus of what we own today are really more of the multi-tenant type space, which we're able to reposition with lower CapEx. But in aggregate, we're still able to drive substantive increases to our cash flow from some of that work as well.

But this would be a very long call to try and even talk about the volume of those smaller space opportunities. And a good example I'll mention on that is, this quarter we had two vacates that we chose to have occurred in the portfolio that were each around 20,000 feet in the Inland Empire, both of which we are doing modernization and we'll see pretty substantive increases in the rents on those spaces. But again, they weren't large enough to really list in repositioning in the supplemental. So, hopefully that adds some color.

(inaudible), Stifel.

Hi, thank you. John Guinee here. Talk about to the extent you guys are familiar, what's happening at the ports in terms of infrastructure improvements or to the downside, more labor issues and if that affects your business at all?

Hi John, it's Howard. It's interesting what's happening; Long Beach opened their first fully automated terminal where I think they've increased their capacity in terms of loading and unloading containers by threefold in terms of the timeframes and they've deployed automation and that's really the wave of the future. And in terms of the impacts to us, as you know the tenants in our portfolio are here servicing the large population base we have.

And when the ports are functioning optimally or slower, one way or another they figure out how to make it work, because they have to service this population. So the type of, I think, questions that you're thinking of really directly impact more of big box, that is really beholding to the timeframes to move their product into the ports and then get the product to their building. So in terms of -- for us, we would tell you that that timeline has little to do with our portfolio and our tenant base.

Perfect, thank you.

John Petersen, Jefferies.

Thank you. Just curious with rents growing as fast as they are and leasing spreads going up, what's the feel that you get as you negotiate with tenants in terms of renewal; in terms of their, I guess, willingness and ability to actually pay higher rents? I guess to what I'm getting at, are you seeing more people where maybe if they didn't move out this time, you're feeling like the next rent bumps is really going to squeeze them?

Hi John, it's Howard. It's a great question and it's always a fine line we walk in our renewals. And you really see the differential right now in the leasing spreads between new and renewal, because on new leases, we have the ability to absolutely charge the maximum the market will bear and many, many times now, we find that we have multiple tenants offering on our spaces and so we could push it to the limit.

When it comes to renewals, we're aggressive with tenants. But there is a fine line between being aggressive and alienating a tenant and having them leave out a spider, whatever the reason might be. And we'd rather have an occupied building, even though the frictional cost to moving the tenants in and out are pretty low, we rather not push people out of buildings over another 1% or 2% increase in our leasing spreads.

So, and as an example of that, if you look at our GAAP leasing spreads, for instance; in new we're at 17.6%, and renewal is 14.4%; and on a cash basis, new leases were 10.7% and renewal was 4.9%. So it's more evident, obviously, on the cash basis than the GAAP this quarter, but it fluctuates from quarter-to-quarter. But that's really what we've seen in terms of the market today and why you see that differential.

Okay, that's helpful. And I guess, along those same lines. I man just curious what percent of your tenants that move out actually leave the infill markets that you're in right now, whether they move to Inland Empire West or whatever other options they have, or is that just something you don't really see that often?

Well. We really don't track it as closely as you might want to know that type of data. But we actually try to work with our tenants when some of them can't afford to pay the rents they were able to command, let's say, in some of -- let's give you an example like Orange County where rents have been really growing fast.

I'm thinking of one project we have in North Orange County, we're actually trying to move our tenant who can't push up to the same rent. We already have an offer on this space. We're trying to move him over into the Inland Empire where he can save $0.20 a foot. But I can't really tell you that where they all are moving. Some of them are just going to move out and take lesser quality buildings than we generally have in the Rexford portfolio and they're willing, at some point, to sacrifice quality and functionality for a lower rate, because their business won't support it.

Hey, it's Michael. One related comment on that and I think maybe what you're asking for is, where do these tenants go, and what's the velocity within the infill markets? Is there an escape hatch for these guys to go out. And lot of these businesses, they literally can't operate if they go out to Inland Empire, because they are servicing the regional infill business environment one way or another.

But another measure is, if you look at the amount of leases that expire during the quarter at Rexford, and if we look at as of this week the percentage of those leases that expired that do not renew, the percentage that have -- where we've already re-tenanted is about -- 57% of those leases have already been re-leased.

So, that's a pretty tremendous statistic and I don't want to quote cash and GAAP releasing spreads yet, because it can change materially between now and the end of the quarter on an aggregate basis. But suffice to say that the cash and GAAP releasing spreads on that 57% of leases that have already been re-let is very, very healthy double digits. So all indications are that the market continues to operate at a very, very healthy level.

Thank you for that. And I'm curious on the transaction side of things, just maybe an update on the feeling from buyers and the sellers in the market. Obviously, there is concerns about rising interest rates and maybe some concerned about what impact that would have on cap rates. Are you seeing any changes as you're bidding on properties with the number of other investors that are bidding along with you? If that's been increasing or decreasing, just given movement with interest rates or anything else, I guess, for that matter?

This is Howard, John. It's a great question. Apparently, the market thinks there is a big impact. But when you get down to the basics of our business and where we operate here in Southern California, we actually have seen a compression further in cap rates. When you look at some of the larger transactions out there, there was recently about a million feet that transacted in Orange County of Class A product and it traded sub 4% in terms of a cap.

It had a little bit of vacancy, and even with that vacancy, it was filled up, it would still be around a 4.1%, 4.2% cap rate. And do we see that on the assets that we buy, we always like to comment and tell you that we are not cap rate type buyers. We really are looking to, how we can create value in assets and how we can stabilize those in 12 to 24 months typically. And for us, we're not seeing any real difference at all in where we've been able to stabilize our assets and we gave some examples earlier.

So typically, on average, we're stabilizing north of 6%, somewhere in the 6.5% range on an average basis. So, in terms of how we look at the market today, it seems like there is a bit more product that we're starting to look at, not necessarily actively marketed product, but a lot more conversations we're having in terms of our pipeline and we don't see really any dramatic change. I mean, everybody wants the moon first, but then, when you get down to finalizing a deal, they all seem to still work out to a point where we can buy them.

But that said, we turned down many, many, many more transactions than we actually buy and those are obviously transactions, we couldn't get to underwrite at numbers that we felt comfortable to bring into the portfolio. And most of those don't go to another buyer, they just never happen. So hopefully that's a little more data on the insight you're looking for.

Mike Mueller, JPMorgan.

I have a few questions on the -- I guess the new disclosure on the repositioning page with the same-store. And I guess, how do you decide what goes in the same-store pool. Is it just based on timing? Because when I think about this and think about the conversations with investors over time, I think most people tend to think of, here is our same-store occupancy and here is the year-end guidance and that's the internal growth piece and then this is a little bit more, put money in, get a return on it.

So it's a little bit separate and here in this disclosure, it just underscores that I think people could be either maybe double counting or mixing up or just something like that. So what's the best way for us to think about this and just not get it mixed up with the traditional occupancy, the same-store guidance there and how do you figure out what on this page ends up in the same-store pool and doesn't?

Mike, this is Adeel. I think we've kept the definition of black as white as possible from the very get go. We have essentially used the definition that if we had owned that property for the entire period of comparison, we would include in the same pool and furthermore, what we did about a year ago, about a year and a half ago, is to even simplify the definition. We established a same pool at the beginning of each year. So for that full entire year of comparison and that we are not changing the pool.

So whatever we owned for that comparative periods, so for 2016 versus 2015 if we had owned that project for the entire period, we would include that in the pool. So that's the definition part of it and we've kept it consistent. Furthermore, I think if anyone wanted to jump ahead and figure out, okay, what is 2017 going to look like, it's rather easy because we do disclose all the projects and the respective dates that they were purchase, so people -- one can easily, quickly stratify the next year same pool that's going to reset itself from 01/01/2017 and so on and so forth.

So we try to keep it as simple as possible so that in guidance that we give out at the beginning of the year has always been married to that one pool that we established at the beginning of each year. And the only color that we always add is that, we do try to go to the process of describing to our audience, our analysts that what is under repositioning during that periods you were able to see comparative analysis and that could probably be tied into the repositioning pages in the back, so you are able to quantify both sides of that

that equation.

So hopefully that makes sense, but our definition has always been kind of black and white from that perspective. Now on the property portfolio overview page, we started doing that about two quarters ago where we added a little bit more color so we can quantify from a total consolidated pool, how much of that is same pool versus non, so you're able to see how much of the total square footage is sitting on the same pool bucket versus the other, so you're able to see that. Prior to two quarters ago, you couldn't see that. So that was just based on demand that we understood that people would appreciate that data. So, hopefully that helped answer the question that you were asking.

Yes, I think so. So there aren't any dollar cut offs. So, for example, if you have a $10 million property and you put another $5 million into it, like a 50% increase on it, a property like that could still make its way into the same-store pool?

Yes, absolutely. It's time is the key thing, the comparability of that property is the key defining variable in the definition. So it has nothing to do with the fact that that property is having more repositioning dollars. We do our very, very best that we have that year window before our property becomes incorporate into a pool, so we do our very best to -- if there is a value-add play, we're trying to do very best to get that repositioning done as soon as possible, so when it comes into the pool, you're able to see that impact of NOI.

But every once so often, you do have a little bit of a belief that the repositioning kind of flows into in that same pool and has not repositioned just yet, so you'll see that. But otherwise, we do not let the cost element of it be the deciding factor, simply a time and the comparability period over period.

Blaine Heck, Wells Fargo.

On the repositioning properties, generally it seemed like there are some nice completions during the quarter and thanks for the additional disclosure, but also there are a couple of quote, periods until stabilization forecasts that may have stayed the same sequentially, which kind of implies stabilization moving back three months. So, I guess just generally, how are you feeling about the interest you're seeing in those properties? Do you think your leasing velocity add-back in that group is quicker or slower than pro forma or just kind of about what you're expected?

Hi Blaine, it's Howard. First of all, there is sort of a progression that's occurring on the repositioning page. The current repositionings are buildings that are actually not able to be occupied. So, there is construction work or permitting or something going on that they're not yet ready for lease up. So, when you move down, the next category is lease up and there's only three buildings that are in that lease-up phase right now. And then the final category is obviously completed during the quarter, which would mean that it was leased-up.

So in terms of those repositioning properties, those three, we do have good activity on them. I think one of them will be practically full before the end of the year and strong activity on the other. So really no indication of any type of a slowdown in demand in the marketplace.

Yes. I guess I was just looking I guess [I had] those lease-up properties and the two first one stayed the same in the period till stabilization, but it seems like you guys -- if I'm taking your comments correctly, you think those are going to be leased-up pretty quickly?

Yes, we would hope so and that's our (inaudible).

And then quickly, Adeel, just coming back to the balance sheet, do you have any preference at this point or can you just talk about how you think about sources of capital now and the relative attractiveness between dispositions, ATM issuance, preferred equity or debt going forward in order to keep the acquisitions coming in past what you have in cash?

Sure. I think -- so starting with the last part of the question, the preferred, I think preferred was a great execution from our perspective, and I think it comes from a belief that we have a long-term belief in the organization and where we think this organization is going to be. So that's great capital when you think about it from that perspective, holistically about the long-term possibility of the Company and just the overall trajectory that you believe in.

Furthermore, I think, because of that preferred, we ended the quarter at a very nice note from a balance sheet perspective. We do have the $55 million, so that can carry us into Q4. And if -- what we executed in Q2, was there any indication of how we could deploy the proceeds on that one sale or couple of sales that we had, and how we're able to generate a great yield, I think that's a great proxy of what we can potentially look forward to doing, when we have couple of more dispositions here.

So I think that is also something that we have now done this year and we can certainly continue to look at that. So that also gives you a little bit more runway from just what we're able to do and what that does to the overall NOI, and the FFO up to the bottom line. Furthermore, I think the facility is completely untapped, and then again, it's a very attractive capital still, it's completely untapped. And then obviously, as I answered the question earlier that was asked by Jamie is that, at no point you rely on one of these sources. You always triangulate to make certain that you are marrying these sources of capital with what you have on your docket as far as acquisitions are concerned.

So I think, we feel very, very comfortable and the last thing I can add is that it all kind of sits on the premise that we believe in our balance sheet. We want to keep that balance sheet as strong as possible so we will make certain that at no point in time we stretch that and I think as long as we keep it disciplined we'll hopefully continue to execute on all these fronts.

But again, where all those forward looking as far as what should we be doing and I think what we've done over the last couple of years have any indication of how we'll think about our capital stock, you'll continue to see us execute from that perspective and looking at other term-loan debt, other unsecure pieces and so on and so forth and other avenues that could be accretive to the overall nature of our business. So you all can continue to see us do that. But I think, balance sheet wise, we ended up really well and we have a lot of avenues that are available to us.

Okay, great. I'll leave it at that. Thanks for taking the question a little late.

Ladies and gentlemen, we've reached the end of the question-and-answer session. I would like to turn the call to management for closing remarks.

Thanks. We just like to thank everybody for tuning in today and we look forward to seeing and hearing from you again soon and for sure within about three months. Thanks everybody.

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