Rexford Industrial Realty Inc (REXR) 2016 Q4 法說會逐字稿

Greetings and welcome to the Rexford Industrial Realty fourth quarter 2016 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I'd now like to turn the conference over to Steve Swett Thank you, you may now begin.

Good afternoon. We would like to thank you for joining us for Rexford Industrial's fourth 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 represents non-GAAP financial measures. The Company's earnings release and supplemental information package, which were released this afternoon and are available on 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 up the call for your questions. Now, I will turn the call over to Michael.

Thank you, and welcome to Rexford Industrial's fourth quarter 2016 earnings call. I will begin with a summary of our operating and financial results. Howard will then provide an update on our markets and our recent transaction activity. Adeel will then follow with more detail on our quarterly and full-year results, our balance sheet, and will introduce our outlook for 2017.

2016 was an extraordinary year for Rexford and for our shareholders. Exceptional operating results helped drive a 45.4% total stockholder return for the year. We increased Same Property NOI by 9.1%, on a cash basis, on top of the 7.5% we recorded in 2015, achieving strong releasing spreads and ending the year with our stabilized Same Property portfolio, at 96.9% occupied. We acquired nearly 3.4 million square feet of industrial properties at favorable yields, most sourced through off-market or lightly-marketed transactions, and many with substantial value-add outside.

Since our 2013 IPO, we have acquired $1.1 billion of industrial property, growing our portfolio square footage by almost 3 times and are NOI by 3.2 times. We strengthened and expanded our balance sheet during 2016. In April, we completed our third follow-on equity offering and raised net proceeds of approximately $175 million. In August, we raised $87 million through our inaugural issuance of professional preferred stock. And during fourth quarter, we raised another $13 million through our ATM program. Along with about $40 million of proceeds from dispositions, these activities funded almost all of our 2016 acquisitions.

Now, turning to our fourth quarter results, we achieved core FFO of about $15 million for the fourth quarter of 2016, which is a 27% increase over the prior year. Core FFO per share was $0.23, about a 10% increase over the prior year. On a Same Property basis, NOI increased 9.1% in the fourth quarter of 2016, compared to the fourth quarter of 2015, driven primarily by a strong 7.8% increase in rental revenues. Same Property Portfolio cash NOI also increased 9.1%.

During the quarter, we signed 98 leases, for approximately 765,000 square feet. Our leasing spreads were 16.1% on a GAAP basis, and 5.9% on a cash basis. 18% GAAP spreads and 9% cash spreads on our new leases demonstrate the ongoing strength of our infill target markets. We acquired four industrial properties for an aggregate purchase price of approximately $60.2 million, bringing our total acquisitions for the full-year to nearly $372 million.

Our pipeline remains robust and Howard will provide more detail on our transaction activity later in the call. As we move forward, there are several factors that differentiate the strength of our target Southern California infill and industrial markets. Tenant demand remains exceptionally strong, with market occupancy above 98%, yet the risk of new supply of for-rent industrial product is virtually nonexistent due to high-barriers, lack of available land and high land and development costs.

In fact, competitive supply in our infill markets is shrinking, with over 100 million square feet of industrial product having either been removed or converted to other uses since 2001. E-commerce continues to drive an acceleration in demand. We believe our infill Southern California industrial market is positioned to benefit from the growth in e-commerce more than any other market.

With the two largest ports in the nation, Los Angeles and Long Beach, responsible for over 40% of all imports for the entire country, we operate an irreplaceable, high-quality industrial portfolio, serving both the first mile, and the coveted last-mile, of distribution in a growing and economic zone, substantially larger than the vast majority of countries. Embedded in our in-place portfolio, we see the potential for organic NOI growth of over 23% over the next 18 to 24 months, driven by several factors, which include the completion and lease-up of our repositioning space, capturing upside from the 2.4 million square feet of leases rolling in 2017 that we estimate to be about 9% below market rents on average; the 3% annualized rental bumps embedded in nearly all of our leases; and the full-year benefit of acquisitions completed during the fourth quarter.

In addition, our external growth opportunity remained substantial, with a pipeline of accretive investment opportunities, enabled by our proprietary originations methods. Since our July 2013 IPO, we have tripled the size of our Company, and yet our current portfolio represents a mere 0.8% market share of our infill Southern California market. Given the fragmentation and sheer size of the market, equal in economic value to the next four to five largest markets combined, we have a tremendous consolidation opportunity in front of us.

Given the recent post-election indications from Washington and general interest to calibrate the current phase of the real estate cycle, we thought it worth while to comment on a few topics. With regard to potential changes to trade or tariff policy, and their potential impacts on industrial demand, it is important to differentiate our infill tenants as they disproportionately serve local and regional consumption, as opposed to super regional trade or global logistics.

As we have seen during prior periods of reduced imports or port slowdowns, our infill tenants are less impacted by shifts in global trade flows, as compared to those in the big box, logistics-driven markets, such as the Eastern Inland Empire. Incidentally, with regard to trade flows, the combined ports of Los Angeles and Long Beach experienced the highest volumes since 2007, with over 15.6 million TEUs last year.

On the other hand, to the extent trade policy helps bring back more manufacturing to domestic soil, Southern California may also benefit as we are home to more regional manufacturing jobs than anywhere else in the nation. With regard to ongoing revenue and NOI growth, we have not yet seen any deceleration in trends within our infill markets.

Further, our ability to create value is not solely reliant upon rental rate growth. Our value-add focus to increase cash flow and value at the property level means we have the capacity to generate favorable NOI growth, even during phases of the cycle when market rents have plateaued.

We'd like to thank our Rexford team for their tremendous dedication, creativity and results. Thanks to these efforts, Rexford continues to deliver on our mandate to generate substantially better-than-core cash yields and strong accretive growth in the nation's largest and most sought after industrial market, in infilled Souther California. And with that, I am very pleased to turn the call over to Howard.

Thank you, Michael, and thank you, everyone for joining us today. First, I will recap our 2016 acquisitions, then update you on our markets, primarily utilizing market data from CBRE, and then review our fourth quarter acquisition and disposition activity.

During 2016, we acquired 20 properties, totaling about 3.4 million square feet in our target, Southern California infill markets, for $372 million. The average project size was 168,000 square feet and the average tenant space size was 45,000 square feet, increasing our portfolio-wide average tenant size, and helping to drive greater operational efficiencies. One-third of acquisitions were in the Orange County submarket, which CBRE projects to be the highest rent-growth market in Southern California for 2017.

About 25% of acquisitions were value-add and the balance were core plus. For the full-year the aggregate inbound yield was 5.1%, even with 11% of the space encompassing partially- or fully-vacant buildings. The aggregate projected stabilized yield-on-cost is just under 6%. Entering 2017, overall market fundamentals are as good as we have ever seen them, and we expect the strong landlord-favored market conditions to continue in Rexford's infill markets.

Excluding the Inland Empire East, Southern California closed 2016 with near-capacity industrial occupancy of 98.2%. For 2016, asking rents increased 6.5% on a weighted-average basis across all Rexford's infill markets. The 1 billion square foot greater Los Angeles industrial market reported a 1.2% vacancy rate at year-end, unchanged from 2015. Asking lease rates increased 3.5% in 2016, and CBRE projects rent growth of 5.7% in 2017.

For full-year 2016, the 250 million square foot Orange County industrial market reported 7.7% asking rate increase, with the vacancy rate at year-end at 1.6%, a 30 basis point decrease from 2015. CBRE projects that asking rents will grow 9.4% in 2017.

The 278 million square foot Inland Empire West industrial market reported overall asking rate growth of 15% in 2016, with that year-over-year increase in vacancy of 40 basis points, to end at 2.1%. CBRE projects 7.5% rent growth in 2017 for Inland Empire East and West combined. At year end, Inland Empire West had just under 10 million square feet under construction, primarily larger spaces not competing with Rexford's product.

For 2016 the 190 million square foot San Diego industrial market reported an all-time high in asking rates, increasing 6.2% for the year, and an all-time low in vacancy, ending at 4.5%. CBRE projects that San Diego asking rents will grow 6.8% in 2017.

Now moving on to our Q4 transaction activity. In the fourth quarter we acquired four industrial properties in our infill markets, for an aggregate $60.2 million. We continue to source and close transactions that provide us with expected stabilized returns, in excess of market cap rates. About 67% of the assets were acquired off-market, or lightly-marketed, and 40% have value-add components.

In October, we acquired 3927 Oceanic Drive, a 55,000 square foot building in north San Diego submarket, for $7.2 million, or $131 per square foot. The high-quality property is 100% leased and was acquired from an owner-user who required a flexible short-term structure and quick closing. The initial return is approximately 5.3%, with an expected stabilized return on cost of 6.1%.

In November, the Company acquired North Figueroa, a 134,000 square foot 14-space multi-tenant industrial building in Wilmington, within the Los Angeles South Bay submarket. The property was acquired for $13 million, or $97 per square foot. The project is 63% occupied, with most of the space leased on a month-to-month basis, allowing us to execute value-add repositioning to capture significantly higher rents over the next two years. After repositioning, we expect to achieve a stabilized return on cost of 6.6%.

In December, we purchased a two-building industrial complex containing 285,000 square feet on Fourth Street, within the Inland Empire West submarket. The high-quality property was acquired for $24.4 million, or $86 per square foot. The buildings are fully-leased to a strong tenant on a triple-net basis at a below-market rent, providing a current cash return of 5%.

Finally, in December, we purchased an 84,000 square foot single-tenant industrial building in the central San Diego submarket for $15.5 million, or $185 per square foot, inclusive of excess land. This best-in-class property, 100% leased to a credit tenant on a triple-net basis, was purchased at an attractive yield, with longer-term rent upside by capitalizing on excess land and cross-dock loading, ideal for future last-mile e-commerce use. The current return is approximately 5.3%.

We are extremely pleased with our 2016 acquisitions, and as we enter 2017, we continue to see stabilized and value-add opportunities that meet our return criteria, and we currently have $17.2 billion of new investments under contract. Finally, in the fourth quarter, we continue to execute on our strategy to recycle capital through property dispositions.

In November, we sold to industrial properties for gross proceeds of about $19 million. These proceeds were reinvested into our $24 million acquisition of Fourth Street, providing for not only an efficient tax-deferred exchange, but we effectively treated a property with 60 tenants into a single-tenant net-leased building, thus enhancing our operational efficiency. For full-year 2016, were closed on five dispositions, building $40.7 million. In aggregate, the in-place yields based on sales prices equated to 4.5%, and the sale proceeds were all reinvested through tax-deferred exchanges.

As we move forward, we will continue to consider dispositions. In many cases, unlocking value and providing opportunities to accretively recycle capital. I will now turn the call over to Adeel.

Thank you, Howard. In my comments today, I'll review our operating results for the fourth quarter and full-year 2016. Then, I'll summarize our balance sheet and recent financing activity. And finally, I'll discuss our outlook for 2017. Beginning with our operating results, for the three months ending December 31, 2016, Company share core FFO was $15 million, or $0.23 per fully-diluted share.

This compares to $11.9 million, or $0.21 per fully-diluted share for the fourth quarter of 2015. Core FFO per share increased due to our strong acquisition activity completed in the past 12 months and Same Property full-year growth, which was partially offset by increased interest expense and higher diluted share count. Company share FFO and Company share core FFO were essentially the same, at $0.23 per fully-diluted share. For the full-year 2016, Rexford reported Company share core FFO of $55.1 million, or $0.88 per fully-diluted share.

Core FFO excludes the impact of approximately $1.9 million of nonrecurring acquisition expenses and about $1 million of non-reoccurring legal reimbursements. Including these costs, Company share of FFO was $54.3 million for the full-year 2016, or $0.86 per fully-diluted share. Within our portfolio, we continue to capture strong growth and income. Same Property NOI was $17 million for the fourth quarter, as compared to $15.5 million for the same quarter in 2015, representing an increase of 9.1%. Our Same Property NOI was driven by a 7.8% increase in rental revenues and 4.6% increase in property operating expenses. On a cash basis, Same Property NOI was also up 9.1% year-over-year.

Turning now to our balance sheet and financing activity. During the fourth quarter, we utilized cash and sale proceeds to fund most of our investment activity, and you should note that [all] preferred securities. During the quarter we utilized our ATM as previously reported, issuing approximately 572,000 shares of common stock at an average price of $23.14 per share, raising gross proceeds of just over $13 million. As we enter 2017, our balance sheet remains strong in support of our growth objectives. With approximately $15 million of available cash, zero draw on our line of credit, no debt maturities in 2017, and only about $5 million of debt maturities in 2018.

As you saw earlier this week, we executed a new $450 million senior unsecured credit facility, including a $350 million revolving line of credit and $100 million term loan. The facility matures in February 2021, with two six-month extensions and has an accordion future, allowing an expansion to $1 billion under certain circumstances. This replaces our prior $300 million credit facility. In addition to expanded availability, it offers spreads lower than the old facility.

With regard to our dividend, this week our Board of Directors declared a cash dividend of $0.145 per share for the first quarter of 2017, payable in cash on April 17, 2017 to common stock and unit holders of record on March 31, 2017. This quarterly dividend represents an increase of 7.4% over the prior quarterly dividend rate.

Finally, I would like to review our outlook for 2017. Our guidance refers only to our in-place portfolio, as of today, and does not include any assumptions for acquisitions, dispositions or capital transactions, which have not yet been announced. For 2017, we expect to achieve core FFO range from $0.91 to $0.94 per share. Please note that our guidance for core FFO does not include acquisition costs (inaudible) costs that we typically eliminate when calculating this metric.

Our guidance is supported by several factors. We expect year-end Same Property occupancy within a range of 93% to 95% and year-end stabilized Same Property occupancy within a range of 96% to 98%. We expect to achieve Same Property NOI growth for the year of 6% to 8%. Please note that our 2017 Same Property pool comprises 116 properties, with an aggregate of 11.6 million square feet, representing 78% of our consolidated portfolio square footage.

For G&A, we anticipate a full-year range from $20 million to $20.5 million, including about $5 million of non-cash Company-wide equity compensation. I'd like to note, though we're not providing guidance for 2017 acquisitions at this time, we remain excited about our robust pipeline. We expect to continue to grow our portfolio in a creative manner. As we work through the year, we look forward to updating you with our acquisitions activity and any updates to our full-year guidance. That completes our prepared remarks. With that, we'll open the line to take any questions. Operator?

Thank you.

(Operator Instructions)

Our first question is from Jamie Feldman - Bank of America. Please proceed with your question.

Great, thanks. I thought you guys did an acquisition in Inland Empire West. Can you maybe talk about that building and discuss how that compares to some of the big-box assets that maybe some your peers own, given your thesis.

Sure. Hello Jamie, it's Howard. That was a very lightly-marketed transaction. It originally encompassed two other buildings out-of-state, and we convinced them to split that Southern California asset off. It was actually two high-quality buildings on one parcel of land and it's master-leased by a company called Heritage Bag, and they actually sublease one of the buildings.

The other notable aspect of that was, we completed that transaction, 75% of the purchase price were through our tax-deferred exchange dollars from selling a project mainly in Orange County that had 60 tenants. So, it was a very efficient trade for us not only in terms of moving into a high-quality property, but the tenant size was really only one.

In terms of the quality of the buildings, there are 28 to 30 foot clear, [yes, so far as] sprinklers, a significant amount of loading, and being two different buildings, I wouldn't really call them big-box. They were only about 130,000 to 140,000 feet each. And, they have some flexibility where we could even devise them down the road.

Okay, and the tenant use, are they distributing across the US or are they just distributing locally?

Heritage Bag occupies one building, and they manufacture plastic trash can liners. And they distribute as well is manufacture. That one is probably more regional. They have facilities around the country. And, the other tenant was a 3PL. That was their subtenant.

Okay. Thank you. And then, can you help us understand for the same store guidance, how much of that is lease-up of transition assets versus stuff that has been stabilized?

Jamie hi, it's Adeel. So, we added a [2007] outlook page on the supplemental, which is page 30, that will hopefully point you to some of these questions. I'm going to go over some key facts that are already on the page. So the Same Store pool is changing from 9.5 million square feet to 11.6 million square feet.

And as I had mentioned in our remarks, 93% to 95% is our full-year occupancy guidance, on a stabilized basis that's 96% to 98% and the Same Property portfolio growth 6% to 8%. The one thing that we added on the guidance page, is that about $3.4 million off that NOI growth that's in the 6% to 8%, is coming from the repositioning and development page that we have in the supplemental.

Furthermore, just to give you some perspective, the ending December 31, 2016 occupancy for that new pool was 91.89%, which is, for guiding, 93% to 95%. So, hopefully that helps you build some color for this new pool that's going to be effective in 2017.

Okay, so, you're saying $3.4 million is, kind of, repositioning assets. What is that in terms of basis points -- of the 6 to 8?

It's hard to quantify, I don't have the full numbers, but it's a small number. I'll quantify and throw the answer back a little bit later, once I have it.

All right, great. And then, finally, can you just talk more about cap rates in the markets and any kind of trends you are seeing?

Sure. Yes, Jamie, it's Howard, again. We pointed out last quarter's compression we're seeing in some of the larger asset sales -- we mentioned about a $1 million square foot transaction in Orange County that had a stabilized return in the very low fours.

We don't see that changing at all, in terms of the markets here in Southern California. We continue to point out the services of Rexford -- we're really not a cap rate buyer, in terms of the value-add activities we do.

There's a distinct difference between the assets we buy, where about 70% are lightly-marketed or truly off-market, versus actively-marketed properties. Even the properties that you see being more actively-marketed that are stabilized, that are not some of these larger transactions, today those are trading somewhere in the 4.5% to 5% cap range. And, that's pretty consistent to what we saw last quarter, as well.

Jamie, just go back to your question regarding how much that 3.4 is in terms of percentage, it's about 40% or so of that 6% to 8% guidance.

40% of the 6% to 8%?

Correct.

Okay, all right, that's helpful. Thanks.

Thank you.

Our next question is from Mike Mueller - JPMorgan. Please proceed with your question.

Yes, hello, can you hear me?

Hi, Mike.

Hi, yes, I guess going back to that -- just going back to, essentially what Jamie was talking about with the Same Store pool. When you at -- just thinking about a project like Midway, where there's no NOI contribution today, and a few years out you have a $70 million project that's going to have a big return on it, and something like will skew the Same Store pool. What's the thought process of having an asset or project that big in this pool today if it's contributing nothing. And, it's going to create some noise in the pool going forward.

Hey Mike, it's Michael here, nice to hear you. Thanks for the question. Ordinary course for our business involves a lot of repositioning. Sometimes it's a large property, like the one you pointed out with Midway, but frankly, more often than not, it's a lot of small- or medium-sized properties.

And often times, it's a small- or medium-sized space within our properties. So, if we start to carve out spaces or partial properties, it just starts to get very, very complicated, very difficult to drive their NOI contributions or deductions, and it just becomes very difficult. So, what we do instead of that, is provide you guys with those stabilized projections and outlook, as well as consolidated. And, so, that's how we try to work around that.

Okay. For something like Midway this year, is there a notable impact on it? Because it was put into the pool this year. It looks like the total investment so far is $48 million, but was it a negative hit to the pool? I'm not sure what the contribution was last year.

Mike, this is Adeel. The impact to the pool is very insignificant, if any. Because, while the project is under construction, the minimal costs that are being incurred are being capitalized. The fact that you have a 2015 and 2016 -- comparing 2016 and 2017 you're not going to see a lot of noise coming through. It's going to be fairly muted. (Inaudible)

Okay. So something can be in the Same Store pool be can capitalized and not impacting an NOI result?

Yes, that's fair. Yes, absolutely. I think Midway is a great example because it's an entire project. And, if you have a partial project, you can have that impact of capitalization. And when we talk about capitalization, it's primarily taxes and insurance, not a whole lot more, so -- but those are the lion's share of the expenses that you have, typically, anyway, just to carry a project during those repositionings.

So yes, that will typically happen. But Midway is a good example where, this year versus last year, the impact to the pool is fairly muted because of that year-over-year comparison and capitalization.

Okay. And then, I guess, one other question, real quick, and I'll hop off. I think there was a comment about the mark-to-market portfolio being 9%. I think the cash spreads, thus far, have been averaging around 5%. Is it reasonable to assume, as we look out to 2017 and 2018, your spreads gravitate up toward that 9% number?

Hi Mike, it's Michael again. You're right, you know, historically, we've had similar mark-to-markets, in fact, in some prior periods, they've been a little bit wider than 9% mark-to-market.

But the fact of the matter is, at every point in time we're not necessarily pushing every renewal to the maximum market rents that, that submarket will bear, because there are other efficiencies associated with keeping that tenant -- you don't have to invest in TIs and commissions, and all that sort of thing. So, it's a balance.

And, I think our focus right now is rolling tenants where we can drive NOI growth, and where we can drive an improvement and the quality of the tenant base. And in the process, we are also extending at this point in the cycle, the average lease terms, which is a great attribute as well.

Okay. I'll hop out. Thanks.

Our next question is from Thomas Lesnick - Capital One. Please go ahead with your question.

Hi, guys. Good afternoon. My first question is bigger picture on the investment sales market out there right now. Are you guys seeing any demonstrative shift in how some of the larger institutional players are thinking about capital allocation across LA and Inland Empire right now? Is there a greater focus on, maybe moving a little bit more infill towards value-add?

Hi, Tom, it's Howard. That's a broad question, with a lot of interesting perspective I can give you on it. CBRE, today, would tell you that Southern California is the number one destination of investment capital, at least seeking to get in to buy industrial in the country.

So, there is a lot of demand from an institutional standpoint for assets that are located here. As far as, the value-add side of it, we haven't seen that institutional capital really willing to deviate too far off the fairway, in terms of what they buy. In fact, I'll give you a great example.

We bought, in third quarter we bought a project in Fullerton that was like 340,000 feet. It had a 200,000 foot building off-site, and it had some smaller buildings, but it also had some value components to it. We wound up paving some excess land -- almost an acre of land and expanding a lease with a land-storage tenant to create more value. And we're also in the process of repositioning a freestanding building that had been used as 100% office, and we're converting that to more traditional industrial. And we'll stabilize that at a substantially higher yield than institutional buyers are willing to achieve on some of the stabilized assets.

And, I was just asking the brokers that told us about it last night. And they just confirmed, again, that people just don't know how to handle anything that has that value-add component, really. So, the long answer to your short question, I guess might be, no we haven't really seen a deviation where more people would like to do value-add. It's not easy to do. And we've got a great team here at Rexford that helps us do it. And, we work hard to make it work.

And, Tom, it's Michael. I will just add -- it's very difficult to institutional capital that is trying to deploy billions of dollars or hundreds of millions of dollars of equity to focus on these small- and medium-sized opportunities which is really what it generally takes to create a lot of value. If you look at the transactions they focus on, they're typically multi-property portfolios, that are largely stabilized. So, it's very much a different playing field, in general.

I appreciate that insight. Looking at dispositions, you noted in the release, favorable market dynamics is a reason for sale, given that market conditions appear robust and don't appear to be slowing down at all. Do you expect to potentially look at selling more than you historically have in 2017?

We really aren't offering any dispositions guidance, at this point. As you know, we do look at the portfolio very carefully. We will probably wind up selling something this year. We do have one small project right now that is actively on the market. It's about 60,000 feet, and it has a bit more office tenants then we prefer to have any multi-tenant type project. So, we felt it was a good time to dispose of it.

By the way, the project you referred to as being sold with the market timing, that was actually a fully-marketed investment sale. I mentioned in my comments that we'd basically traded that 60-tenant property into a single-tenant building in Inland Empire West.

So, that was really more of an opportunity for us to dispose of something that had a four cap rate range in it, and move into that five, which had much more operational efficiencies. And, we do look for those opportunities.

That's very helpful. And last one from me on leasing, again very, very strong rent spreads there. But, looking at the comparison between the new and renewal leases, even though GAAP rents were both in the mid-teens, cash runs for the renewal leases were up a little bit less than the new leases. I guess, maybe, I would have expected you guys to have a slightly greater pricing power on the renewals. Is that really just a function of the mix of leases during the quarter or is there something, with respect to market -- market lease terms that I am missing?

It's really more of an operational philosophy, right? We want the tenants on the portfolio to be with us in good times or bad. And, we have to treat them right. So, when we're bringing in a new tenant, obviously, we're going to achieve the highest possible rent we can get in the marketplace.

We've got multiple people typically competing for spaces, and that's the time where we really maximize the rent, not to the point where we alienate and offend some of the existing tenants. But that's not to say, we don't push the rents as hard as we really can. It's a bit more delicate of a negotiation, than with a new tenant, in that respect.

Got it. That's very helpful. Thanks, guys. Nice quarter.

Thank you.

(Operator Instructions)

The next question is from John Guinee - Stifel. Please go ahead with your question.

Thank you. If you look at your hundred 115 to 125 building portfolio, is there any opportunity to up zone and increase the density, or any opportunity to change the use without increasing the density? Or is it pretty much, what you see is what you get, for decades?

Hi John, it's Howard. That's a great question because we losing a lot of industrial supply here in Southern California. I think what we see is, in some areas there is a huge differential between the industrial values and some of the other converted or repurposed uses.

For instance, downtown Los Angeles where we have the arts district, where you take properties that were selling as industrial for maybe $100 a foot, and all of a sudden they're worth $400. They convert to creative office and residential.

But, that's really not the norm, when you really look more on a broader geographic basis. And I'll give you another example, maybe that will help answer the question. We had a project we sold during the year that was in the mid-counties area that was 153,000 foot older industrial building built in the 1960s. It was six seventeen foot clear.

We had interest in it from residential developers who wanted to build multi-family housing there. And, we were able to achieve a sale of that building to an owner-occupant that was, arguably, the same value or perhaps even higher value, than what those residential land values converted to.

And, the interesting part was, if you looked at the income we have in that project prior to the sale, it effectively was a 4.1% yield on the sale price, in terms of prior income. So, our bigger opportunity really seems to be those user-sales, versus going through the trouble having to convert to different uses on the typical product, I'll say, that we say we own.

Thank you. Nice quarter.

Thank you.

Our next question is from Manny Korchman - Citigroup. Please go ahead with your question.

Hi guys, good afternoon. Michael and maybe Howard, on the beginning of the call you spoke about different macro economics trends and how they might impact your assets. Has that changed tenant philosophy at all? I know you spoke about the potential for increased manufacturing. Are you having manufacturing tenants come to you looking for incremental space?

Hello Manny. Good to hear your voice. It's Michael. A great question as well. I wouldn't say it's driving a substantial change in our tenant strategy, at this point. We are seeing the complexion of tenants evolve over time.

And, I wouldn't say that's necessarily changing dramatically, given what's happening in Washington, or otherwise. And again, we are seeing an acceleration in e-commerce driven tenants and businesses, having a nice impact on our business. And we foresee that going forward.

I think the key thing to think about our business, is we're focused on generic industrial space. And, to us that means -- you know, call it, 5% to 18% office and the rest warehouse and loading doors.

And, the benefit of that, as opposed to targeting specific industries, or targeting a little bit more manufacturing, versus distribution, the beauty of that, is in it of itself, that enables us with that generic product focus to target an appeal to the largest, deepest and most diverse universal tenants out there.

So, just to give you some examples, we have a very warehouse-driven space and they want to do a little more manufacturing, maybe the next tenant -- maybe they need to have some quality control rooms, whatever it is. We put up a little drywall and add a few rooms. We want to revert it back to warehouse you take on the drywall.

So, staying true to that generic industrial space footprint is very, very valuable; it's very powerful. And, we're extremely well-positioned to adapt to the market. Whether it's the e-commerce tenant coming in or there's a distribution tenant coming in, or somebody that's going to do a little light manufacturing. So, that's really how we see it.

And then, maybe on the transaction side of things. Has there been any discussion about 1031s either going away or changing impacted the transaction market or on the buying or selling front?

It's really too soon to know, Manny. We don't know what's really going to change, and everyone is certainly talking about it. But, it's not changing anybody's behaviors, in terms of anything we're seeing.

Great, thanks, guys.

Thanks, Manny.

Our next question comes from Blaine Heck - Wells Fargo. Please go ahead.

Hi, guys, good afternoon. So, in guidance of your year-over-year increase in G&A, is I think roughly around 16%, which seems high. Can you just talk about that and what the main components of the increase are?

Hi, Blaine, it's Adeel. So, a couple of things before I jump into the components. This year, for full-year G&A was $17.4 million. One thing to note, that we did benefit from $1 million of recovery in prior litigation costs from the insurance company.

So, our run rate was really about $18.4 million for the full-year. So, that's number one. And that, obviously, once kind of use that in comparative to the guidance that we're pushing for 2017, the delta is smaller than the 16% that you talked about.

As far as the guidance for 2017, and what's included, I think the run rate from [18.4] 2016 carries forward, and then, we did an aid care earlier this year, in terms of equity that was granted to the named executive officers in the company at the tail end of 2016.

So, you're seeing the impact of that. And the other thing that I (inaudible) that this is the second year the board granted us that equity. So, you're seeing the latter affect of that equity grant coming in this year. So, that should be the biggest piece that's coming into the guidance.

Okay, that's helpful. I guess, just more generally, as you guys grow your portfolio through acquisitions, do think your team is now at a place where you can kind of continue to increase in size without commensurate increases in G&A?

Hello, Blaine, it's Michael. Yes, I think we are seeing nice operating leverage being demonstrated through our growth. And, I think that's going to continue. Frankly, it should accelerate. We've got our regional footprint in place, in terms of office presence. We have four regional offices now. We don't need anymore.

The good news is, we don't have to replicate the top-end of our management team because we are staying focused on infill Southern California. There's going to be a couple more senior hires over the next year or two. But, we see that operating leverage starting to accelerate frankly, as we continue to grow the square footage. I think you're seeing that -- you're going to see that through G&A as a percentage of our NOI.

And, I think you're also seeing it on a consolidated basis, if you just look at our financials. I mean, if you look at our square footage increase through 2016, we increased square footage by about 25.6%, yet we increased NOI by over 37%. So, those are things that we really focus on in the business.

Sure. That's helpful.

One last thing I wanted to add, in terms of Michael's. So, that 16% you had talked about, that's really about 11%, so there's about 500 basis points delta. And, the other thing that I alluded to, was the fact that the grant that was issued -- granted in, I guess in 2016, like I said, the second year, all else being equal, if that continues it's a trend in 2017 and beyond, 2019 will be the stabilization year.

So, just something to keep in the back of your mind, in terms of how that impacts future G&A. In terms of just, how the equity comp impacts the G&A.

Okay. Great to know. And then, lastly, looking at the repositioning project on page 25, it looks like the months to stabilization either increased or stayed the same, quarter over quarter for the Midway properties, 9401 De Soto, and the South Anderson Street properties. Any color on those projects? And the extended time to stabilization?

Hi, it's Howard. Yes, on Midway, we are pretty deep into the project. We had some original projections that we've just fine-tuned a bit more. We've decided -- a bit of a different approach on some aspects of it. It just needed a correction on the timeline.

The De Soto project is actually completed now. And, we're in the lease-up on that. As far as Anderson, Anderson is also completed. And, we are expecting we'll be able to announce some strong leasing activity there, probably knock out all the space, frankly, in the first quarter.

Blaine, by the way, on Midway, which is the larger of the properties, you'll notice also that our stabilized NOI has also gone up. And, that comes back to the refinement in improving the strategy that Howard was referring to.

All right, good to hear. Thanks, guys.

Our next question is a followup and comes from John Guinee - Stifel

Please go ahead.

Just to clarify this on the whole G&A thing, just because you guys were up 45% last year, do think you need to increase G&A?

Actually, no.

That was a joke. You don't have to answer it. Thanks.

Thank you.

Thank you. At this time I will turn the floor back to management for closing remarks.

On behalf of the company, we just want to thank everybody for joining us today. And, we look forward to reconnecting in about three months. Thank you.

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