Rexford Industrial Realty Inc (REXR) 2021 Q3 法說會逐字稿

Greetings. Welcome to the Rexford Industrial Realty, Inc. Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to your host, David Lanzer, General Counsel. You may begin.

We thank you for joining us for Rexford Industrial's Third Quarter 2021 Earnings Conference Call. In addition to the press release distributed yesterday after market close, we posted a supplemental package in an updated investor presentation in the Investor Relations section on our website at www.rexfordindustrial.com.

On today's call, management's remarks and answers to your questions contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future.

In addition, certain financial information presented on the call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP reconciliations and an explanation of why such non-GAAP financial measures are useful to investors. Today's conference call is hosted by Rexford Industrial's Co-Chief Executive Officers, Michael Frankel; and Howard Schwimmer; together with Chief Financial Officer, Laura Clark. They will make some prepared remarks, and then we will open the call for your questions.

Now I will turn the call over to Michael.

Thank you, David, and welcome, everyone, to Rexford Industrial's Third Quarter 2021 Earnings Call. I'll provide a few brief remarks, followed by Howard, who will discuss our transaction and market activity, and Laura will then provide an update on our balance sheet and related metrics.

Rexford continues to perform at extraordinary levels. And as our team's quarterly results have raised the bar once again, I'd like to begin this call by thanking our entire Rexford squad for your outsized performance. We are humbled by your dedication, your entrepreneurial approach to creating value and by our market-leading execution. You are truly excellent and we are grateful to have the opportunity to work with every one of you.

Our team's accomplishments include over $880 million of acquisitions during the quarter, bringing year-to-date investments to over $1.3 billion. Most importantly, these investments deliver substantial value creation with an aggregate projected stabilized unlevered yield, that is about 50% higher than the stabilized yields associated with marketed transactions today for a similar quality product. Our team drove releasing spreads of 54% on a GAAP basis and 39% on a cash basis. The entrepreneurial efforts by our team are continuing to drive portfolio rent and cash flow growth that substantially exceed market rent growth. We grew consolidated NOI by 39% and core FFO by 47% compared to the prior year quarter. We also increased FFO per share by over 30% year-over-year. Our market-leading cash flow growth has been achieved while maintaining a best-in-class low leverage balance sheet, with leverage at 12.7% of total enterprise value.

Rexford is the third largest and fastest growing publicly traded industrial REIT in America and has delivered consistent outperformance. Our same-property cash NOI growth, which has averaged 9% over 5 years, our FFO per share growth, which has averaged 13% over 5 years, and our dividend growth, which has averaged 12% over the prior 5 years, have all substantially exceeded the average of all other industrial REITs in the nation. Our team's performance continues to be supported by strong market conditions.

Tenant demand and market rent growth continue at unprecedented levels and all signs point towards continued strength. In fact, a range of market dynamics indicate that we are still in the early stages of several long-term trends driving market rent and value growth into the future. The pandemic-driven expansion in e-commerce along with shifts in the supply chain, driving warehouse demand in prime infill locations is well documented. However, a range of additional factors are driving long-term demand growth in our markets. For example, some of the nation's largest legacy bricks-and-mortar retailers and manufacturers are fundamentally adjusting their business models to survive and thrive in an e-commerce omnichannel retail landscape, requiring a substantial increase in local last-mile warehouse space.

We're also seeing the emergence of substantial new businesses, leveraging e-commerce and new technology, driving extensive new demand for warehouse space within infill Southern California. Further, we are seeing the benefits resulting from our exclusive focus on infill Southern California, the nation's highest demand and most highly valued first and last-mile logistics market. Within our infill markets, the extreme scarcity of available product and the inability to increase supply to resolve the long-term supply/demand imbalance sets the stage for the current acceleration in market rent growth.

We also continue to see substantial price elasticity in terms of our tenants' ability to pay increasing rent, particularly as rent typically represents a very small share of our customers' economics. As we look forward, we see an expansive opportunity to capitalize upon our internal and external growth strategies. From an internal growth perspective, we currently project approximately $94 million, equal to about 27% of embedded NOI growth from our in-place portfolio over the next 18 to 24 months, assuming no further acquisitions.

In addition, our external growth opportunity continues to grow in quality and volume, driven by our year-over-year cumulative impacts of our ongoing research and investment lead generation, as we deepen our market penetration and build upon our information advantage over time. With a near 1.9% market share within our 2 billion square foot market, we have a substantial growth opportunity before us. Most importantly, with over 1 billion square feet of legacy product built prior to 1980, we benefit from a nearly limitless palette of value creation opportunities available to us by leveraging our proprietary access to the infill Southern California industrial market and by capitalizing upon our expertise to increase product functionality, quality and cash flow. Consequently, we believe the company is very well positioned to continue to drive strong cash flow growth and value creation for shareholders.

And with that, I'm very pleased to turn the call over to Howard.

Thank you, Michael, and thank you, everyone, for joining us today. According to CBRE, our target markets, which exclude the Inland Empire East, ended the quarter at 1.2% vacancy, representing historically high demand. Rental rate growth continues at elevated levels. And based on our internal portfolio metrics, market rents within our portfolio increased by 24% over the prior year. This significant increase from recent quarters reflects an acceleration in demand and a lack of availability within our supply-constrained infill markets. This positions us well to capture strong rent spreads into the foreseeable future.

Our consolidated portfolio weighted average mark-to-market for cash rents is now estimated at 27%. In the third quarter, Rexford realized strong leasing performance, achieving record leasing spreads. In the quarter, we signed over 1.8 million square feet of leases, realizing cash and GAAP rent spreads on new leases of about 28% and 42%, respectively, and about 44% and 61%, respectively, on renewal leases. Year-to-date, including transactions closed since quarter end, we have completed 34 acquisitions for an aggregate purchase price of $1.3 billion. 85% of these transactions were acquired through off-market or lightly marketed acquisitions sourced through our proprietary research-driven processes.

For the third quarter, we completed 13 acquisitions totaling $880 million, which included 2.1 million square feet of buildings plus 110 acres of income-producing low-coverage industrial outdoor storage sites and 9.8 acres of land for near-term redevelopment. In total, these investments are producing a 4.4% initial yield and are projected to generate an aggregate 5.9% stabilized unlevered yield on total investment. After quarter end, we completed 2 acquisitions for $33.5 million, including a 62,000 square-foot building and a 4-acre land site for near-term development.

On the disposition front, we sold a 72,000 square-foot property for $18.6 million in the North San Diego submarket achieving a 16.6% unlevered IRR. The proceeds were used to tax-efficiently fund a portion of our acquisition activity. Moving forward, we expect to continue to sell assets opportunistically to unlock value and recycle capital.

Looking ahead, we currently have over $300 million of new investments under LOI or contract. These transactions are subject to customary due diligence with no guarantee of closing. We will keep you apprised as transactions are consummated.

Turning to repositioning and redevelopment activities. During the quarter, we stabilized 4 properties at an aggregate stabilized yield on total investment of 6.3%. These properties comprised a total of 605,000 square feet and represent an aggregate investment of $145 million. A few highlights include the redevelopment of Lawrence in 90,000 square-foot newly constructed 4-tenant building in the Ventura County submarket, where we achieved a 6.4% initial unlevered stabilized yield on total costs and growing through average annual contractual rent increases of 3.9%. The repositioning of 2 buildings at Rancho Pacifica comprising 488,000 square feet in the South Bay submarket, where we achieved a 6.3% unlevered stabilized yield on total cost, bringing the projected unlevered yield on the entire 1.1 million square-foot property to just under 6%. And the repositioning of Reyes Avenue, a 4.5-acre industrial site converted to a paid container storage facility in the South Bay submarket, where we achieved a 6.2% initial unlevered stabilized yield on total costs growing through annual 3% rent increases.

We currently have over 2.5 million square feet of current and planned value-add and redevelopment projects across our portfolio, with a projected total investment of $629 million, which are detailed in our supplemental and are estimated to deliver an aggregate return on total investment of 6.5%. These projects represent substantial value creation when compared to the mid-3% cap rates in today's market for stabilized assets.

And with that, I'm pleased to now turn the call over to Laura.

Thank you, Howard. Third quarter same-property NOI growth was a strong 9.7% on a GAAP basis and 13.3% on a cash basis, well ahead of expectations. This exceptional growth was driven by year-to-date leasing spreads of 45% and 30% on a GAAP and cash basis, respectively. On top of these strong leasing spreads, the contractual annual rent steps we are embedding into our executed leases continues to increase. In the third quarter, 70% of our executed leases had rent steps over 3% and averaged 3.6%.

Also contributing to our outperformance in the quarter is our same property occupancy that is approaching 99%. Same-property occupancy finished the quarter at 98.8% with average occupancy at 98.6%, up 80 basis points over the prior year. As the foundation of these strong results is our exceptionally stable diverse tenant base, as demonstrated by our continued low levels of bad debt. As a percent of revenue, third quarter bad debt was a positive 10 basis points, driven by our low number of watch-list tenants and recoveries of prior reserves. Year-to-date, bad debt as a percent of revenue is a nominal 15 basis points. These strong results collectively enabled us to grow core FFO per share by 30% over the prior year to $0.43 per share in the quarter.

Turning now to balance sheet and financing activities. We have an active quarter on the capital markets front, driven by the significant level of transaction volume. We continue to focus on maintaining a disciplined, low leverage balance sheet, proven through all phases of the capital cycle. As of September 30, net-debt-to-EBITDA was 3.8x, below our target leverage of 4 to 4.5x. Third quarter activity includes a $400 million 10-year unsecured green bond issuance at a 2.15% coupon. We were excited to execute our first green bond issuance, further demonstrating our commitment to accelerating our positive impacts to the environment, our communities, tenants, employees and shareholders. We repaid a $225 million term loan due in 2023 and redeemed our 5.875% $90 million Series A preferred stock.

In regards to common equity activity, we issued a total of 13.7 million shares of common equity in the third quarter for total net proceeds of approximately $783 million through a number of transactions, including the following: The issuance of 3.4 million shares through the ATM program for net proceeds of $206 million. We settled all forward equity issued prior to the quarter, issuing 7.2 million shares of common equity for net proceeds of approximately $395 million. And finally, in late September, we successfully priced a public offering of 9.6 million shares of common stock. Of the total offering, 3.1 million shares were issued on a regular way basis for net proceeds of $182 million. We have 6.5 million shares or approximately $380 million of forward equity remaining for settlement.

At quarter end, our liquidity was $1.1 billion, including $60 million of cash, the aforementioned $380 million of forward equity proceeds remaining for settlement, and full availability on our $700 million credit facility. We also have approximately $300 million available under our ATM program and no debt maturities until 2023.

Now turning to guidance. Given our strong performance to date and the robust market fundamentals, we are increasing our full year projected core FFO guidance range to $1.60 to $1.61 per share from our previous range of $1.48 to $1.51 per share. The revised midpoint of our range represents 22% year-over-year earnings growth per share. As a reminder, our guidance does not include acquisitions, dispositions or balance sheet activities that have not yet closed. We have provided a roll forward detailing the drivers of our increased guidance in our supplemental package.

A few highlights include: Same-property NOI growth on a GAAP basis has been increased to 8.25% to 8.75%, up 225 basis points at the midpoint. And on a cash basis, has been increased to 11.5% to 12%, also up 225 basis points at the midpoint. Excluding the impacts of nominal COVID-related deferrals, 2021 cash same-property NOI growth is projected to be a strong 10% to 10.5%. Average occupancy in the same-property pool is up 25 basis points at the midpoint to 98% to 98.5%. Consolidated bad debt as a percent of revenue is now projected to be 20 basis points for the full year below historical averages and further improved from our projection last quarter of 70 basis points.

Finally, our third quarter and subsequent to quarter end transaction volume of $914 million is expected to contribute approximately $15 million of NOI or $0.10 per share in 2021. Year-to-date, we have closed on over $1.3 billion of acquisitions. Looking forward into 2022, we expect our year-to-date acquisitions to contribute over $36 million of incremental NOI when compared to 2021. We'll provide further details as well as our full 2022 guidance with our fourth quarter earnings release.

This completes our prepared remarks, and we now welcome your questions. Operator?

(Operator Instructions) Our first question is from Emmanuel Korchman from Citigroup.

Maybe this is 1 for Howard. You talked about rental rate growth in your portfolio that's outstripping the market. Could you give us some more details on what's driving that? Is it just a matter of mix? Is it age, location, the fact that you've put some capital into these assets and so they are now more highly renovated than some of the market is or something else?

Manny, nice to hear your voice. Well, there's a lot unpacking that question. I think really, you need to start at these low vacancy rates that we have in the marketplace. There's just a dearth of any space, let alone quality space. So there's really just an all-on fight on the tenant side these days to get occupancy on anything that's available. And in fact, I think one thing we'll probably start talking more about is off-market leasing that's starting to occur, where we have brokers approaching us, knowing we might have an exploration trying to wedge their way in on some of the leasing.

But the rental rate growth in the market, we mentioned on the call that our market grew 24%. It's pretty astounding. I mean our growth, when we measure compared to some of the other data that's out from the brokerage firms, is fairly similar. Our highest rent growth we experienced was in the Inland Empire West, where we had 52% growth year-over-year. And our next highest growth market was the San Gabriel Valley. And what's interesting really is when you look at those markets, San Gabriel Valley, for instance, has 0.2% vacancy today. Mid-Counties has 2 -- 0.2% vacancy. So it's just really a perfect storm situation, I think, in terms of being able to drive these rents. And a lot of the push is on the tenant part and obviously, on our side, too, pushing the rents, but people really just have to have space that are doing whatever they can to secure buildings.

It's Michael. Manny, I was going to add to that because I think you're kind of asking how do we differentiate? Why is it that our market rent growth is exceeding? Why is it rather than our portfolio rent growth is exceeding what we're seeing in the market overall? And I think there really goes to the Rexford business model fundamentally in that when we buy assets, we're targeting the best locations in the market. And these are very large and deep markets, as you know. And further, if they're not the most functional in the submarket when we acquire them, add the opportunity. In other words, as soon as we can drive the opportunity or vacancy, we proactively renovate and reposition to make them the most functional in the submarket. And so we're positioned to outcompete both from a location perspective and from a functionality perspective, Manny, to your point.

And then I think the other key element, this might be the most important element is the team at Rexford. It's the entrepreneurial efforts of the team to simply outcompete and to stay ahead of the market. And today, we have such an information advantage relative to other owners in the market in leasing as well as acquisitions, in the sense that we're doing well over 2 leases on every business day. So our access to most current information is really unparalleled in the market. And that equips our team to really outperform the way that we're seeing them do that.

Michael and Howard, this is Michael Bilerman here with Manny. If I can just ask a second question just about now that the portfolio is so large and so concentrated in your market, how do you think about sort of alternate use value is -- just given the upward trend, supply-constrained markets, and I recognize how good industrial is doing. But in many cases, there could be opportunities where you could and you've obviously sold some assets in the past, take advantage of potential pricing for alternate uses, and what's the process internally to uncover that? And is there a land mine of potential value within the portfolio that's not being recognized for that initiative?

Michael, thanks for joining us today as well. It's Michael here. It's a great question. And as you know, historically, we've been doing this for a very long time. And there are entire submarkets that we used to own in that have been converted to other uses, and made for very good disposition opportunities for Rexford. And that will continue to unfold. But to be frank, I wouldn't consider it to be a very large or very material percentage of the portfolio where you're going. I think that selectively, yes, you could -- there's some added value there, certainly over time.

And the process internally is we are -- I mean, we have an extensive, call it, asset management process, where we're looking at every asset in the portfolio. We're reevaluating the business plan for that asset. We revisit it on a quarterly basis. Many of the assets actually more frequently than that given the pace of market rent growth more recently. And so it's an extensive process at Rexford and we're looking for those value creation opportunities, which from time to time, to your point, may include a disposition. And that's where you see us also pruning the portfolio and taking advantage of some of those opportunities over time.

Is there 1 in the works that we should be cognizant like I look at what PSP did, right, and selling the thing in San Diego at a 1.5% cap an asset that the Street valued at $7,500 million that they sold to over $300 million and a cost of capital at a 1.5% yield. Are there opportunities like that where The Street is just not capturing this other upside other than your strong industrial business?

There are a lot of opportunities -- yes, there are a lot of those opportunities in our portfolio, but the value today is really to capture those rising industrial rents. With the pandemic, you've seen a real big pullback obviously in the office side and retail and hotel, which really we're taking out a lot of industrial sites. Housing, for the most part, has obviously still been functioning. The construction costs have put a lid on what can be paid for some of the land sites to convert them to housing. But when you look at industrial land over the past year, our numbers tell us that land values for industrial sites have grown to almost 80%. And -- in our market, yes. And obviously, you've heard a lot about industrial rental growth and so those higher land values are still supporting those industrial values.

And so at this moment in the cycle, industrial is really working well. And there's more opportunity in our portfolio to capture those higher yields with the assets we have than there are for these alternative uses for the most part, really today. But yes, as Michael mentioned, we do sell things that tend to outperform cap rate type typical sales. And we have a history of doing that in the portfolio, and I'm sure we'll be able to talk more about some of those as time moves forward.

Howard brings up, by the way, an interesting point related to the multifamily and housing issue, because right now, California has introduced a mandate to increase the housing stock by 20%. And that's going to put -- then they're going to have to put incentives in place. They're looking at zoning and creating some rezoning opportunities for additional housing. And that will probably drive another cycle, frankly, of opportunity where you're going to see more conversion as sort of the industrial locations that are already adjacent and surrounded by multifamily, much of which we own. And you may see more of that going forward. Probably, that's going to take 20 years to resolve that or more.

Right. And have had industrial stock goes down and the rest of it becomes more valuable. So you get a 2-fer. Thank you so much. Appreciate it.

Our next question is from Jamie Feldman from Bank of America.

So I know you gave kind of the highlights on the NOI growth over the next 18 to 24 months, but you provided some really helpful slides last night in your presentation. Can you just walk through with a little bit more granularity, the moving pieces to get to that NOI growth you're talking about?

Sure. Great to hear from you, Jamie. Go ahead, Laura.

Yes. Jamie, thanks so much. Yes, so the NOI growth that we're talking about is -- are 27% projected NOI growth over the next 18 to 24 months. And I think it's -- first, it's really important to recognize that, that growth is what's embedded in our current portfolio. So that doesn't assume any additional acquisitions or external growth. So as a starting point, that's -- that represents $94 million of NOI growth over the next 18 to 24 months. And that's comprised of about $35 million or call it about 35% of that growth is coming from our acquisitions that we acquired. So -- already acquired acquisitions, not prospective in the portfolio from Q3 and beginning of Q4.

Another 35% of that growth, about $35 million is related to leasing spreads. So we did announce on the call and is included in the deck as well that the mark-to-market on our portfolio is about 27% today. And that is on, by the way, a cash basis, which is purely the cash and does not incorporate -- does not incorporate future rent bumps on those cash pre-leasing spreads. And then the other component of that $94 million of growth is repositionings that are already in process and that we expect to complete over the next 18 to 24 months.

Okay. Great. That's helpful. And then you talked about a lot of the capital you raised in the quarter. Can you just help us understand your thoughts on financing going forward? What do you have on the balance sheet to fund all the investments you've talked about? And when do you think you might need capital again?

Yes. So I think at the core, we continue to be really focused on maintaining that low leverage investment-grade balance sheet. You'll continue to see us be opportunistic and take an opportunistic approach to capital raises as you've seen us do in the past, taking advantage of capital sources, debt and equity to fund acquisition opportunities and refinance debt maturities. And looking forward, we don't have any debt maturing until 2023. We sit in a really good position from a debt maturity perspective. We feel really well positioned given our current acquisition pipeline, which is about $300 million of acquisitions that we have under contract or LOI that we expect to close in the coming months. We have $60 million of cash on hand. We also have about $380 million in forward equity proceeds remaining for settlement. So we feel good about our current liquidity position.

Okay. And then finally, Michael, you had mentioned customer economics being a big reason why you're able to keep pushing rents. Can you just provide a little bit more color on what you mean by the customer economics and maybe where warehouse rents fit into the total supply chain?

Of course. No, thanks for the question. And, by the way, I think it's not just about customer economics, but we can start there. And really what you're referring to is the fact that the rent associated with the, for instance, for a distribution-oriented company. If you compare rent even just to their transportation costs for their goods, transportation costs are a multiple of their typical rent. And so rent is really a nominal element of their overall expense structure or overall revenue -- as a percent of revenue or net income typically. And what we're seeing also is that location can help resolve some of those other more costly items like transportation costs. So by locating in warehouses closer to the end user customer, they can actually reduce some of the transportation costs at the end of the day. So it actually helps resolve some of their financial issues, and drive profitability.

But I think that the rent as a percentage of their economics is really just 1 driver of demand and sort of the tenant's ability to pay more rent. And it really goes down to a number of facts. Number one, by and large, these locations truly are mission-critical to our tenants. In other words, if they didn't have the space in our portfolio within infill Southern California, they would really be unable to run their business, because they're disproportionately distribution and consumption driven, and they're distributing into the largest zone of population and consumption in the country by far, in infill Southern California. And so they really don't have other options.

And despite this being an expensive operating environment in Southern California, it's been that way for many, many decades. And so if tenants by and large had the luxury of moving to a lower cost location outside of Southern California, they probably did that on average, a 15, 20 or more years ago. And then it goes deeper into some of the dynamics that are occurring within our markets and within the customer base. And we're seeing -- as a result of new technologies, as a result of some of the ancillary opportunities that are created through e-commerce, you're seeing both legacy businesses driving new demand, and we're seeing new technologies and new business models emerging that are driving new demand. And I'll just give a couple of quick examples. Think about some of your legacy largest retailers in America, Target, for example. They have fundamentally altered their business model. They didn't want to be the next Sear's. And so they've actually went from owning operating out of only large big-box supercenters. Now they open and operate small scale, 20,000 square foot, even smaller, stores in urban and smaller towns.

Standard -- service that they have to put in place what they call sortation centers, which are small warehouses, within the infill markets that service some of those smaller footprint stores. And those are Rexford warehouses. And that's demand that did not exist even 5 or 7 years ago.

And then you've got manufacturers, who had to adjust their business model. And I recall the story that happened to me having to repair a garbage disposal at my house and calling on a Sunday, the manufacturer's number on the machine, and they're offering to sell me directly through e-commerce on their website at a 50% discount compared to what I could buy their same garbage disposal at 1 of the large-scale retailers. So -- and then we also see new business models emerging. And these are really exciting for Rexford, because -- and Rexford by the way is really positioning ourselves to get in front of this new tenant demand. When I came with a few examples, servicing some of the verticals, consumer staples, daily necessities, we're even seeing companies that want to distribute perishables, frozen goods like ice cream that really can't be transported more than, say, 30 minutes and really substantial new demand for our portfolio.

And then you have new technology. For instance, the electric vehicle market that's been created over the last 10 years. Aerospace and Space technology, which is the focus here in Southern California. So it's a really -- if you take a holistic look at the marketplace, there's a set of really interesting and exciting long-term drivers of demand. And of all those sectors that I described in those examples, those tenants weren't saying, oh, gee, rents just a small percentage of economics. Therefore, I can pay more. They were saying, in order to survive or in order to execute my fundamental business model, I need this location. And it's not so relevant what I need to pay for it. So that's kind of where we're at today.

Our next question is from Blaine Heck with Wells Fargo.

Howard, you guys have consistently highlighted how fragmented the ownership of warehouses is in your markets and the low level of institutional ownership. Do you think anything has changed during the pandemic or coming out of it that would make the private owners more or less willing to sell their industrial buildings or even other properties that could be converted into industrial?

Blaine, thanks for the question. Things are not too different than they've always been, right? So there's no secret that Southern California has been the best performing market in the country for many years. And we have a different set of capital that's now decided that they have to own industrial and why not do it here in Southern California, which really -- from our standpoint, really just emphasizes how we started our company and the business model we chose, where we're really focused on creating these off-market opportunities, as you alluded to, from these private individuals.

Surprisingly, our system is actually performing better even with this focus on values increasing and more capital chasing industrial transactions. On average, we've purchased about 70% of our transactions since IPO being off market or lightly marketed. And today, that's looking more like 85% in the more recent year and even in the prior year. So we're getting better at what we do. And surprisingly, we still encounter people that don't even use brokers and don't even look to a broker for advice. One of our larger transactions we closed in the quarter was a 360,000 square foot building in the Inland Empire West. And we bought that property at probably 40% discount to probably what it would have traded for on the open market. And the seller was able to transact confidently without a broker. It was somebody in the real estate business, a developer, a long-time owner and they were just in the disposition mode on a particular asset.

But our strategy still is involving brokers in most all of what else we do just to support owners and help them understand the markets. But no, I mean, look, there's really -- the widely marketed transactions are really where the opportunity is for the institutional type owners to penetrate into the marketplace. And with those type of acquisitions, we're starting to see cap rates trading in the 3.5% range for a quality product that's marketed, which based on the numbers you're hearing us quote today, is almost 300 basis-point differential of where we're stabilizing the assets on average we're buying, especially the value creation opportunities that we have in our portfolio.

Great. That's really helpful. And just sticking with acquisitions. You guys have recently acquired several outdoor storage facilities for, I think, redevelopment once the lease expires. Can you just talk about your appetite for more covered land plays or nontraditional development opportunities? And what's driving that? Is that just the scarcity of other deals on the market? It sounds like you guys are getting plenty of looks at deals. Or is it maybe better pricing for those deals that might not be as straightforward?

Well, it's probably a little bit of everything you're mentioning. During the quarter, we acquired 3 industrial outdoor storage sites, about 108 acres. And those came in at 4.4% yield. And as we stabilize those over the next few years, that yield is going to grow to about 5.8%. So those are attractive yields. Those are sites that -- sure, long term, you might consider as a covered land play, but there's an even greater scarcity of outdoor storage type property in the Southern California marketplace, and there's an extraordinarily high demand and users chasing those.

During the quarter, 1 of our stabilizations was a 4.5-acre site in the South Bay, where we literally removed, I think it was almost 100,000 square feet of building from the site, preleased it to a company using it as a container storage yard, and achieved, I believe, it was a 6.2% stabilized yield on total cost. So that's a strong yield. I mean that's almost better than you can do on some of the buildings in the marketplace. So there's a place for those type of sites in our portfolio.

And then as far as covered land plays, we consider that a little bit different than these outdoor storage sites. During the quarter, we bought 5 properties, about 70 acres, about $286 million worth. And those are properties that we have a little bit longer view in terms of getting to the land in order to develop it. And on average, those land sites were fairly spread out from San Diego to Inland Empire, in the infill LA markets. And on average, those were about $94 a square foot that we paid on the land sites. And those markets, in the infill markets in the entirety today, if you look at the average cost of land, that's about $125 a foot. So we bought those at about a 25% discount to overall what land values are. And those came in at about -- on a blended area basis at 4.8% initial yield and then down the road being able to stabilize at over 6%, at about a 6.4% return. So those are fantastic opportunities. We're getting paid handsomely to wait until we can redevelop the sites. And so yes, we'll continue to buy those as well as the outdoor storage sites in the marketplace.

And if I can really quickly follow-up on that. In your remarks, you mentioned you currently have $300 million under LOI or contract. Can you just segment that out into how much of that consists of currently functional industrial buildings? How much of it is more of a redevelopment play and how much you might put in that covered land play bucket?

Yes. Well I'd love to, these are transactions, some of which are still in due diligence. And so it's a bit early to be commenting on what we might be buying in terms of the mix. But we're going to continue to report as we always do as we close those transactions, and give you full details in our next quarterly update.

Our next question is from Connor Siversky with Berenberg.

I just want to zero in on Page 13, where you quote this 27% gap from your existing rents to average market. I appreciate that color, first of all. This might be a stretch here, but I'm wondering for the leases expiring in 2022, can we work under the assumption that these would be older leases signed with the market rents are lower than the current average and then below the [1,167] number quoted for your in-place ABR?

Connor, Yes, I mean the in-place leases, that's blended throughout the entire portfolio. And if we were looking just the 2022, the mark-to-market is actually a bit higher. So it's closer to 30%.

Okay. Okay. That helps. And then in 1 of your answers before, you had mentioned this 20% increase in housing stock. Is that for California in general or LA specific? And then as you mentioned that they were planning to rezone industrial usage for that new housing stock?

Yes. So it is California-wide and where you have major metropolitan areas, it's really helping to try to address some of the housing and homeless issues as well, driving that. And it's not so much that they're targeting industrial areas to rezone them, but what they're looking at is doing zoning overlays or making adjustments to the zoning where you can enable some further development. And that's very much in process. We're starting to see it already coming to vote and coming to play in different areas, but it's really in the earlier stages. So it's just hard to know at this point how much of that will include areas that are including industrial zone land.

But if you take a look at the infill market here in Southern California and the areas where we own and operate, it's amazing the density of multifamily and even single-family homes in and among these little industrial pockets. So clearly, that represents some opportunity.

Okay. I might also just add to that. We've had conversations with multifamily developers and for the most part, you don't see a lot of affordable type of housing being developed because of the costs. In fact, we talked to someone about being really creative and trying to hear how to put some housing on top of industrial. And they said, you give us your rooftop for free, and we can put some housing on it. So it's going to take some support from the government in 8 different housing agencies to find a possibility to deliver land at very, very low cost or free to deliver some of the vast need of housing that we have here.

So while we expect to see a lot of housing developed, it's not just a slam dunk to start scooping up all the industrial land to build housing on. The kind of housing we need here can't readily be developed based on the current industrial land values. It's going to have to be subsidized.

Okay. That's an interesting dynamic for sure. Just last 1 on the development pipeline. I know this question has come up in the past, but -- are you seeing any continued pressure from labor shortages or the cost of labor? And is this having any kind of real-time impact on project time lines?

I wouldn't say that the labor or shortage of labor is really a delay in terms of project time lines. It's really just typical thing in Southern California, which is the entitlement process. It can be long and arduous. And there are some surprises that you hear in there. But once we're ready to build and execute on a project, we really haven't experienced any type of a delay related to labor.

Our next question is from Mike Mueller with JPMorgan.

I was just wondering if you can tie this together. You talked about market rents being up 24% year-over-year, and the in-place portfolio mark-to-market is 27%. I mean it just -- if I think back to last year, I don't recall you talking about a mark-to-market that was barely positive. So I'm just wondering if you can just talk about that dynamic a little bit.

Maybe I'll just comment real quick and Laura, you can fill in some of the details, if you like. But I think the mark-to-market has been material for many years actually. I think historically, maybe it was in the low teens. If you go back 1, 2, 3, 4, 5 years, it's probably been in the low teens. And we're just seeing -- we're seeing that acceleration here due to, a, the quality and location of our product in conjunction with the acceleration in market rents. So it's not too surprising. And I think what's really interesting is that many of these releasing spreads that you're seeing at Rexford and when we look at the mark-to-market in the portfolio, those are rents that have already rolled within the last -- in many cases, 2 to 3 years.

And so if you look at the cumulative increase in rent for some of these tenants in the market, it's really somewhat impressive. And I think the -- it's really important to look at the current market rent acceleration in more of a historical context, because the growth in rents over the long term has really not been that substantial in the industrial market in Southern California. In fact, Howard and I, 20 years ago, 15 years ago, we consistently asked ourselves why aren't we seeing more market rent growth and this is going back 15 or more years. And because we've had a supply demand imbalance for many decades.

And I think today, we're at a point where the drum is so tight and the more sophisticated ownership like Rexford in the market can now sort of drive pricing. And because tenants really have almost no alternatives if they were to lose control of their space. And -- but frankly, if you look back 30, 40 years, average market rent growth was around 3%, sometimes just under, sometimes a little lower, but if you look at the longer-term average around 3%. And so we're playing a little bit of catch up today. And I think in the longer historical context, this rent acceleration really does make sense. And frankly, if you look at on a global and historical basis, other markets that are very urban and dense, it's not -- these are not shocking market rents. In fact, we're seeing that all indications are a point of the fact that we've got a long runway ahead. So it's a really interesting time right now for us.

Yes. One other thing is that Michael said on that -- to put that 27% mark-to-market into perspective, last quarter, the mark-to-market on our portfolio is 19%. And the prior -- the quarter before that, so in the first quarter, it was closer to 12%. So we've certainly seen -- as we've seen market rents accelerate, we've seen an acceleration in our portfolio mark-to-market as well.

Got it. Okay. And 1 other question, too. On the Q3 acquisitions, I think you mentioned there was an in-place yield of about [$4.4 million]. What was the split between stabilized product that was -- that's largely stabilized versus something that's a little bit more value-add to kind of blended that $4.4 million ?

Well, I think about 46% of what we bought, we consider value add, but in this quarter, a lot of it came in with income in place. I don't have the exact breakdown in front of me. We can certainly get back to you on that question. But -- it obviously varies from quarter-to-quarter as well in terms of those value-add percentages and in-place income or a lot of times we're buying vacant property. But unless Laura, you have that, I can get back to you on that.

Yes, I do, Howard. Mike, the value add that was, I'd say, a lower going-in initial yield was about 1/4, about 25% of the 3Q acquisition.

Our next question is from Dave Rodgers from Baird.

Just 1 question left for me. I wanted to talk about maybe where tenants when they do leave what's happening to them. And I don't know if we talked about it before, but it looked like rough numbers, you're on an annualized rate of about 2 million square feet of tenants that probably go somewhere else, leave, close shop, whatever the case might be. You've done excellent backfilling that space or redeveloping it. So that's not the issue. I guess, is there anything instructive in these kind of tenant exits that are telling you kind of where they're going, where their next location might be for you, submarket, et cetera. Anything instructive out of that? Maybe that's for Michael, I'm not sure.

I think it's a great question, actually. And I don't know if there's really a story to be told there. I mean we are -- at the same time, we're seeing tremendous expansion within our portfolio from our tenants. So I don't -- I mean Howard, do you have any thoughts related to anecdotally where some of those tenants might be going?

Yes. I mean some of the moves are within our own portfolio at this point, Dave. We've got a very large portfolio -- and that actually has been a focus of the team lately is to expand tenants and relocate them within the portfolio. So we're doing quite a few of those type transactions. And so those aren't really reflected in the retention rate, though, where we actually keep a tenant or move them into another vacancy. And some of it is short-term tenants. 154,000 feet of move-outs this quarter were just temporary tenants, we put into a couple of the recent -- repositioning acquisitions that we intend to take down for a period of time as we do the repositioning work.

So I think really an answer to your question is don't necessarily look to the retention rates to tell the whole story on what's happening within the portfolio, because a lot of it is really our choosing and we're always trying to create an income stream on any space that we have. So today, we're actually having a lot more success with filling short-term tenancies. So those will be reflected in a lot of the move-outs as well.

Put another way, a lot of those tenants you're asking about would have preferred to stay in the space. And it's uncertain if they're able to find an alternative to the extent they didn't expand to another Rexford space.

(Operator Instructions) Our next question is from Chris Lucas from Capital One Securities.

I guess maybe just a follow-up on the question about the tenant move-outs and sort of any pattern there. I guess I'm curious as to from the assets you're buying from, is there any change in sort of how that mix or reasons why people have been selling relative to, say, 3, 4, 5 years ago?

I'd say the 1 catalyst that we continually mentioned is this generational change in the ownership, where you have this huge aging population of either private owners or partnerships with patriarchs of the families and the partnerships, just getting to the point where they're doing estate planning and we continue to buy assets from a lot of those type of owners. So for the most part, that is continuing to grow.

And the other side of it also is the value of industrial real estate today. A lot of people that we approach on the sale really had no idea their assets are worth -- what the product is transacting for in the market today. And so we're creating that catalyst to convince somebody that they should be selling and taking advantage of this market right now. So -- but for the most part, not a lot has changed on our end in terms of how we source these. The data that we research does change quarter-to-quarter. These catalysts vary a little bit depending on what's happening in the market and whether there's a particular industry that's thriving or waning, but the methods that we deploy really continue in the same manner.

And maybe I'll just add to that a little bit. I think that what Howard mentioned in terms of we're pursuing opportunities with catalysts, and it's really Rexford's outbound our internal research and our outbound outreach directly to owners and the brokerage community. And I think it's a function of the fact that we're deeper and better in the markets today than we were even a year ago, let alone 5 or 10 or 15 years ago. And whether measured by the quality of our research, our lead generation, the quality of our team and also Rexford continues to grow and mature. And so the value proposition, for instance, to an owner to do an upbeat with Rexford today. It's kind of an amazing value proposition for those owners.

I mean here we are this really demonstrated the power of the business model. And these are long-time owners who really love and appreciate their infill industrial assets, and they really don't want to dilute that interest into some national or global portfolio because as soon as they trade their infill Southern California asset, for a portfolio -- an interest in a portfolio that includes any assets outside of Southern California, that's an immediate dilution in quality and future value appreciation. So they're very keen on transaction with Rexford. It's a unique opportunity to these owners. And that's why with the last few years, we've seen a pretty dramatic increase in the UPREIT activity, which also generally caters to some of these long-time owners that Howard mentioned that are experiencing this generational shift in ownership that is truly of historic proportions, by the way.

So it's an exciting time for Rexford because not only are we becoming deeper and better in the markets and better at what we do, but the market in many ways it's flowing into our arms in a sense, the best part of the market. And as I mentioned in my earlier remarks, that part of the market that was earliest developed, that comprises -- there's over 1 billion square feet of product built prior to 1980 that truly has the most incredible range of opportunities for us to go in and resolve functional obsolescence to really drive a lot of improvement in the assets and the functionality and to drive cash flow and value creation. So that -- it's just an exciting time in the market. And that's what Howard and I, we often say, although we really enjoyed growing the company to where it is today, we still feel like we're barely out of the starting gate in terms of the opportunity to continue to do what we do and do it better into the future.

So let me ask this 1 other question then, which is I mean, is the picture, the outlook looks amazing, right? So what do you worry about? What are the things on your CEOs that you sit back and take what if -- what are we worried about?

Well, we can -- we -- Howard and I, we define this business. We created this business together. And when we created the business, we said, let's create the most bulletproof business model that we could possibly imagine. And when we did that, we thought of all the possible risk, market risk, all the sorts of things you naturally think about. And that's why you see the business model as focused as it is on infill Southern California with an incredible ability to create value. And that ability to create value is going to further distinguish the company during periods when we don't see market rent growth the way we do see it today across the United States. Because we have an ability to create value and to drive cash flow growth even during long periods of time when there may be no market rent growth. And that's for the physical improvement in appreciation of the assets that we execute on.

And so I think the business model we've created has tried to mitigate the things that we can't control. Like market risk, et cetera, of the economy. The things that we can control is that personally, I spend my nights staying up thinking about and worrying about it. And the #1 thing we can control, which is also the single greatest determinant at the level of our execution, our success or our failures going forward. And that's our people. And so we are obsessed about our people and the development of our people, that they feel respected, that Rexford is a place where they can flourish and grow like at no other enterprise. And so that is a single grade of focus, frankly, at this point in time for us -- for me. Howard, do you have any thoughts?

No, just nothing, I agree with you. I mean we can't tell you how much time we spend with our people, Chris, and the focus because that is the business. It's fantastic. We own 35 million feet of buildings in our market, but as Michael says, without a great team of people, none of this would be possible.

We have reached the end of the question-and-answer session, and I will now turn the call over to Michael Frankel for closing remarks.

I'd just like to thank everybody for joining us today. And we look forward to reconnecting with you in about 3 months. And in the meantime, we wish everybody a fantastic Halloween and holiday season and wish you all well. Thank you so much.

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