Rexford Industrial Realty, Inc. (REXR) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Rexford Industrial Realty Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I’d now turn the conference over to your ICR. Thank you, you may begin.

Good afternoon. We would like to thank you for joining us for Rexford Industrial’s third quarter 2016 earnings conference call. In addition to the press release distributed today, we have posted a quarterly supplemental package with additional details on our results in the Investor Relations section on our website at www.rexfordindustrial.com. On today’s call, management’s remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually identified by the use of words such as anticipates, believes, estimates, expects, intends, may, plans, projects, seeks, should, will and variations of such words or similar expressions. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include those related to revenue, operating income or financial guidance. As a reminder, forward-looking statements represent management’s current estimates. Rexford Industrial assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the company’s filings with the SEC. In addition, certain of the financial information presented on this call represents non-GAAP financial measures. The company’s earnings release and supplemental information package, which were released this afternoon and are available on company’s website, present reconciliations to the appropriate GAAP measure and an explanation of why the company believes such non-GAAP financial measures are useful to investors. This afternoon’s conference call is hosted by Rexford Industrial’s Co-Chief Executive Officers, Michael Frankel and Howard Schwimmer, together with Chief Financial Officer, Adeel Khan. They will make some prepared remarks and then we will open up the call for your questions. Now, I will turn the call over to Michael.

Thank you, and welcome to Rexford Industrial’s third quarter 2016 earnings call. I will begin with a summary of our operating and financial results. Howard will then provide an overview of our markets and our recent transaction activity. Adeel will then follow with more details on our quarterly results and our balance sheet with an update on our guidance for the 2016. Our third quarter results continue to demonstrate the strength of our business model and ability to drive accretive growth across our platform. We achieved same property NOI growth of 8.2% over the third quarter of 2015, driven by a 530 basis point increase in stabilized same property occupancy the 96.3%. We signed approximately 837,000 square feet of new and renewal leases achieving weighted average lease spreads of 15.6% on a GAAP basis and 7% on a cash basis. Company's share of Core FFO for the third quarter was $14.2 million representing a 27.1% increase from third quarter 2015 and Core FFO per share was $0.22, a 10% increase from the prior year quarter. During the third quarter, we acquired approximately 949,000 square feet, primarily value add industrial assets within our Core infill Southern California market for an aggregate purchase price of $80.8 million. Year-to-date including acquisitions closed after quarter end, we have acquired a total of $319 million of asset, adding 2.9 million square feet equal to a 24% increase to our portfolio. We also bolstered our balance sheet and access to new capital source with our inaugural referred equity 5 and 7, 8 coupons [ph] offering in August. We’ve raised net proceeds of approximately $87 million and offering that was well timed and exceptionally well supported by a wide array of institutional investors. As we look towards the end of the year, we’d like to recognize our entire Rexford team for their tremendous effort and exceptional results. It’s also a great time to reflect that at Rexford , the measure of a great business is not merely the ownership of building, rather our commitment to having a truly great business starts with our strategy, focus and above all our ability to attract and to develop the best talent in our industry. Our strategy is to focus on creating value exclusively in infill Southern California. This market is the economic size about the next four to five largest U.S. markets combined. That is the nation’s strongest market measured by tightest occupancy, rental rate there about 60% higher than the next largest market and first square foot values that is the highest in the nation. Our infill markets have almost no land for development and there’s virtually no threat of new supply emerging release. In fact, nearly 70 million square feet of product has been removed from the market since 2001 converted to non-competing usage. This is an incredibly fragmented and relatively inefficient market with over 1 billion square feet of industrial space built prior to 1980. We believe we have a practically limitless well of opportunity require existing buildings where we can increase cash flow and value throughout the real estate market. At Rexford, we do the extra work required to identify and execute on accretive investment there often not available to competing buyers. Consequently, about 70% of our acquisitions have been achieved through off market and lightly marketed transaction. We also outcompete with the most effective investor at leasing and asset management capability in our region, ensuring our ability to maximize cash flow and value through cycle. Our markets continue to demonstrate historically strong fundamentals, which Howard will highlight shortly. However we’re most excited about the accretive, secular growth and better in our business as we move forward. This is a business that has increased rental revenues by 41% year over the prior year, representing an increase in revenue that is 3.5 times greater than the increase in operating expenses over just the prior 12 months. Our performance demonstrates our commitment to deliver on our corporate mandate which is to provide substantially better cash yields and typical core or institutional yield and the nation’s most favorable industrial market infill Southern California. As we look forward, we see exciting opportunities to continue the strong organic growth of our in-place portfolio. Our properties in value add repositioning are expected to contribute over $15 million of incremental NOI, mostly for the next 12 to 24 months. We continue to capitalize in our ability to roll rents higher with 2.5 million square feet of generally below market leases expiring next year. We also see an opportunity to continue to drive occupancy gains as tenants simply have very few relocation options and robust growth in e-commerce continues to intensify demand. The growth in e-commerce is well known. However, its impact on our target markets is just beginning to accelerate and we believe Southern California’s infill markets will disproportionately benefit from the continued growth of e-commerce compared to other national market. To begin with, Southern California is the nation’s largest regional population at largest zone of consumption where therefore the largest endpoint for e-commerce distribution. Much of the product delivered via e-commerce enters the nation’s two largest ports of LA and Long Beach with about 50% of imports distributed locally. And Southern California is a leading center for the growth of e-commerce enabled businesses. Each dollar spent via e-commerce is driving an exponential increase in the movement of packages locally as compared to traditional brick and motor retail driven by pre-return and intense competition to satisfy compressed same day delivery timeframe. Rexford’s info portfolio benefits from its position in the supply chain the last mile reporting those consumer and business deliveries and a regional economy larger than most country. Our external growth also continues to be a strong contributor of FFO per share growth and that is a great segue. As I am very pleased to turn the call over to Howard, who detail our transaction activity and submarket operating condition.

Thanks, Michael, and thank you everyone for joining us today. As on past calls, I’ll first update you on our markets, primarily utilizing market data from CBRE and then review our recent acquisition and disposition activity. Southern California excluding Eastern Inland Empire maintained a record low industrial vacancy rate of 1.6% unchanged from last quarter. Greater Los Angeles County of 1 billion square foot of industrial market maintained historic 99% occupancy during the quarter. Asking lease rates were up marginally quarter-over-quarter. Rents have grown 2.9% since the start of the year and CBRE projects rent growth of 5.9% by the end of 2017. New development is limited by almost no land availability and land values have increased 30% year-over-year. Ventura County reported significant improvement with vacancy declining from 2% to 1.5% during the quarter as tenants migrated into the market attracted by the larger available spaces and lower rents. Asking rates were unchanged during the quarter and there were no new deliveries in Q3 and no new spaces currently under construction. Orange County reported a 20 basis point decrease in vacancy from the last quarter to 1.4%. Asking rents continued their upward trend increasing 6.3% over the first quarter. Industrial development remains low with only 260,000 square feet under construction, representing just 0.1% of market inventory. The lack of available industrial land for development in the region is exasperated by increasing rezoning the residential or mixed use of industrial land. In the Inland Empire, activity during Q3 was heavily slanted into the Inland Empire West which is a part of Rexford’s focus as demand from mid and smaller sized tenants remained strong. By contrast, the Inland Empire East where we do not focus at a slow quarter as gross leasing activity decreased 85% compared to the second quarter. Asking rates in the Inland Empire West increased 7.5% in Q3 or two quarter increase of almost 19%. However, vacancy increased from 1.8% to 2.3% due to an increased amount of 300,000 square foot and larger building deliveries which generally do not impact our portfolio. In San Diego, asking rents increase 8.1% year-over-year to a record high and vacancy decreased slightly down the order of 4.3%. There were no new construction deliveries in Q3 and 910,000 square feet representing 0.5% of the market inventory is currently under construction. Now moving on to our transaction activity. Year-to-date, we acquired 17 industrial properties in our target Southern California infill markets, but aggregate cost of about $319 million. 75% of the assets were acquired off market or lightly marketed, 45% have value-add components and all are expected to achieve stabilize returns in excess of market cap rates. In July, we completed the acquisition of the 85% interest that we did not own in our Mission Oaks Boulevard JV, $221.8 million or proximately $56 per square foot at total value. The recently reposition 458,000 square foot project is located in Camarillo within Ventura County and a 32 acre land parcel as access land for future expansion. The project’s least occupancy has recently increased from 66% to 80%, putting us on track to exceed the previously disclosed 7.5% yield on past that was projected for next year based on achieving only 75% occupancy. In August, the company acquired 1,600 Orangethorpe, a 346,000 square foot by building industrial complex located in Fullerton and the Orange County North submarket for $40.1 million or 116 per square foot. This high image complex is 97% leased to 8 tenants at rates that are over 20% below market on average. Additionally, the property has a value-add component with the repositioning of vacant frontage building previously used as office to an industrial use and approximately 40,000 square feet of raw land. The initial return is approximately 5.3% and we expect to achieve a stabilize return on costs of 5.7%. In September, we purchased two buildings in Nelson Avenue located in the City of Industry within the San Gabriel Valley submarket for $15 million or approximately $103 per square foot. The 146,000 square foot vacant industrial buildings are out over 9 acres and were effectively purchased at land value. Value-add redevelopment includes constructing 54,000 square feet on excess land, modernizing and demising the existing buildings and delivering 7,000 to 22,000 square foot dark hard spaces in a modern industrial complex. After repositioning, we expect to achieve a stabilized return on cost of 6.4%. Subsequent to quarter-end, we purchased the high quality 55,000 square foot distribution building in Oceanside in North San Diego for $7.2 million or $132 per square foot. The property was purchased as a short term sale-leaseback and we expect to achieve a stabilized return of over 6% on tops. We continue to see stabilized in value-add opportunities as we close out 2016 and currently have $37 million of new investment under contract or letter of intent. We completed $21.7 million of assets sales year-to-date in 2016 and have another $19 million of dispositions under contract. We continue to consider this additional dispositions and we expect to realize significant value creation on lease sales and to a creatively recycle the capital. Before turning the call over to Adeel, I would like to take a moment to discuss two of our repositioning project which we completed this quarter and produced stabilized yield in excess of our original target. As Michael noted earlier, a Core FFO strategy is our deep value-add expertise, which allows us to acquire and reposition industrial asset, leasing yields well in excess of market cap rates augmenting strong internal growth as we drive cash flow and value creation for shareholders going forward. During the quarter, work was completed and we subsequently released our Frampton Avenue asset in Torrance and the supply constrained South Bay market. The asset was acquired in April, 2014 for approximately $3.9 million and upon expiration of a lease. The building, office areas and site were renovated to like new condition, investing an incremental $1.7million. We achieved a stabilized yield on cost of 7%. Additionally, Lakeland Road located in Santa Fe Springs in the Mid-Counties submarket was completed and leased during the third quarter. We purchased this vacancy of tenant building with excess land in the fourth quarter of 2015 for $4.3 million and immediately modernize the building and in dock loading and resolving to deferred maintenance issues. We realize the stabilize yield on cost of 6.4%. Looking ahead, we have three completed projects and lease of space and 5 more currently under repositioning representing over 900,000 square feet. There is significant embedded growth on portfolio as we lease and complete repositioning project through mid-2018 and we have robust acquisition opportunities that should continue beat projects into this pipeline as we move forward. I’ll now turn the call over to Adeel.

Thank you, Howard. In my comments today, I’ll review our operating results. Then I’ll summarize our balance sheet and recent financing transactions. And finally, I’ll review our outlook for 2016. Beginning with our operating results, for the three months ending September 30, 2016, company share of Core FFO was $14.2 million or $0.22 per fully diluted share. This compares to $11.2 million or $0.20 per fully diluted share for the third quarter of 2015. Core FFO per share increased due to our strong acquisition activity completed in the past 12 months in same property for full year growth which was partially offset by increased interest expense and higher diluted share count. Core FFO excludes the impact of acquisition expense, which was approximately $380,000 this quarter. Including these costs, company share of FFO was $13.9 million for the quarter, or $0.21 per fully diluted share. For the nine months ending September 30, 2016, Rexford reported company share of core FFO of $40.1 million or $0.65 per fully diluted share. Core FFO excludes the impact of approximately $1.5 million of non-recurring acquisition expenses and about $643,000 of non-recurring legal new reimbursement. Including these costs, company share of FFO was $39.3 million for the nine months ending September 30, 2016 or $0.64 per fully diluted share. Within our portfolio, we continue to capture strong growth and income. Same-property NOI was $16.3 million for the third quarter as compared to $15.1 million for the same quarter in 2015, representing an increase of 8.2%. Our same-property NOI was driven by 8.4% increase in rental revenues and a 8.9% increase in property operating expenses. On a cash basis, same-property NOI was up 6.8% year-over-year. Turning now to our balance sheet and financing activity. During the third quarter we continue to augment our balance sheet and access a new capital source with a grow offering a 5.875% series A cumulative redeemable preferred stock. A completion of the offering will raise net proceeds of approximately $87 million, which were utilized to fund our acquisition pipeline for general and corporate purposed. We believe our balance sheet is not better position than ever, with due debt maturity to 2017 and only about $5 million due in 2018. Additionally, we have approximately $55 million of available cash and nothing drawn on our $200 million line of credit leaving us with ample liquidity for acquisitions. Finally, with regard to guidance for 2016, we’re increase on our guidance for Core FFO to a range of $0.87 to $0.89 per share. Please note, that our guidance does not include the impact of any transaction or capital market activities that have not yet been announced. No acquisition cost or other costs, we typically eliminated when calculating this metric, otherwise our guidance is support by several factors. For the 2016, Same Property Portfolio, we expect during year end occupancy within a range of 94% to 95% and expect to achieve GAAP Same Property NOI growth for the year within a range of 7% to 8%. And for G&A, we anticipate a full year range from $17.5 million to $17.8 million including about $4 million in non-cash companywide equity compensation. That completes our prepared remarks. With that, we’ll open the line to take any questions. Operator?

Thank you. At this time we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Manny Korchman from Citigroup. Please proceed with your questions.

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

Hi, Manny. It’s Howard. We look at our portfolio monthly, quarterly, weekly to really understand what opportunities might exists to sell for pricing that really is above cap rate type sales. And it’s not really a core - really focus of ours. And I think we’ve explained in the past that we really achieve the same results when we sell buildings to owner, users if not even better. A great example was the sale of the also we had on Mulberry in the Mid Counties area where we achieved literally the equivalent above 4.1 cap rate for a building, there was 150,000 feet, 17 foot clear built in the 60’s. That clearly would not be a 4.1% cap rate where we see class A buildings that have been selling for those type of numbers lately. So really I think the best thing to think about is the opportunity that is abundant not polio to capture of those type of that type of upside rather from that have a sale versus a sale for an alternative units. But yeah, you will see us every once in a while something that could be used and developed for something other than industrial.

Great. There was a recent article that PLD is building a multi-story distribution facility in Seattle, is that something you’ve guys have supported, is anyone else for the new markets what do you think about.

Well, I think we’re certainly ahead of that direction. Right now in terms of development, we’ve seen bigger boxes really the only thing that has made sense in terms of industrial development on for lease basis especially when you think about it in the infill markets where you have to build and have economy that scale the amortize out the cost of land. It’s something maybe we would see in the periphery of downtown or some of the other very high land priced markets. But it sounds very expensive to build those and to make the rents work within the confines of really what market rents are. It’s also a little challenging because if you look at some of the buildings you’re referring to, they typically are built to accommodate smaller trucks than the type of trucks that are typically used in Southern California and for most large distribution type uses. But I agree it and attended there and it’s something that we look at an ask our architects about concrete contractors every once a while to check in and see when they might makes sense.

Last one for me, just can you comment on where your pipeline currently fits of these acquisitions?

Sure. We’re very, very busy right now, and in the past we’ve typically commented that we have about $1 billion worth of product that we’re monitoring in our own database, which is typically mostly, lightly marketed or truly off market opportunities. Yes, it’s been a great year for us so far, we’re still busy in terms of some closings remain this year and we have plus $38 million under contract are or LOI. And we have quite a few LOIs under negotiation still. So I think we’re asking is looking forward to 2017 what do we expect and although we don’t offer guidance on our acquisitions. We’re optimistic about our ability to continue to buy property that meets or exceeds our return on cost we describe in the past.

Thanks, guys.

Our next question comes from the Jamie Feldman with Bank of America.

Great. Thank you. I think you’ve said in your earlier comments $157 million of acquisition on your contract, and then you said $38 million. Can you just tie those two and maybe talk more about what’s under contract versus LOI and maybe I heard it wrong?

Yes, I don’t recall any of our comments referring to $157 million of under contract acquisitions. It’s plus $38 million. So…

And then I get before that - go ahead.

No. There is nothing else we’re going to complain to clarify what you’ve heard.

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

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

Okay. All right. Sorry for my confusion. And then I guess the deal going back your comments and capital available. So where would you say how much could you buy before you need to raise more capital?

Yeah, Jamie. This is a good question and you ask this question last times, so I recall it. I think we this quarter is definitely better in the sense that we have $55 million on the books and cash obviously prepared help a lot from that perspective. That leaves the facility completely available at $200 million and then I also remind in the share, we still have the ATM and of course we have that now. It’s hard to project as to when you will need more equity because it’s a buy product of a few factors right, but deals we’re looking at and it’s never just going to be one dimensional where we’re just going to play as debt. So it’s going to be triangulated effort between some equity and some debt. So I think we feel really, really comfortable. I think our debt to EBITDA ratio is pretty healthy at the end of the quarter. And again that is going to stay as part of our strategy that’s always been a discipline. So we’ll always manage that to the best to our ability. So the answer is that we can go pretty far in the current available facility that we have right now which is not $200 million before we have to really get started getting nervous on that ratio perspective. And like I said and you’ll have to sprinkle and the ATM is all there. So that can help mitigate that impact. So it’s a hard number for me to just put a mile marker for the audience here, because there’s a lot of factors involved, but at least you have the building blocks to how we can look at this going forward.

Okay. And you guys think about your 2017 exploration, so where do you think the mark-to-market is? Or even across the portfolio?

Hey, Jamie. It’s Michael, good to hear from you. We have about $2.5 million square feet expiring next year. I think it’s about 19% - plus 17% of total revenue expiring next year and mark-to-market supply in the 5% to 10% range plus or minus?

That’s on a cash basis?

On a cash basis.

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

Yeah. I mean anecdotally we’ve talked about the fact that Amazon has become a customer of ours for instance. And that’s distributing their fresh product the perishable consumables food product is a great example. And we have a wide range of sort of 3PL type providers that are servicing the e-commerce industry. I think frankly that’s one of the reasons that the e-commerce impact is hard to quantify, because when you have a 3PL out there who’s just processing orders and whether they’re distributing single boxes to a consumer whether they’re spending stuff to a retail outlet or to a business. They don’t necessarily correlate, which orders were originally placed be e-commerce or not and what we do see is a pretty dramatic impact in terms of the package well. There is a big difference between a consumer ordering toothpaste or some very small element as single package as compared to going down to the nearest staples or red lesser are supermarket and buying all their good in one fell swoop. So it’s very interesting leasing activity this quarter is probably that was about 15% in terms of tenants who indicated that their business is in some part materially driven by e-commerce, but that really underestimates the true activity because again a 3PL and again the majority of our space is distribution and warehouse oriented. So we work to quantify the impact, it’s pretty darn exciting for us. In particular given our location I mean infill markets as really the last mile because it’s not just the volume of good that intense competition to deliver in the one to two hour time frame same day delivery timeframes. And the last comment on that is I think we’re seeing another wave of e-commerce growth driven not just by business to business and business to consumer, but by manufacturer to consumer and were manufacturers are bypassing the entire distribution channel not just retail to deliver direct to consumers through their e-commerce purchases and their web presence.

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

Yeah. They still have to hand yes, because we’re still talking about timeframe. So I’ll give you a really interesting example, personal example, a couple weeks ago, I’ve - our - we are home and forgot the diversion, but it’s relevant, it expired, stop working, and I know there is a label on the garbage disposal stores one of this thing with a phone number for the manufacture, and said 24 hours, seven days a week. So I called the number this was a Sunday morning by the way. Sure enough the manufacturer answer the phone and he said, yes he diagnosed it, you need a new garbage disposal. So I said great and he said he has two options. You can go online or go to the nearest store, go to Home Depot and you can pick up a replacement or here’s a code, you can go into our website and it will give you 50% off on any new garbage disposal. So here is a manufacturer, the dollars to them is probably still the same or better as compared to distributing via their retail or distribution channels. And by the way, the next day delivery and this was a Sunday. So they can’t satisfy that if they don’t have that warehousing present in the market, and I think that’s a really interesting trend, because it wouldn’t have been very long ago that manufacture would have been protecting those channels not bypassing.

Okay. That is interesting. Good luck with new garbage disposal.

You know it’s working well, so I appreciate that. I installed in my side.

I broke mine. It’s such a good story.

Give me a call, I will get you new one.

Thanks man. All right, I appreciate it. Thanks for your time.

Our next question is from Paul Autry [ph] JPMorgan

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

Hi, Paul its Howard. Well we bought one building that had no occupancy as 145,000 feet on Nelson Avenue in the City of Industry and that was a project we planned for repositioning. Additionally we’ve mentioned the mission of JV that we bought out the 85% we didn’t own and that one we’ve projected a cap rate next year of about a 7.5% based on 75% occupancy with when we bought it, we had about 66% occupancy and we’re already at about 80%. So we’re ahead the game on that one. The other asset we bought was in Orange County there was just a complex about 346,000 feet and that one came in 5.3% yield and we expect to stabilize that next year at 5.7% yield on total cost, and that over by with the Nelson project dimensional, but they can we expect to stabilize that one at a 6.4% yield on cost.

Okay. Thanks. And if you guys have any idea what kind of the I guess the impact on sequential occupancy of those acquisition there?

Well. If you look at Nelson and Mission Oaks of those came in with quite a bit of vacancy obviously. So Mission, Mission Oaks had I think there was an over 100,000 feet of vacancy maybe as more than 145,000 feet on the Nelson. And if you look at the quarter-over-quarter, portfolio occupancy declined a little bit but it was mainly attributable or slowly attributable to us putting these value-add project.

Got it. Okay, thanks.

By the way in the set, you’ll find some stabs. This is Michael, where you’ll see that stabilize pro forma occupancy. This is including uncommenced leases get you to about 96.7% on a consolidated basis. So that will gives you also some indication.

Got it. Thanks.

Our next question is from Thomas Lesnick from Capital One.

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

So you’re asking with respect to expectations for same store occupancy going forward? The acceleration?

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

Well, I thinking using that of bunch of different ways. And first of all, occupancy is just one of our various drivers NOI growth and profitability growth. And we do see room for occupancy growth in the same store fully you see this year, although we wouldn’t encourage people to underwrite where the submarket are. But if you look at the data the submarkets are right now operating around a 2% of vacancy back on a weighted average basis. So theoretically in the market, there is room to grow an occupancy, although again we wouldn’t encourage people to underwrite at those levels, because you do nationally as some structural occupancy in a tenant portfolios such as ours. And the other thing to think about next year is that the same store pool will shift and that’s going to incorporate some assets, we acquire some value-add opportunities some vacancy. So you are going to shift there. And in terms of looking at the growth in the economics for the business next year, I think it’s more important to think of this a little more probably, we will get some within occupancy, we are going to get some very meaningful lift in through the releasing activity. Don’t forget that in addition to these very healthy recent spreads, we’ve been driving. We have contract 3% annualized run rate bumps imbedded in almost all of our leases. And then you’ve got the repositioning that are going to start to flow in incremental economics and cash flow, most or much of which is going to flow right down to the FFO line and that’s pretty substantial, I’m just giving indication that we have about over $14.5 million of NOI contribution coming in from the major repositioning projects that we list on our repositioning page in the supplemental. And what’s really interesting about that is that represents about $67 million of incremental investment going forward and dollar for dollar return on that investment is just over 20%. So that’s pretty creative use of investment dollars going forward. If you bundle all that together by the way, we’re looking at probably a 25% plus or minus growth potential in NOI, if we look at to the next 24 plus or minus month. So those are pretty darn exciting but that assuming we don’t buy another asset as of the end of the quarter. So and of course we are going to buy some very nice assets going forward with a lot of value-add potential and growth. We’ve sitting very, very well from an economic and FFO per share growth perspective going forward and I think that occupancy pieces going to play a role but it’s just one of several roles.

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

No, that’s very helpful. I appreciate that inside. I have a follow-up for you on a same store. I mean the range is still 7% to 8% for the year. Three quarters into the year that feels kind of wide to be given that the first three comps are known. So –but by my math you would have to basically post a 40 figure close to 5% to break below the low end of the range and north of 9% to a close 8% for the year. Is there anything in 4Q that variable are their property tax appeals or anything else has got to hang out there that’s leaving that range is what but the range is wide as it is?

Right. Tom, the answer - I think the answer lies in the fact that our pool continues to change. So what’s happening in Q4, what are the projects that was under repositioning last year but repositioned at middle of Q3 support. Q4 2015 and Q4 2016, you’re seeing a very comparable result from a comparison perspective. So the growth that you would have seen in the prior quarters, you’re not seeing that in Q4 because the comparability is there now. Furthermore, one of the other caviars, one of other neon is that we have in our stand pool that all is going to be there because we’re going to be interchange the pool because our growth trajectory has been so significant, is that if we do have a value-add play, you are able to capitalize certain expenses like taxes and insurance, well those projects are being repositioned. You’re seeing those from a prior period comparisons perspective when you compare that but this year you are seeing those expenses by the higher takes. So Q4 one of the larger projects that we had in 2015 last year was stabilized fully for the fourth quarter. So that’s like you’re going to see that growth slowed down somewhat, so that’s why you’re able to still get yourself up to the 7% to 8% that we guided to because of those couple of major reason.

Got it. That makes sense. And then just regarding your G&A guidance for me to actually go recoveries you guys have G&A roughly 13.8 year-to-date implying again roughly 37, 38 for fourth quarter which seems kind of low to me. How should we thinking about G&A as a whole for fourth quarter and was there anything that drove elevated G&A for this quarter?

Yeah. So let me have some color as far as some of the key components there ever in this quarter and how you should be thinking about Q4 2016, please. So we’ve got a good year so far and a lot of fronts leasing and also of course the based on that we did a full year nine month adjustment a certain bonus that was built into the Q3 2016 G&A. So the $5.1 million of G&A are just seeing includes a year-to-date cumulative true up of $535,000 to be approximately run that. So you’re seeing that, excluding that you would have seen a number $4.5 million which is very possible to what is on Q2. Again this is a byproduct of we’ve seen and this is a projection write and this is not something that has been awarded this is just a projection from our best estimate of the board still has to weigh and the business. So that’s what you seeing in Q3. Now based on that comment and that number that we adjusted for Q3 Q4, quit coming up slightly higher than that. So if you were at a run rate of 4.5, 4.4 with the last two quarters that could be slightly higher maybe in the range of 4.7, 4.8. But that based on what we know today, obviously we’re still going to project for 2017, once we had better data as far as what the board decides some equity comp and there’s other factors that can change that but as of right now where we sit. How do we get to that $17.5 million to $17.8 million of guidance that we get there.

Got it. That’s really helpful. And then last one for me, I guess this is for Michael, Howard. But you guys spoke at length about the opportunity and the redevelopment for their accretion for projects that are not yet outwardly identified to off on the street. What it is the opportunity that’s currently embedded within the portfolio that just how the Midwest listed on that roster yet. Is there a portion of the portfolio maybe 10%, 25% whatever that’s in the queue for redevelopment had a later point time?

Hi, Thomas, It’s Howard Schwimmer. No I really think we’ve identified anything that’s meaningful for the most part we try to talk about them as we buy them and on this on this call we mentioned some of the developed redevelopment opportunities. But during this life cycle of any of our assets what we find is there’s always an opportunity to do some sort of repositioning work to create more value maybe the functionality or just modernization of the space and that then it and it’s hard to predict sometimes when those leases might role where we take advantage of those opportunities or not. But we - we have a couple things that will pop up next year I mean one that I’m thinking about is 100,000 foot building that in the San Gabriel Valley that we know is a vacate and we’re going to do some substandard work on that, it’s across dock - will be a cross dock facility with access land in the market. But that’s really the largest one. I believe we really haven’t put yet on to the repositioning page. And as - and then there’s just the smaller spaces probably 60% plus of what we own today are really more of the multi-tenant type space which we’re able to reposition with lower CapEx. But in aggregate, we’re still able to drive standard increases our cash flow from some of that work as well. But this should be a very long haul that try to even talk about, those - the volume of the smaller space opportunities. And a good example and I’ve mentioned on that is in this quarter, we had two vacates that we chose to have occur in the portfolio that we’re each was around 20,000 feet in the Inland Empire, both of which were doing modernization and we will see pretty substantive increases in the rent on those spaces. But again they’re not, they weren’t large enough to really lift is in repositioning in the supplemental. And hopefully that answer.

Yeah. It’s great. Really appreciate the inside guys, nice quarter.

Thank you.

Our next question is from John Guinee with Stifel.

Hi, thank you. John Guinee here. I’m talk about to the extent you guys are familiar, what’s happening at the ports in terms of infrastructure improvements overall to the down side more labor issues and if that effects your business at all.

Hi, John. It’s Howard. Yeah, the ports - it’s interesting what’s happening Long Beach openly they first fully automated terminal where I think the increase their capacity in terms of loading and unloading containers by threefold in terms of the timeframes and the deployed automation. And yeah, and that’s really the way for the future. And in terms of the impact to us as you know the tenants in our portfolio are here largely servicing their large population base we have and when the ports are functioning optimally or slower, one way or another they figure out how to make it work because they have to service this population. So the type of I think questions that you’re thinking of really directly impact more of big box that is really beholden to the timeframes to move their product in to the Forex and then out and get the product to the built their building. So in terms of for us we would of course tell you that that timeline has a little to deal with our portfolio and our tenant base.

Perfect. Thank you.

Our next question is from John Peterson with Jefferies.

Hey, thank you. Just kind of curious with rents growing as fast as they are in leasing space going up, what’s the feel that you get as you negotiate with tenants in terms of renewals, in terms of their I guess willingness and ability it’s actually pay higher rent for you. I guess what I’m getting, although you are also seeing more people where maybe he didn’t move out this time you’re kind of feeling like the next ramp up is really going to squeeze them?

Hi, John. It’s a Howard. It’s a great question and it’s always a fine line we walk in our renewals and you really see the differential right now in the leasing spreads between new and renewal because on new leases, we have the ability to absolutely charge the maximum the market will bear. And many, many times now we find that we have multiple tenants offering our spaces. And so we can push it to the limit. When it when it comes to renewals, we’re aggressive with tenants. We’re aggressive with tenants but there’s a fine line between been being aggressive and alienating a tenant and having them leave out of a spider, whatever the reason might be. And we’d rather have an occupied building even though the frictional cost moving to tenant in and out are pretty low. We’d rather not push people out of buildings over another 1% or 2% increase in our leasing spreads. So - and an example of that if you look at our gap leasing spreads for instance, newer rate 17.6% and renewal 14.4%. And on a cash basis new leases were 10.7% and renewal was 4.9%. So there - it’s more evident obviously on the cash basis than the gap this quarter but it fluctuates from quarter-to-quarter but that’s really what we’ve seen in terms of the market today and why you see that differential.

Okay. That’s helpful. I guess kind of along those same line, kind of curious what percentage of your tenants that move out you know actually leave the kind of infill market that in right now whether they move to Inland Empire West or whatever other option they have, or is that just something you don’t really see that often.

Well, we really don’t track it like as closely as you may have want to know that type of data. But we do know we were actually trying to work with our tenants when some of them can’t afford to pay the rents they were able to command let’s say in some of, let’s give you an example like Orange County where rents have been really growing fast. I’m thinking of one project we have in North Orange County, we’re actually trying to move our tenant who can’t push up at the same rent we already have an offer on a space. We’re trying to move in over into the Inland Empire where he can save $0.20 a foot. But I can’t really tell you that where they all moving, some of are just are going to move out and take lesser quality buildings than we generally have in the portfolio and that they’re willing at some point to sacrifice quality and functionality for a lower rate because their business won’t support it.

Hey, it’s Michael. One related comment on that and I think where we’re going to asking for is where do these tenants go and what’s the velocity within the infill markets, is there a an escape hatch for these guys to go out and a lot of business they literally can’t operate if they got to Inland Empire because their servicing the regional infill business environment one way or another. But another measure is if you look at the amount of leases that expire during the quarter at Rexford and if we look at as of this week, the percentage of those leases that expired. They did not renew percentage that have already we’ve already recommitted is about 57% of those leases have already been released. So that’s a pretty tremendous statistic. And I don’t want to quote cash and gap releasing spreads yet because it can change materially on the quarter in basis, but surprise to say that the cash and gap releasing spread on that 57% of leases that have already been re-led is very, very healthy double digit. So all indications are that the market is operated a very, very healthy level.

Got it. And then, thank you for that. I’m curious on the on the transaction part of things just you know maybe been update on kind of the feeling from buyers and sellers in the market obvious there’s concerns about rising interest rates and maybe some concerns about what impact that would have on cap rate. So are you kind of seeing any changes as you’re bidding on properties with that number of other investors that are bidding along with you, that’s been increasing or decreasing or decreasing just given movements with interest rate or anything else I guess for that matter.

Yeah, this is Howard, John. It’s a great question. Apparently the market thinks there’s a big impact, but when you get down to the basics of our business and where we operate, here in Southern California, we actually have seen a compression further in cap rates. When you look at some of the larger transactions there, there was recently about a million feed that transacted in the Orange County of Class A product and it traded some 4% in terms of the cap it had, a little bit of vacancy and even with that vacancy was filled out, it would still be around 41, 42 cap rate. So do we see that on the assets that we buy? We always like to comment and tell you that we’re not cap rate type buyers. We really are looking to how we can create value in assets and how we can stabilize those in 12 to 24 months typically. And for us, we’re not seeing any real difference at all in where we’ve been able to stabilize our assets. We gave some examples earlier, so typically on average we’re stabilizing north of 6 and more than 6.5% range on an average basis. So in terms of how we look at the market today, it seems like there’s a bit more product that we’re starting to look at, not necessarily actively marketed product, but a lot more conversations we’re having in terms of our pipeline and we don’t see really any dramatic change. I mean, everybody wants the moon at first, but then when you get down to finalizing a deal, they all seem to still workout to fund where we can buy them. With that said, we turned down many, many, many more transactions than we actually buy. And those are obviously transactions we couldn’t get to underwrite that numbers that we felt comfortable to bring into the portfolio and most of those don’t go to another buyer, they just never happen. So hopefully that’s a little more data on the inside of the comfort.

Yeah, that’s great. Thank you guys for the color, I appreciate it.

Our next question is from Mike Mueller from JPMorgan.

Yeah hi, I have a quick question on the - I guess the new disclosure on the repositioning page with the same store. And I guess, how do you decide what goes in the same store of course it’s just based on timing because when I think about this and think about the conversations with the investors overtime, I think most people tend to think of, here’s that same store occupancy and here’s the year-end guidance and that’s the internal growth piece. And then this is a little bit more, put money in, get a return on it, so it’s a little bit separate and here this disclosure it just kind of underscores that I think people could be either maybe double counting or mixing up or just something like that. So what’s the best way for us to think about this and just not get it mixed up with the traditional occupancy, the same store guidance and how do you think you’re - what on this page ends up in the same store pool and does it -

Mike, I think we - this is the deal, we’ve kept the definition at black and white as possible from the very get go. We intentionally use the definition that if we had owned that property for the entire period of comparison, we would include in the same pool. And furthermore, what we did about a year ago, about a year and a half ago is to even simplify the definition. We establish a stand pool at the beginning of each year, so for that full entire year of comparison that we’re not changing the pool. So whatever earn for that comparative period, so for ‘16 versus ‘15, if we had owned that project for the entire period, we would include that in the pool. So that’s the definition part of it and that we’ve kept it consistent. Furthermore, I think if you take a look at our - if anyone wanted to jump ahead and say, you’re at - okay, does ‘17 going to look like, it’s rather easy because we do disclose every fall the projects and their respective dates that they were purchased, so one can easily, quickly stratify the next year’s stand pool that’s going to reset itself from 1-1-17 and so forth. So we try to keep it as simple as possible, so the guidance that we give out at the beginning of the year has always been married to that one pool that we establish at the beginning of each year. And the only color that we although had is that we do try to go to the process of describing to our audience or analyst that what is under repositioning during that period, you’re able to see a comparative analysis and that could further be tied into the repositioning page. As in the back you’re able to kind of quantify both sides of that equation, so hopefully that makes sense, but our definition is of being black and white from that perspective. Now, on the property portfolio overview page, we started doing this by two quarters ago where we add a little bit more color, so we can quantify from a total consolidated pool, how much of that is same pool versus ones that you’re able to kind of see, how much of the total square footage is sitting in the same pool bucket versus the others. You’re able to see that. Prior to two quarters where you couldn’t see that, so that was just based on demand that we understood that people would appreciate that data. So hopefully that helped to answer the question that you’re asking.

Yeah, I think so. So still is there R&D dollars. For example, if you have a $10 million property and you put another 5 million into it, so it’s 50% increase now, a property like that could still make it to the same store pool?

Yes, yes, absolutely. Time is the key thing; the comparability of the property is the key defining variable in the definition. So it has nothing to do with the fact that that property is having more repositioning dollars. No, we do our very, very best that you - we have the year window before our property becomes incorporated into a pool, so we do our very best to - if there is a value add play, we try to do our very best to get that reposition done as soon as possible, so that it comes into the pool. You’re able to see that impact depend a lot but everyone, so often you do have a little bit of a belief that the repositioning kind of flows into the same pool that is not repositioned just yet, so you’ll see that. But otherwise, we do not let the cost element of it. The deciding factor is simply a time and the comparability, period-over-period.

Okay, thank you.

Our next question is from Blaine Heck from Wells Fargo.

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

Hi, Blaine, it’s Howard. First of all there’s sort of a progression that’s occurring on this existing page. The current repositioning are buildings that are actually not able to be occupied. So there’s construction work or permitting or something going on that they’re not yet ready for lease up. So when you move down, the next category is leased up and there’s only three buildings that are in that leased up phase right now. And then the final category was obviously completed during the quarter, which would mean that it was leased up. So in terms of those repositioning properties, those three, we do have good activity on them. I think one of them will be practically full before the end of the year and strong activity on the others, so really no indication of any type of a slowdown in demand in the market place.

Yeah, I guess I was just looking, I guess at those leased up properties and the two first ones stayed the same in the period till stabilization, but seems like you guys - if I’m taking your comments correctly and you think those are going to be leased up pretty quickly.

Yeah, we would hope so and that’s our expectation.

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

Sure, sure. Yeah, I think - so starting with the last part of the question, the preferred. I think preferred was a great execution from our perspective and I think it comes from a belief that we have a long-term belief in the organization and where we think this organization is going to be, so that’s great capital when you think about it from that perspective holistically about the long-term possibility the company and just the overall directory that you believe in. Furthermore, I think because of the preferred, we ended the quarter, I had a very nice thought from a balance sheet perspective, do you have the fifty parts that is curious into Q4 and if what we executed in Q2 was any indication of how we could deploy the proceeds from that one sale a couple of sales that we had and how we’re able to generate a great year. I think that a great proxy of what we can potentially already doing when we have a couple more dispositions here. So I think that is also something that we have now done this year and we can turn this into a look at that. So that also gives you a look at more runway from just what we’re able to do and what that does to the overall NOI and the FFO, up to the bottom line. Furthermore, I think the facility is completely untapped and then again that is to very attractive capital still is completely untapped and then obviously they answer the question earlier there by Jamie is that and never no point you rely on one of these sources you’re always trying to make certain that you are marrying these sources of capital but what you have on your docket as far as the acquisitions concerned. So I think it’s we feel very, very comfortable and as the last thing I can add is that it all kind of sit on the premise that we believe in our balance sheet. We want to keep the balance sheet as strong as possible so we will make investing, no point in time we stretch that. And I think as long as we keep a disciplined you know we’ll hopefully continue to execute on all these fronts. But again with always forward thinking forward looking as part, what should we be doing and I think what we’ve done over the last couple of years of any an indication of how we think about our capital stock and you’ll continue to see execute from that perspective and looking at other term loan debt, other unsecured pieces and so on and so forth and other venues that could be accretive to the overall nature of our business. So you can continue to see us do that but I think a balance sheet wise we ended up really well and we have a lot of - and have news that are available to us.

Okay, great. I will leave it that. Thanks for taking my question.

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

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

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