Rexford Industrial Realty, Inc. (REXR) Q4 2016 Earnings Report, Transcript and Summary

Greetings and welcome to Rexford Industrial Realty Fourth Quarter 2016 Earnings Call. At this time all participants are in a listen-only mode. And a brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I’d now turn the conference over to Steve Swett. Thank you, you may begin.

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

Thank you, and welcome to Rexford Industrial’s fourth quarter 2016 earnings call. I will begin with a summary of our operating and financial results. Howard will then provide an update on our markets and our recent transaction activity. Adeel with then follow with more detail on our quarterly and full year results, our balance sheet and will introduce our outlook for 2017. 2016 was an extraordinary year for Rexford and for our shareholders, exceptional operating results helped drive a 45.4% total stockholder return for the year. We increased same property NOI by 9.1% on a cash basis on top of the 7.5% we recorded in 2015 achieving strong releasing spreads and ending the year with our stabilized same-property portfolio at 96.9% occupied. We acquired nearly 3.4 million square feet of industrial properties at favorable yield, most sourced through op-market or lightly marketed transactions and many with substantial value add upside. Since our 2013 IPO we have acquired $1.1 billion of industrial property growing our portfolio’s square footage by almost 3 times and our NOI by 3.2 times. We strengthened and expanded our balance sheet during 2016. In April we completed our third borrow on equity offering and raised net proceeds of approximately $175 million. In August, we raised $87 million through our inaugural issuance of perpetual preferred stock. And during the fourth quarter we raised another $13 million through our ATM program. Along with about $40 million of proceeds from disposition, these activities funded almost all of our 2016 acquisition. Now turning to our fourth quarter results, we achieved core FFO of about $15 million for the fourth quarter of 2016 which is a 27% increase over the prior year. Core FFO per share was $0.23 about a 10% increase over the prior year. On a same property basis, NOI increased 9.1% in the fourth quarter of 2016 compared to the fourth quarter of 2015 driven primarily by a strong 7.8% increase in rental revenues. Same property portfolio cash NOI also increased 9.1%. During the quarter, we signed 98 leases for proximately 765,000 square feet. Our leasing spreads were 16.1% on a GAAP basis and 5.9% on a cash basis. 18% GAAP spread and 9% cash spreads on our new leases demonstrate the ongoing strength of our infill target markets. We acquired four industrial properties for an aggregate purchase price of approximately $60.2 million brining our total acquisitions for the full year to nearly $372 million. Our pipeline remains robust and Howard will provide more detail on our transaction activity later in the call. As we move forward there are several factors that differentiate the strength of our target Southern California infill industrial markets. Tenant demand remains exceptionally strong with market occupancy above 98%, yet the risk of new supply of full rent industrial product is virtually nonexistent due to higher barriers, lack of available land and high land and development costs. In fact competitive supply in our infill markets is shrinking with over a 100 million square feet of industrial products having either been removed or converted to other uses since 2001. E-commerce continues to drive an acceleration in demand. We believe our infill Southern California industrial market is positioned to benefit from the growth in e-commerce more than any other market. With the two largest ports in the nation of Los Angeles and Long Beach responsible for over 40% of all imports for the entire country, we operate an irreplaceable high quality industrial portfolio serving both the first mile and the coveted last mile of distribution and a growing economic zone, substantially larger than the vast majority of the countries. Embedded in our in-place portfolio we see the potential for organic NOI growth of over 23% over the next 18 to 24 months, driven by several factors which include the completion and lease-up of our repositioning space, capturing upside from the 2.4 million square feet of leases rolling in 2017 that we estimate to be about 9% below market rents on average, a 3% annualized rental bumps embedded in nearly all of our leases and the full year benefit of acquisitions completed during the fourth quarter. In addition, our external growth of opportunity remains substantial. For the pipeline of accretive investment opportunities enables our proprietary originations method. Since our July 2013 IPO, we have tripled the size of our company and yet our current portfolio represents a mere 0.8% market share of our infill Southern California market. Given the fragmentation and sheer size of the market equal in economic value to the next four to five largest markets combined we have a tremendous consolidation opportunity in front of us. Given recent post-election indications from Washington and general interest to calibrate the current phase of the real estate cycle, we thought it’s worthwhile to comment on a few topics. With regard to potential changes to trade or tariff policy and the potential impacts on industrial demand, it is important to differentiate our infill tenants as they disproportionately serve local and regional consumption as opposed to super regional trade or global logistics. As we have seen during prior periods of reduced imports or port slowdown, our infill tenants are less impacted by shifts in global trade flows as compared to those in the big box, logistics driven markets such as these Eastern Inland Empire. Incidentally with regard to trade flows, the combined ports of Los Angeles and Long Beach experienced the highest volumes since 2007 with over 15.6 million TEUs last year. On the other hand to the extent trade policy helps bring back more manufacturing to domestic soil, Southern California may also benefit as we are home to more regional manufacturing jobs than anywhere else in the nation. With regard to ongoing revenue and NOI growth, we have not yet seen any deceleration in trends within our infill market. Further, our ability to create value is not solely reliant upon rental rate growth. Our value add focus to increase cash flow and value at the property level means we have the capacity to generate favorable NOI grow even during phases of the cycle when market rents have plateaued. We'd like to thank our Rexford team for their tremendous dedication, creativity and results. Thanks to these efforts Rexford continues to deliver on our mandate to generate substantially better than core cash fields and strong accretive growth and the nation's largest and most sought after industrial market in infill Southern California. And with that I am very pleased to turn the call over to Howard.

Thank you Michael and thank you everyone for joining us today. First I'll recap our 2016 acquisitions then update you on our markets primarily utilizing market data from CBRE and then review our fourth quarter acquisition and disposition activity. During 2016, we acquired 20 properties totaling about 3.4 million square feet in our target Southern California infill markets for $372 million. The average project size was 168,000 square feet and the average tenant space size was 45,000 square feet increasing our portfolio wide average tenant size and helping to drive greater operational efficiencies. One third of acquisitions were in the Orange County submarket which CBRE projects to be the highest rent growth market in Southern California for 2017. About 25% of acquisitions were value add and the balance were core plus. For the full year, the aggregate inbound yield was 5.1% even with 11% of the space encompassing partially or fully vacant buildings. The aggregate projected stabilized yield on cost is just under 6%. Entering 2017, overall market fundamentals are as good as we've ever seen them and we expect the strong landlord favorite market conditions to continue in the Rexford’s infill markets. Excluding the Inland Empire East, Southern California closed 2016 with near capacity industrial occupancy of 98.2%. For 2016 asking rents increased 6.5% on a weighted average basis across all Rexford infill markets. The 1 billion square foot greater Los Angeles industrial market reported a 1.2% vacancy rate at year-end unchanged from 2015. Asking lease rates increased 3.5% in 2016 and CBRE projects rent growth of 5.7% in 2017. For full year 2016, the 250 square foot Orange County investor market reported 7.7% asking rate increase with the vacancy rate at year end at 1.6%, a 30 basis point decrease from 2015. CBRE projects that asking rents will grow 9.4% in 2017. The 278 million square foot Inland Empire West industrial market reported overall asking rate growth of 15% in 2016 with a year-over-year increase in vacancy of 40 basis points to end at 2.1%. C B R E projects 7.5% rent growth in 2017 for Inland Empire East and West combined. At year end Inland Empire West had just under 10 million square feet under construction, primarily larger spaces not competing with Rexford’s product. For 2016, 190 million square foot San Diego industrial market reported an all-time high in asking rates, increasing 6.2% for the year and an all-time low in vacancy ending at 4.5%. CBRE projects that Sand Diego asking rents will grow 6.8% in 2017. Now moving on to our Q4 transaction activity. In the fourth quarter, we acquired four industrial properties in our infill markets for aggregate $60.2 million. We continue to source and close transactions that provide us with expected stabilized returns in excess of market cap rates. About 67% of the assets were acquired off market or lightly marketed and 40% have value add components. In October we acquired 3927 Oceanic Drive, a 55,000 square foot building in north San Diego submarket for $7.2 million or 131 per square foot. The high quality property is 100% leased and was acquired from an owner user who required a flexible short-term structure and quick closing. The initial return is approximately 5.3% with an expected stabilized return on cost of 6.1%. In November, the company acquired North Figaro, 134,000 square foot 14-space multi-tenant industrial building in Wilmington within the Los Angeles South Bay submarket. The property was acquired for $13 million or 97 per square foot. The project is 53% occupied with most of the space leased on a month to month basis, allowing us to execute value add repositioning; it captures significantly higher rents over the next two years. After repositioning we expect to achieve a stabilized return on cost of 6.6%. In December, we purchased a two-building industrial complex containing 285,000 square feet on Fourth Street within the Inland Empire West submarket. The high quality property was acquired for $24.4 million or 86% per square foot. The buildings are fully leased to a strong tenant on a triple net basis at a below market rent providing a current cash return of 5%. Finally, in December we purchased an 84,000 square foot single tenant industrial building in the Central San Diego submarket for $15.5 million or $185 per square foot inclusive of excess land. This best in class property 100% leased to a credit tenant on a triple net basis was purchased at an attractive yield with longer term rent upside by capitalizing on excess land and cross-dock loading ideal for future last mile e-commerce use. The current return is approximately 5.3%. We're extremely pleased with our 2016 acquisitions and as we enter 2017 we continue to see stabilized and value add opportunities that meet our return criteria and we currently have $17.2 billion of new investments under contract. Finally in the fourth quarter, we continued to execute on our strategy to recycle capital through property dispositions. In November, we sold two industrial properties for gross proceeds of about $19 million. These proceeds were reinvested into our $24 million acquisition of Fourth Street providing for not only an efficient tax deferred exchange but we effectively traded a property with 60 tenants into a single tenant net lease building thus enhancing are operational efficiency. For full-year 2016 we’ve closed on five dispositions building $40.7 million. In aggregate, the in-place yields based on sale prices equated to 4.5% and the sale proceeds were all reinvested through tax deferred exchanges. As we move forward, we will continue to consider dispositions in many cases unlocking value and providing opportunities to a critically recycled capital. I'll now turn the call over to Adeel.

Thank you Howard, in my comments today, I will review our operating results for the fourth quarter and full-year 2016, then I’ll summarize our balance sheet and recent financing activity and finally I’ll discuss outlook for 2017. Beginning with our operating results. For the three months ending December 31, 2016, company share and core FFO was $15 million or $0.23 for fully diluted share. This compares to a $11.9 million or $0.21 per fully diluted share in the fourth quarter of 2015. Core FFO per share increased due to our strong acquisition activity completed in the past twelve months in the same-property portfolio growth, which potential offset by increased interest expense and higher diluted share count. Company share or FFO and company share or core FFO were essentially the same at $0.23 per fully diluted share. For the full-year 2016, Rexford reported company share and core FFO of $55.1 million or $0.88 per fully diluted share. Core FFO exclude impact from approximately $1.9 million of non-recurring acquisition expenses and about $1 million of non-recurring legal reimbursement. Including this cost, company hare or FFO was $53.3 million for the full-year 2016 or $0.86 per fully diluted share. Within our portfolio, we continue to capture strong growth and income. Same-property NOI was $17 million for the fourth quarter as compared to $15.5 million for the same quarter in 2015 representing an increase of 9.1%. Our same property NOI was driven by 7.8% increase in rental revenues and 4.6% increase in property operating expenses. On a cash basis, same-property NOI was also up 9.1% year-over-year. Turning now to our balance sheet and financing activity. During the fourth quarter, we utilized cash and sales proceeds to fund [indiscernible] investment activity and you should note that our preferred securities. During the quarter, we utilized our ATM has previously reported featuring approximately 572,000 shares of common stock at an average price of $23.14 per share. Raising gross proceeds of just over $13 million. as we enter 2017, our balance sheet remains strong and supported by growth objectives with approximately $15 million of available cash, zero drawn on line of credit, note that maturities in 2017 and only about $5 million of debt maturities in 2018. As you saw earlier this week, we executed a new $450 million senior unsecured credit facility including a $350 million revolving line of credit and $100 million term loan. The facility matures in February 2021 with two six months extensions and having accordion feature allowing an expansion to $1 billion under certain circumstances. This replaces our prior $300 million credit facility in additional to expanded availability of our spread, lower than yields facility. With regards to our dividend, this week our board of directors declared a cash dividend of $0.145 per share for the first quarter of 2017. Payable on April 17, 2017 to common stock and unit holders of record on March 31, 2017. This quarterly dividend represents an increase of 7.4% over the prior quarterly dividend grade. Finally I’d like to review our outlook for 2017,. Our guidance refers only to our in-place portfolio as of today and does not include any assumptions for acquisitions disposition or capital transactions which has now just been announced. For 2017, we expect to achieve core FFO range of $0.91 to $0.94 per share. Please note that our guidance for core FFO does not include acquisition costs, further cost that we typically eliminate when calculating this metric. Our guidance is supported by several factors. We expect year-end same-property occupancy within a range of 93% to 95% on year-end stabilized same-property occupancy within a range of 96% to 98%. We expect to achieve same property NOI growth for the year of 6% to 8%. Please note that our 2017 same property [indiscernible] 116 properties with an aggregate of 11.6 million square feet representing 78% of our consolidated portfolio square footage. For G&A, we anticipate a full-year range from $20 million to $20.5 million including about $5 million of non-cash companywide equity compensation. I’d like to note, though we are not providing guidance for 2017 acquisitions at this time, we remain excited about our robust pipeline. We expect to continue to grow our portfolio in accretive manner. As you look through the year, we look forward to updating you with our acquisitions activity and any updates to our full-year guidance. That completes our prepared with that we’ll open the lines to take any questions. Operator?

[Operator Instructions] Our first question comes from the line of Jamie Feldman with Bank of America. Please proceed with your question.

I though you guys did an acquisition in Inland Empire West, can you maybe talk more about that building and how that compares to some of the big box assets that maybe some of your peers own given your thesis?

Hi, Jamie it’s Howard. That was a very lightly marketed transaction. It actually recently encompassed two other buildings out of state and we convinced them to split that Southern California asset off and it was actually two high quality buildings on one piece of land and its master leased by a company called Heritage Bag and they actually sublease one of the buildings. So the other notable aspect of that was we completed that transaction 75% of the purchase price were through our text for exchange dollars from selling a project mainly in Orange County that had 60 tenants, so it was a very efficient trade for us not only in terms of moving into high quality property but the tenant size was really only one, but in terms of the quality of the buildings they're 28 to 30 foot clear ESFR sprinklers, significant amount of loading and being two different buildings they weren't, I wouldn’t really call them big box, they were only about 130,000, 140,000 feet each and they have some flexibility where we could even devise then down the road.

And the tenant use, are they distributing across the US or they’re just distributing locally?

Heritage Bag occupies one building and they manufacture plastic trash can liners and they distribute as well as manufacturer and that one is probably more regional. They have facilities around the country and the other tenant was a [indiscernible] that was their subtenant.

And then can you help us understand for the same-store guidance, how much that is like lease-up of transition assets and everything versus [indiscernible]?

Jamie, hi its Adeel, so we added 2017 outlook page on the supplemental which is page 30 that will hopefully point you to some of these questions. But I’m going to go over some key facts that are already on the page is the same-store approval is changing from 9.5 million square feet to 11.6 million square and as I have mentioned in our remarks 93% to 95% is our full-year occupancy guidance, on a stabilized basis is 96% to 98% and the same property portfolio growth is 6% to 8%. The one thing that we added on the guidance page is that about $3.4 million of that NOI growth that’s in the 6% to 8% is coming from the repositioning and the development page that have in the supplemental. Furthermore, just to give you some perspective, the starting 12/31/16, the ending I should say, the 12/31/16 occupancy for that new pool was 91.89%, which is lower the guidance of 93% to 95%. So hopefully that helps you fill some color for this new pool that’s going to be effective in ’17.

Okay. So are you saying 3.4 million is kind of repositioning assets, what is that in terms of basis points, the 6 to 8?

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

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

Sure. Jim, it’s Howard again. We pointed last quarter’s compression we were seeing in some of the larger asset sales. We mentioned about 1 million square foot transaction in Orange County that had a stabilized return in the very low 4s. We don’t see that changing at all in terms of the market share in Southern California. And we continue to point out in terms of Rexford, we’re really not a cap rate buyer in terms of value add activities we do and there is a distinct difference between the assets we buy were about 70% or lightly marketed or truly off market versus actively marketed properties. So, even the properties that you see being more actively marketed that are stabilized that are not some of these larger transactions, today, those are trading somewhere in the 4.5% to 5% cap range and that’s pretty consistent to what we saw last quarter as well.

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

40% of the 6% to 8%?

Correct.

Thank you. Our next question is from the line of Mike Mueller with JPMorgan. Please proceed with your question.

I guess going back to that, [indiscernible] but just going back to essentially what Jamie was talking about with this same-store pool, when you look out, I mean just thinking about a project like Midway where there is no NOI contribution today and a few years out, you got a $70 million project that’s going to have a big return on it and I think that will use the same-store pool. So I mean what’s the process of having an asset or project that big in the pool today, if it’s contributing nothing and if it’s going to create some noise to the pool going forward?

Hey, Mike. It’s Michael here. Nice to hear you. Thanks for the question. So ordinary course of business involves a lot of repositioning. And sometimes, it’s a large property like the one you pointed out with Midway. But frankly more often than not, it’s about small and medium sized properties and oftentimes it’s small medium size space within our properties. So if we start to carve out spaces or partial properties, it just starts to get very, very, very difficult to drive their NOI contributions or deductions and it just becomes very difficult. So what we do instead of that is provide you guys with both stabilized projections and outlook as well as consolidated. And so that's how we try to work around that.

Okay. So for something like Midway this year, is there a notable impact on it because it was put into the pool this year? It looks like the total investment so far is 48 million, but was it a negative hit to the pool, I’m not sure what the contributions was last year?

Well, the impact, Mike, this is Adeel. The impact to the pool is very insignificant if any because while the project is under construction, the minimal costs that are being incurred are being capitalized. So the fact that you have a 15 and 16, compared to the period of 16 and 17, you’re not going to see a lot of noise coming through. It’s going to be fairly muted. It comes with that project.

Okay. So something can be in the same-store pool, but be capitalized and not impacting the NOI results?

That’s fair. Yes. Absolutely. I think Midway is a great example, because it’s an entire project and if you have a partial project, you can have that impact of capitalization of and when we talk about capitalization, it’s primarily tax within insurance and not a whole lot more. But those are the lion’s share of expenses that you have typically anywhere, just to carry a project during those repositioning. So, yeah that will typically happen, but basically it’s a good example where, but this year, this year versus last year, the impact to the pool is 30 million because of that year-over-year comparison in cash position.

Okay. And then, I guess one other question real quick now and I’ll hop off. I think there was a comment about the mark to market in the portfolio being 9%. I think the cash spreads thus far have been averaging around 5. So is it reasonable to assume and as we look out to ’17, ’18, your spreads gravitate upward that 9% number?

Hey, Mike. It’s Michael again. You're right. Historically, we’ve had similar mark-to-markets and back in some prior periods have been a little bit wider than 9% mark-to-market, but the fact of the matter is at every point in time, we’re not necessarily pushing every renewal to the maximum market rent. So that's marketable there because there are other efficiencies associated with keeping that tenant and you’d have to invest in TIs and commissions and all that sort of thing. So it’s a balance and I think our focus right now is rolling tenants where we can drive NOI growth and where we can drive an improvement in the quality of the tenant base. And in the process, we're also extending out this point of the cycle, the average lease terms which is a great attribute as well.

Our next question is from the line of Tom Lesnick with Capital One Securities. Please go ahead with your question.

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

Hi. Tom. It’s Howard. That's a broad question with a lot of interesting perspective I can give you on it. [indiscernible] today would tell you that Southern California is the number one destination of the investment capital, at least seeking to get into by industrial in the country. So there's a lot of demand from an institutional standpoint for assets better located here. As far as the value add side of it, we haven't seen that institutional capital really willing to deviate too far off the fairway in terms of what they buy. In fact, I’d give you a great example we bought in third quarter, we bought a project in Fullerton that was, I think it was like 340,000 feet. It had a 200,000 foot building on a site and it had some smaller buildings, but it also had some value components to it. We wound up paving some excess land, almost an acre of land and expanding a lease with a land storage tenant to create more value and we're also in the process of repositioning a freestanding building that had been used as 100% office and we're converting that to more traditional industrial and we’ll stabilize that at a substantially higher yield than institutional buyers are willing to achieve on some of the stabilized assets. And I was just asking the brokers who sold us about it last night and they just confirmed again that people just don't know how to handle anything that has a value add component really. So the long answer to a short question I guess might be, no, we haven’t really seen a deviation where more people would like to devaluate it. It’s not easy to do. We've got a great team here at Rexford that helps us do it and we work hard to make it work.

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

I appreciate that insight. I guess looking at dispositions, you noted in the release favorable market conditions -- favorable market dynamics as a reason for sale, given that market conditions appear to -- appear robust and don't appear to be slowing down at all, do you expect to potentially look at selling more than you historically have in ’17?.

We really aren't offering any dispositions guidance at this point, but as you know, we do look at the portfolio very carefully and we'll probably wind up selling something this year. We do have one small project right now that’s actively on the market, about 60,000 feet and it has a bit more office tenants that we prefer to have in a multi-tenant type project. So we felt it was a good time to dispose of it. By the way, the project you referred to is being sold with the market timing. That was actually a fully marketed investment sale. And I've mentioned earlier in my comments that we had basically traded that 60 tenant property into this single tenant building [indiscernible]. So that was really more of an opportunity for us to dispose of something that had a poor cap rate, range and moves into that 5, which had much more operational efficiency. So we do look for those opportunities.

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

Well, it's really more of an operational philosophy, right. We want the tenants in our portfolio to be with us in good times or bad and we have to treat them right. So when we're bringing in a new tenant obviously, we're going to achieve the highest possible rent we can get in the marketplace. We've got multiple people typically competing for spaces and that’s the time where we really maximize the rent, not to the point we alienate and offend some of the existing tenants, but that's not to say we don't push the rents as hard as we really can. But it's a bit more delicate of a negotiation than with the new tenant in that respect.

Thank you. [Operator Instructions] The next question is from the line of John Guinee with Stifel. Please go ahead with your question.

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

Hi, John. It’s Howard. It’s a great question because we are losing a lot of investment supply here in Southern California and I think what we see is in some areas, there's a huge differential between the industrial values and some of the other converted or repurposed uses, for instance downtown Los Angeles where you have the arts district where you take properties that were -- selling is industrial for maybe $100 a foot and all of sudden, they're worth 400 that convert to creative office and presidential, but that's really not the norm when you really look more on a broader geographic basis and I'll give you another example maybe that will help answer the question. We had a project we sold during the year that was in the Mid-Counties area. It was 153,000 foot older industrial building, built in the 60s, it was 17 foot clear and we had interest in it from residential developers who wanted to build multi-family housing there and we were able to achieve a sale of that building to an owner occupant that was arguably the same value or perhaps even higher value than what those residential land value is converted. And the interesting part was if you looked at the income we had in that project, prior to the sale, it effectively was 1.4% yield on the shale price in terms of the prior income. So our bigger opportunity really seems to be those user sales versus going through the trouble of having to convert to different uses on the typical product I’ll say that we are.

Our next question is from the line of Manny Korchman with Citigroup. Please go ahead with your question.

Hey, guys. Good afternoon. Michael or maybe Howard, in the beginning of the call, you spoke about different macroeconomic trends and how they might impact your assets. Has that changed tenant philosophy at all? I know you spoke about potential for increased manufacturing. Aare you having manufacturing tenants come to you looking for incremental space?

Hey, Manny. Good to hear your voice. It’s Michael. Great questions. Well, I wouldn't say it's driving a substantial change in our tenant strategy at this point. We are seeing the complexion of tenants evolve over time and I wouldn't say that's necessarily changing dramatically, given what's happening in Washington or otherwise. And again, we are seeing an acceleration in the e-commerce driven tenants and businesses, having a nice impact on our business and we foresee that going forward. And I think the key thing to think about our business is that we are focused on generic industrial space and to us that means, call it 5% to 18% office and the rest warehouse and loading doors. And the benefit of that as opposed to targeting specific industries or targeting a little more manufacturing versus distribution, the beauty of that is that in and of itself that enables us with that generic product focus to target and appeal to the largest, deepest and most diverse universe of tenants out there. So just to give you some examples, we have a very warehouse driven space and they want to do a little more manufacturing, maybe the next tenant, maybe they need to have some quality control rooms, whatever it is, we put up a little drywall at a few rooms. We want to revert it back to warehouse, you take down the drywall. So staying true to that generic industrial space footprint is very, very valuable, it's very powerful and we're extremely well positioned to adapt to the market, whether it's an e-commerce tenant coming in, whether it’s a distribution tenant coming in or someone is going to do a light manufacturing. So that's really how we see it.

And then maybe on the transaction side of thing, has any of the discussion about 1031s either going away or changing impacted the transaction market or on the buying or selling front?

It's really too soon to know, Manny. We don't know what's really going to get changed and everyone is certainly talking about it, but it's not changing anybody’s behaviors in terms of what I think we’re seeing.

Your next question comes from the line of Blaine Heck with Wells Fargo. Please go ahead.

Hey, guys. Good afternoon. So in guidance, you’re implying year-over-year increase in G&A of I think roughly around 16%, which seem tied. Can you just talk about that and kind of what the main components of the increase are?

Hi, Blaine. It’s Adeel. So a couple of things before I jump in to the components this year. Full year G&A was $17.4 million. One thing to note that we did benefit from $1 million of recovery in prior litigation costs from the insurance companies. So our run rate was really about $18.4 million for the full year. So that's number one. And that obviously once you’ve kind of used that in comparative to the guidance that we're pushing for ’17, the delta is smaller than 16% that you talked about. As far as the guidance for ’17 and what's included, I think the run rate from 18.4 of ’16 carries forward and then we did an 8-K earlier this year in terms of the equity that was granted to the main executive officers and the company at the tail end of 2016. So you're seeing the impact of that. And the other thing that I focus on there is that this is the second year that board granted us that equity, so you're seeing the ladder effect of that equity grant coming in this year. So that’s essentially the biggest piece that’s coming into the guidance.

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

Hi, Blaine. It’s Michael. Yeah. I think we are seeing nice operating leverage being demonstrated through our growth and I think that's going to continue and it frankly should accelerate. We've got our regional footprint in place in terms of office presence. We have four regional offices now. We don't need any more. And the good news is we don't have to replicate the top end of our management team, because we're staying focused in California. And so there's going be a couple more senior hires over the next year or two, but we see that operating leverage starting to accelerate frankly as we continue to grow the square footage. And I think you're seeing that, you can see that through G&A as a percentage of our NOI and I think you're also seeing on a consolidated basis, if you just look at our financials. I mean if you look at our square footage increase through 2016, it was about -- we increased square footage by about 25.6%, yet, we increased NOI by over 37%. So those are the things that we really focus on in the business.

Blaine, just one last thing I wanted to add in terms of Michael's, so that 16% that you talked about that's really about 11%. So there's about 500 basis points delta. And the other thing that I alluded to was the fact that the grant that was issued -- granted I guess in 2016, like I said that’s the second year. All else being equal, if that continues its trend in ’17 and beyond, 2019 will be the stabilization year. But just something to keep in the back of your mind is in terms of how that impacts future G&A in terms of just how the equity comp impacts the G&A.

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

Hi. It’s Howard. On Midway, we're pretty deep into the project. I think, we had some original projections that we've just fine tuned a bit more. We've decided bit of a different approach on some aspects of it and so it just had a correction on the timeline. The De Soto project is actually completed now and we're in lease up on that. And then as far as Anderson, Anderson is also completed and we're expecting we’ll be able to announce some strong leasing activity there, probably knock out all the space frankly in the first quarter.

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

Our next question is a follow-up from the line of John Guinee with Stifel. Please go ahead with your question.

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

Actually, no that’s –

[Technical Difficulty] Thanks.

Thank you.

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

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

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