Rexford Industrial Realty Inc (REXR) 2022 Q3 法說會逐字稿

Greetings, and welcome to the Rexford Industrial Realty, Inc. Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Aric Chang, Senior Vice President of Investor Relations and Capital Markets. Thank you. You may begin.

We thank you for joining Rexford Industrial's Third Quarter 2022 Earnings Conference Call.

In addition to the press release distributed yesterday after market close, we posted a supplemental package and investor presentation in the Investor Relations section on our website at 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 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 this call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP reconciliations and an explanation on 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. We will make some prepared remarks, and then we will open the call for your questions.

Now I turn over the call to Michael.

Thank you, Aric, and thank you all for joining our Rexford Industrial Third Quarter 2022 Earnings Call. We hope you are well. Following my remarks, Howard will discuss our transaction activity and then Laura will provide an update on our financial performance and guidance.

I'd like to begin by acknowledging the Rexford team. From an operational perspective, our team contributed towards enabling 1 of our strongest quarterly and year-to-date performances on record. Compared to the prior year quarter, we grew core FFO by 45% and increased FFO per share by 16%. Year-to-date, we increased core FFO by 52% and grew FFO per share by over 23%, continuing a sustained level of sector-leading performance.

Our infill Southern California industrial markets continue to demonstrate strong fundamentals with historically high market occupancy at 99%. The ongoing supply/demand imbalance within our infill markets is expected to persist into the foreseeable future due to a dearth of developable land and diminishing supply over time. The extraordinary pace of market rent growth moderated during the third quarter but remains strong and well above historical levels.

Our portfolio continues to operate at or near full occupancy and our leasing metrics demonstrate a robust landlord's market. Our team drove extraordinary leasing spreads of 89% on a GAAP basis and 63% on a cash basis, reflecting acceleration over the prior quarter. Leasing volume also accelerated to 1.7 million square feet of activity for the quarter. Our contractual annual rent increases for leases executed during the quarter increased to 4.4% on average.

Irrespective of our team's extraordinary results, today's broader economic indicators and geopolitics underscore the importance of our thoughtful approach to operations and investments.

Looking forward, Rexford remains well positioned to continue to deliver substantial NOI growth. We project embedded incremental cash NOI growth of 40%, equal to $170 million within our in-place portfolio over the next 24 months based on today's market rents and assuming no further acquisitions. $77 million of this embedded incremental NOI growth derives from rolling expiring leases to higher market rents and through our contractual annual rent steps. $47 million of projected incremental NOI comes from acquisitions closed since the beginning of the third quarter and an additional $46 million of incremental embedded NOI growth derives from our redevelopment and repositioning projects over the next 2 years.

With regard to external growth, Rexford remains well positioned with our low leverage, fortress-like balance sheet that enables us to opportunistically capitalize upon accretive investment opportunities that may result from market shifts or uncertainty. Our strong position also emanates from our exclusive focus on an infill Southern California tenant base. Our infill locations have proven through cycles to be critical to the operations of our tenants across an exceptionally diverse array of industries serving a regional economy that ranks as 1 of the largest in the world.

Our tenants are also operating within an infill market with exceedingly scarce available space. These factors contribute to what we believe to be the strongest, most stable and most dynamic industrial tenant base in the nation.

Finally, the extraordinary quality of our entrepreneurial Rexford team represents our greatest differentiator, executing together on a unique business model, driven by value creation within infill Southern California, the nation's highest barrier, the lowest vacancy, and most highly sought-after industrial market.

Tremendous thanks to the entire Rexford team for your continued passion and pursuit of excellence. And with that, I'm happy to turn the call over to Howard.

Thank you, Michael, and thank you, everyone, for joining us today.

I also applaud and thank our teams for their high performance. The sustained strength of the Southern California infill markets is evidenced by continued historically low vacancy levels and strong rent growth. According to CBRE, quarter-end vacancy across our infill markets was 1%. Based on Rexford's internal portfolio metrics, market rents for comparable space continued to increase and are up by 39% over the prior year. The weighted average mark-to-market for our entire portfolio is now estimated at 72% on a net effective basis and 63% on a cash basis.

Regarding the acquisitions market, we have seen some moderation in industrial transaction volume. However, transactions in our markets continue to achieve record pricing levels, despite rising interest rates and some modest expansion in market cap rates. Marketed quality assets continue to see multiple offers with some recent closings and accepted offers still occurring at cap rates as low as 3%, a reflection of our market's long-term differentiated fundamentals and performance.

At Rexford, we continue to leverage our proprietary market access by selectively focusing on the highest quality, most accretive investment opportunities. During the quarter, we completed $977 million of investments, with 100% located within prime infill Southern California industrial markets.

Subsequent to quarter end, we also closed on a vacant $22 million, approximately 60,000 square foot Class A building in the City of Industry, where we project an unlevered stabilized yield on total cost of 5%. This brings our year-to-date activity to $2.1 billion of investments, that in aggregate, are projected to generate a 4.7% unlevered stabilized yield on total cost.

In addition, we currently have a pipeline of over $250 million of transactions under contract or accepted offer, which are subject to customary closing conditions. These prospective investments are projected to generate an aggregate stabilized unlevered yield on total investment of 5.5%.

Moving to repositioning and redevelopment activity, we have $1 billion of repositioning and redevelopment projects in process or projected to start within the next 24 months. These investments are expected to generate an aggregate 6.7% unlevered yield on total cost. During the quarter, we stabilized 2 repositioning projects, a 106,000 square foot building in the L.A. Mid County submarket, where we achieved a stabilized unlevered return on total cost of 9.3% and a 124,000 square foot building in Orange County, where we achieved a stabilized unlevered return on total cost of 14.4%. Both projects were stabilized ahead of schedule and at about 100 basis points higher yield than projected as recently as last quarter.

Our thoughtful capital allocation, combining $2.1 billion of year-to-date acquisitions plus our $1 billion of near-term repositionings and redevelopments, is projected to generate a 5.4% unlevered stabilized yield on total investment. This aggregate return reflects an approximate 175 basis point premium over current market yields for fully stabilized assets leased at today's market rents.

Now I'm pleased to hand the call over to Laura to discuss our financial results.

Thank you, Howard. Our Rexford team produced another quarter of outstanding results with third quarter exceeding expectations.

Same-property NOI growth for the quarter was a strong 7.2% on a GAAP basis and 9.7% on a cash basis, driven by our extraordinary leasing spreads. We continue to operate at near full occupancy with average same-property occupancy at 98.6% in the quarter and in line with our guidance expectations. Record leasing spreads continue to contribute to our outperformance with year-to-date leasing spreads of 61% on a cash basis and 82% on a GAAP basis.

Annual embedded rent steps in our executed leases have risen 7 consecutive quarters to 4.4% in the third quarter, reflecting our dynamic leasing environment and the strength of our tenant base. Bad debt in the quarter and year-to-date is essentially 0, highlighting the strong credit and stability of our diverse tenants.

This solid operating performance, combined with internal and external growth initiatives, drove core FFO per share growth of 16% over prior year to $0.50. Our sector-leading growth is the result of Rexford's disciplined capital allocation strategy. At the foundation of our highly selective investment process and extremely conservative underwriting assumptions, is our focus on investments that are accretive to cash flow and generate long-term NAV growth, while also maintaining our unwavering commitment to a fortress balance sheet.

During the quarter, we received rating upgrades to BBB+ from S&P and Baa2 from Moody's, a recognition of the strength of our capital allocation and balance sheet strategies.

As of September 30, net debt to EBITDA was a sector low 4.1x and within our long-term target range of 4 to 4.5x.

Now turning to capital markets activities. During the third quarter, we sold 5.1 million shares of common stock through the ATM on a forward basis for $335 million at an average price of $65.43 per share. At quarter end, we settled 11.5 million shares of common stock associated with prior and current quarter ATM sales for a total of $697 million in net proceeds. In July, we closed on a new $400 million term loan expiring in 2024 with two 1-year extension options, and we executed 5 swap transactions related to our $300 million 5-year term loan that closed in May. These swaps fixed the interest rate at an effective 3.7%.

As of September 30, we had $1.2 billion of total liquidity, including $37 million of cash on hand, $189 million of forward equity proceeds remaining for settlement and full availability on our $1 billion revolving credit facility.

Finally, I'll provide an update of our full year guidance. We are increasing our 2022 core FFO guidance range to $1.93 to $1.95 per share from our previous range of $1.87 to $1.90. Our revised guidance range represents 18% year-over-year earnings growth at the midpoint. As a reminder, our guidance does not include acquisitions, dispositions or related balance sheet activities that have not closed.

We have provided a roll-forward detailing the drivers of our revised guidance range in our supplemental package. A few highlights include: same-property NOI growth has been increased to 9.5% to 10% on a cash basis and 7% to 7.25% on a GAAP basis, both up approximately 115 basis points at the midpoint. Assumptions driving same-property growth include full year cash leasing spreads of approximately 60% and GAAP leasing spreads of approximately 80%.

Our projection for bad debt as a percent of revenue is now 0 for the full year. Same property expense growth is projected to be lower than prior expectations, contributing a 15-basis point improvement to same-property NOI guidance.

Looking forward into 2023, we're exceptionally well positioned for superior internal NOI growth. The mark-to-market on our 2023 expiring leases is approximately 65% on a cash basis and 80% on a net effective basis. Annual embedded rent steps throughout our entire portfolio are 3.2% and growing. We have nearly $200 million of repositioning and redevelopment projects that are projected to stabilize in 2023. These projects are expected to generate an aggregate unlevered stabilized yield of 7.1% and 2022 year-to-date acquisitions are expected to contribute approximately $80 million of NOI in 2023, representing approximately $35 million of incremental NOI when compared to 2022.

We look forward to providing detailed 2023 guidance with our fourth quarter earnings report.

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

(Operator Instructions) Our first question is coming from the line of Blaine Heck with Wells Fargo.

I was hoping you could talk a little bit about the types of tenants that are creating the most demand across your portfolio today. And maybe you can touch on tenant size and industry. And then also, if you're noticing any differences in demand by submarket.

Blaine, it's Michael. Thank you so much for joining us today. And it's a great question. The tenant base in terms of incremental demand is amazingly diverse today. It's coming in from consumer products, health care, electric vehicle industry. There's still e-commerce-driven businesses that represent significant demand, for instance, in the prepared food delivery area. We see aerospace. It's really an incredibly diverse array of tenants.

So I think that's 1 of the true attributes and long-term characteristics of the market.

Yes. I guess related to that and on the other side of the coin, are you seeing an outsized impact from higher rates and labor costs on any particular tenant profile in your portfolio? And I guess, how do you think those tenants would fare in a recession?

I think -- I mean, we can talk a lot about the tenant base. We're not really seeing any direct impacts from increased costs in terms of the tenants' fundamental need for the space, for the lease rates that they're paying for the space. As you can see from our leasing spreads and the contractual rental bumps that we're locking in, they continue -- the tenant base continues to demonstrate pretty substantial price elasticity in terms of their ability to pay more rent.

And I think what's interesting is, we were concerned about where the market could go, given sort of the dark clouds on the horizon, the general economy naturally. And when we think about what we experienced during the great financial crisis, for instance, it was somewhat surprising, somewhat counterintuitive in that our tenants fared far more strongly than we anticipated, for instance, in to the early 2009. And I think what we learned then was that these locations are truly essential to the operations of these tenants.

So their businesses may become tougher due to higher interest rates, inflation, lower demand, et cetera, but generally speaking, they believe that they still will have a business as they emerge through the cycle and they also understand that their business requires these locations. And so they are just incredibly sticky tenants, and we've seen that through cycles. We saw that again through the pandemic, when the local and state governments gave our tenants ability to not pay rent. And the result was, they all paid rent essentially, because they didn't want to lose control of their space, as they would have lost their options to renew if they had not paid their rent.

So I think through cycles and we can go back to the 2000 cycle, et cetera, but I think through cycles, the tenant base has demonstrated a level of resilience that is truly exceptional and differentiates the marketplace.

Michael. That's very helpful color. Just switching gears for my last question. You all were very acquisitive again this quarter despite that rising cost of capital that we're seeing across the board. But we did notice that the amount of investments under contract at this point were a little lower this quarter at $250 million versus $500 million when you reported second quarter results. So I'm wondering if that's a sign of you guys being a little bit more conservative with acquisitions in the future. And I guess, what signals in the market might make you guys pull back?

Blaine, it's Laura. Thanks for joining us today. I think it's really important to think about how we make cost of capital decisions. We take an extremely selective approach to capital deployment. And so when we evaluate opportunities and our cost of capital, we are selectively focused on opportunities that drive cash flow growth and on an [accretive] basis and long-term NAV growth. We take a long-term view of our cost of capital, and I think it's really important to look back and think about how Rexford successfully executed on our business model at points in the cycle where we were experiencing a much higher cost of capital than we see today.

And during those times, we grew Rexford on an accretive basis and actually even in the face of little to no market rent growth, which, by the way, is what our business model is built upon, is the ability to create value and not reliant on market rent growth, really through our proprietary acquisition approach, through -- off in lightly marketed transactions and through our repositioning redevelopment expertise.

So when we think about capital allocation, we take a holistic approach to how we invest capital. And in aggregate, if you look at our 2022 investments and that includes acquisitions as well as our repositioning and redevelopment, those are projected to generate a 5.4% stabilized yield, which is well in excess of market yields today. I think it's also important to consider the assumptions behind our stabilized yields. When you look at these stabilized yields, these are initial stabilized deals.

So when you think about that, the long-term returns will far exceed these initial stabilized yields. And that's driven by the annual growth that's embedded in those leases. And today, this quarter, the annual embedded -- the average annual embedded rents in our leases is 4.4%. So that's contributing to the stabilized yields continuing to grow considerably in the future. And I think secondly, our underwriting assumptions continue to be conservative relative to market fundamentals. And that also will contribute to further outsized growth above those initial stabilized yields.

But as you said, I mean, we remain cognizant of our cost of capital. And you can see that within the yield targets, as you mentioned, the $250 million, and we're projecting that $250 million projected yield of 5.5%. And that compares to our year-to-date yield of 4.7%. So we are extremely focused on accretive capital allocation that drives shareholder value over the long term.

Our next question is coming from Camille Bonnel with Bank of America.

I see a majority of the space leased to the county of L.A., who is 1 of your top tenants will be expiring next year. Is there any early read on this lease? And what's the mark-to-market opportunity here, given the ABR is nearly $27 per square foot?

Camille, this is Howard. Nice to hear your voice. That was a recent acquisition that we bought that we actually have planned for redevelopment. And there's a high probability that the county will renew in that space. They do have an option, but the exercise period has not come into play yet. So frankly, we're getting prepared in terms of how we would execute on the redevelopment. And if they do renew, that would be a perfectly fine and very accretive outcome as well.

Thank you for the color. And my next question is, it looks like a majority of the redevelopment projects that were supposed to start this quarter were pushed out and 2023 starts are slightly down, as 1 project is falling into the next year. Is this a reflection of the macro backdrop? Or were there any other factors driving the decision to delay these starts?

No, Camille, it's Howard again. I think 1 of our greatest challenges is working through the permitting and entitlement with the cities and municipalities. And we push them as hard as we can. We're not looking at a risk. Can we actually move forward on these projects? It's just more about waiting for them to process. A lot of these cities still aren't back in their offices, people work remotely. And it's just added months and months of delays to getting these permits. And frankly, we just have trouble projecting that accurately upfront. And so that's why you've seen things get pushed a bit here and there.

Our next question comes from Dave Rodgers with Baird.

I wanted to ask about 1 of the comments you made in your prepared remarks about moderation in rent growth, I think, is what I had heard in the third quarter. Obviously, recognizing trees don't grow to the sky forever. But I'm curious, what's driving that, just given some of your broader macro comments about how strong things still are? Are you getting pushback from tenants, a thinner tenant group? Is there something driving just kind of the pushback on the consistent rent growth?

Hey, thanks so much for joining us today, Dave. It's great to hear your voice. It's Michael. Yes. I don't think -- I think what we're seeing is continued strength from the tenants. I think we never expected the extreme rent growth that we were experiencing period-over-period up until very recently to continue. Frankly, it just was not sustainable. So it's hard to say that -- I think that, obviously, there are concerns to the general economy, but we continue to see a lot of activity on our spaces. It's probably not quite -- if you want to say what is the 1 driver of a slight moderation? Probably we're not seeing the same extreme frenzied level of tenants literally outbidding each other on most opportunities for our significant sized space.

So it's still a lot of tenant activity, well above historical levels of demand in terms of pricing and debt, low downtime, et cetera, and velocity. But I think it's just a little bit of a reversion out of that extreme frenzied pace that we saw earlier in the year.

Yes. And I'll add to that, Dave. I mean we've seen year-to-date market rent growth within our portfolio of 24%, which is still an extremely strong rent growth. And I think that also when you look at the annual contractual rent bumps that we're executing on our new -- on our leases at 4.4%, and that number has continued to increase, actually increased for the past 7 consecutive quarters, that 4.4%, it compares to 3.6% last year. So we do continue to have pricing power in the market, because of the strong demand.

And then, Laura, maybe a follow-up on your answer to the earlier question about just your development yields -- or I'm sorry, your acquisition stabilized yield 5.5% versus kind of 4.7% year-to-date. In the near term, do you all anticipate maybe taking on more risk in terms of just buying more rollover risk, more vacancy in the portfolio with that longer-term view of kind of getting those margins or yields, but do you have to do that by taking a little bit more risk here in the near term? Or do you not think that's necessary?

You want me to help you on that one, Laura?

Sorry, yes, Howard, go ahead.

Yes. So Dave, we're highly focused on the right opportunities in the marketplace. We're very focused on physical value. And sometimes, we don't mind taking a little bit lower yield if we're going to stabilize an asset at a substantially higher yield that's highly accretive. But that said, we're very aware of our cost of capital. And I think the yields that you see in that pipeline right now are a little more indicative to how we're thinking about how we approach the market as we go forward.

And I'll just add to -- go ahead, Laura. I'm sorry.

Sorry, Michael. Yes, Dave, I'll just add to that. I mean I think that we're certainly not taking on more risky deals. I think it's really a function of how the Rexford business model was built and it's built upon creating value over and above market yields through our proprietary acquisition approach and our repositioning and our redevelopment. So our stabilized yields represent healthy spreads of recurrent market yields because -- and really, this is what differentiates the Rexford strategy and is what we like to call that Rexford Alpha. And it's really that ability to generate those above market yields.

And that's been -- we've been doing that historically. And it's interesting if you go back and you look at over the past 5 years, I think our earnings growth per share is a great indication of that Rexford Alpha, which takes into account the cost of funding. So over the past 5 years, our FFO CAGR has been 15% annually, and that compares to 9% for the peer group. And I think even more indicative of the Rexford Alpha is the 3-year FFO per share CAGR and that reflects a period of time that, obviously, the entire industrial market has been performing exceedingly well.

And over the past 3 years, our earnings growth CAGR has been 22% compared to the peer average at 12%. And so I think that represents a continued expansion of that Rexford Alpha and our ability to create outsized value. So I think the 5.5% is a function of our ability to create outsized -- generate outsized return above those market yields and certainly not a function of us taking on more risk.

Our next question is coming from Craig Mailman with Citi.

I wanted to follow-up. I don't want to beat the dead horse here, but I just want to follow up on the cap rate discussion, the transaction market discussion. Earlier in the call in the prepared remarks, you guys made the commentary that valuations are not really moving, at least in the spot market, but you're getting 80 basis points improvement on stabilized yields. So a couple of kind of follow-up questions to that.

Number one, relative to going in cap rates versus your initial stabilized, kind of what's the delta on that? And has the -- what's the general timeframe of that? So I'm just trying to get a sense of how much initial AFFO dilution that maybe given kind of the rising cost of capital for you in the period?

Craig, it's Howard. Yes. So cap rates obviously moderated and expanded in the marketplace. Before directly answering your question, I'm just going to point out that what we've seen through prior cycles is the increase in cap rates doesn't necessarily follow lockstep to how interest rate movements occur. Southern California, just because of all the fundamentals you're well aware of, tends to perform a lot differently than markets that are not land constrained.

And as far as the going in cap rates, et cetera, it's really deal-specific. And it would really depend on the upside or the value creation opportunity that we're able to generate in the property, right? So -- and what I mean is if we're buying something and we have limited value creation, obviously, the cap rate we're going to require at this point in the cycle is going to be substantially higher than, let's say, a near-term repositioning that moves us up to some of the yields you've seen us achieving recently, which you look at the current repositioning and redevelopment portfolio, having a 6.7% stabilized aggregate yield.

We'll buy a vacant property, as you know, or we'll buy something with a lower yield. And typically, if we looked at recent transactions, that timeline to stabilize is plus or minus in the 3-year timeframe.

So I think maybe another way to ask it is a 1 to 5.5% kind of from a 2023 AFFO impact or either going to be -- is that dilutive, neutral, accretive to your cost of capital? And how should we think about that?

Craig, it's Laura. Thanks for joining us today. Yes, Craig, I think what's really important to go back to what I was talking about earlier in terms of how we consider aggregate capital allocation. And so we think -- we certainly are thinking about how we're allocating capital across our entire portfolio. So it's not just our acquisitions, but also across our repositionings and redevelopments, and how those are going to contribute to our accretion and our ability to add value.

So when we think about kind of the bucket in which we're investing, we are looking at -- we are certainly looking at the fact that we want to invest in opportunities that are going to drive accretive cash flow growth. So that's our focus. And as we look at what opportunities -- as we look at bringing opportunities into the portfolio, we are very focused on making sure that we're driving that accretion.

So I guess maybe another way to ask it is as you guys were underwriting earlier this year, late last year, kind of what was the acquired return that you were underwriting to given your cost of capital versus today, with the cost of equity up 100% basis for your cost of debt up. Kind of how does that flow through to the underwriting model from an acquired return perspective? Because ultimately, cap rates are just about at your IRR, right? So just kind of trying to understand the relationship between how you guys think about your WAC versus how you guys think about the required return hurdle of acquisitions and also developments to a point, right? And then way or none on how you think about as you guys burn off the forward equity that's price much more transit than where the stock is today, how do you fund incremental capital deployment, even development side or the acquisition side as you head into '23 as that remains expensive and equity is also being more expensive?

Yes. I mean, Craig, I think it goes back to just how selective we are. And we're going to continue to be selective, even more selective and you're seeing that in our reposition -- in our current pipeline. We announced a pipeline of over $250 million, still significant, but on a relative basis, significantly less than the pipeline was, earlier this year. And that's not because there's not opportunities available. There are certainly opportunities available as we've talked about in terms of the market. But we've chosen to be very focused on making sure we're bringing in those opportunities that are accretive to cash flow and NAV.

And so when you think about required return hurdles, we've certainly moved those up. And you can see that in our 5.5% aggregate stabilized yields that we're underwriting to within that basket of acquisitions. So I think that's the -- I think what's really important, though, is that we're going to continue to be selective on how we allocate capital and how we fund that and obviously, how we fund those opportunities.

So it would be safe to say, we should not expect a similar level of acquisitions in '23 to '22.

So we don't give the acquisition guidance into -- we don't give that forward acquisition guidance. We currently are going to give it into 2023. But that being said, I mean it's really, Craig, going to be a function of the opportunity set. If we have the opportunity to bring in acquisitions that are driving cash flow accretion and NAV, and we can fund those on an accretive basis based on our long-term cost of capital, that's something that could be really attractive to us. So it all depends on the opportunity set in front of us, and we're going to continue to be selective.

Our next question is coming from Mike Mueller with JPMorgan.

I guess in your presentation and comments, you talked about private market cap rates still being seemingly in the mid-3s. And I guess the question is, is that mid-3s on rents that are substantially below market or rents that are generally at market? And just asking because just trying to compare that to that 5% stabilized yield expectation on the go-forward pool.

Mike, it's Howard. Nice to hear your voice. Yes. Those yields that I was mentioning, they did have some mark-to-market in them, but interestingly, they did have term left on them also. So we look at it more as just a testament to the strength of our market and really people perhaps looking through this current cycle. We've mentioned countless times about how the market is a bit different than others in that we don't have any land. It's nearly impossible to expand the supply base in most all of the infill markets here.

And today, you look around, and we just have a dearth of available quality space. And so people still expect stronger rent growth in Southern California, which has been proven through cycles, and they're willing to take a lower yield. Now I'm going to say most of those buyers are institutional. They're not as impacted by the changes in interest rates in the near term, but -- and same as prior comments, we've mentioned that really where you've seen some increase in cap rates is really more of a stabilized -- fully stabilized asset that does not have that right growth.

So if you were to look comparatively, you would see a bit of a stronger movement in those deals that do not have the ability to restabilize at a higher return.

Got it. Okay. So basically, implied in that mid-3s is, rents are not at market and there's some upside in there.

Yes. And -- but we've still seen stabilized deals that I was describing at market rates still occurring sub-4% or around that 4% number.

Our next question is coming from Chris Lucas with Capital One Securities.

Just 2 quick ones. I guess, Howard, when I think about -- this is the question. As it relates to the conversations you're having with your sort of target audience of potential sellers, what's that -- how has that conversation shifted, if at all, say, over the last 90, 120 days, given the change in the macro expectations?

It's interesting. Values have been increasing dramatically because of that upsized rent growth, but values still have some room theoretically to grow, because we still have strong rent growth. That sequential growth we saw in market rents over the past quarter, still really looks like it's 10% annualized rent growth. But the conversations, yes, of course, they're a bit different. Where somebody who is shooting for the moon and wants to sell their asset at a yield that had a lot to do with very low interest rates. Those conversations are quite a bit different. But they're still able to have a conversation and we are able to transact at a number that most people still never dreamed their industrial assets are even worth.

Rents obviously have moved substantially over the past couple of years. And even with moderated rent growth, and the work that we do with those assets, we were able to actually create value and that's not reliant on market rent growth. We're still able to buy some of these opportunities at numbers that the sellers think is quite favorable. So a lot of people are continuing to engage in those conversations.

Chris, it's Michael. Thank you again for joining us. I'd like to just to add to that a little bit to give you a flavor for what we're hearing from sellers right now, in particular, over the last couple of months, because we have seen kind of an increase or a shift in opportunities where sellers are coming either back to Rexford or they're coming to Rexford. For example, where they might have been running a sale process and their -- chose a buyer and the buyer is just not performing. And we've had a few instances like that where they actually come back to Rexford and we're able to reenter those processes. So they're only going to Rexford. They're not going to other buyers in the market. And we're able to capture those at substantially better pricing than where we even had been in some of those processes previously that we elected not to pursue, because the pricing had gotten away from us.

And we're seeing instances where buyers are coming to Rexford on that off market or a very lightly marketed basis, because they know that we are able to close. We're reliable. We have a tremendous brand and level of penetration in the market that is second to none. And it's affording us the opportunity to capture very exciting transactions without incurring any incremental extra risk, to Laura's earlier point, and drive those higher yields that you're seeing coming through the pipeline.

Great. And I guess just maybe a follow-up as it relates to maybe more specific opportunity. Are you seeing people willing to come to market now based on the higher rates, because they have a refinancing issue coming up, they have a or in the case of a deal that didn't go through because the buyer was using leverage? Is that becoming a more prominent component of sort of the opportunity for you guys? Or is that not really changed at all?

That's certainly 1 of the sort of market dynamics that we pursue aggressively at a point like this at this point of the cycle. And as you know, our research originations that drives all that off-market activity is constantly looking for catalysts in the market that could be a leading and owner to potentially need or want to sell or for more favorable opportunities for Rexford where the buyer competition is not able to perform as well. So that is certainly a driver of incremental opportunity today.

And last question for me just relates to sort of lease structure and maybe expense growth exposure. Are you -- can you just give me a reminder as to sort of the breakdown and your lease structure between triple net and then some modified gross or industrial growth kind of -- what's the spread there between the different lease structures and sort of -- how should we be thinking about expense growth going forward? I think Laura mentioned earlier, it was a little less than expected, but just curious as to sort of what your expectations on expense growth are at this point.

Chris, thanks for the question. Yes, as you mentioned, our expense growth guidance has continued to come in. As we started the beginning of the year, our expenses included about 110 basis point impact to increased expenses net of recoveries. Last quarter, that declined to 75 basis point impact and this quarter, it's declined to about 60 basis points for the full year. So really about half of our original projection. The drivers of the lower expense growth really driven by a couple of areas. One is around lower property tax expenses in the City of Industry, a property tax bond was repaid and eliminated the associated tax immediately.

And then we also have had lower nonrecoverable expenses and that's associated with overhead allocation that drove that improvement. That increase in overhead allocation, as a reminder, was related to the timing of hiring and increased labor costs this year. But as we continue to realize economies of scale, we've been able to decrease that protected growth really as a result of our team's focus on operating efficiencies and innovation.

In terms of your question around leasing structure, about 75% of our leases are triple net, and then with the remaining 20% or so -- with the remaining 20% or so that are modified gross and pretty minimal growth leases about 5%.

(Operator Instructions) Our next question is coming from the line of Jamie Feldman with Wells Fargo.

So Blaine and I were discussing this earlier, and we'd love to get your thoughts on it. Now that Prologis and Duke have merged, what do you think the impact is on the competitive landscape overall for U.S. industrial and then, I guess, even more importantly, in your markets? I know you play in a little bit of a different sandbox. But what do you think the big picture is with those 2 companies combined? And does it actually open up investment opportunities to with this position?

Jamie, great to hear your voice. Thank you again so much for joining us today. It's certainly changed the landscape. Rexford now has become the second largest industrial REIT in the country. And so it's been an exciting growth path for us since we took the company public in 2013. And frankly, we rarely competed against either Prologis or Duke on our acquisition activity, exceedingly rare. And I think this will probably further diminish the number of opportunities that we do compete directly head-to-head against them.

So it's -- from an acquisitions perspective, it's probably nominally an improvement for us, but not terribly material.

It appears we have no additional questions at this time, so I'd like to turn the floor back over to management for any additional closing remarks.

We'd just like to thank everybody for joining us. We wish you well, and we look forward to reconnecting in about 3 months.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.