Rexford Industrial Realty, Inc. (REXR) Q2 2019 Earnings Report, Transcript and Summary

Greetings and welcome to Rexford Industrial Realty Inc's Second Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Steve Swett of ICR. Thank you, please begin.

We thank you for joining us for Rexford Industrial's Second Quarter 2019 Earnings Conference Call. In addition to the press release distributed yesterday after market close, we posted a supplemental package in the Investor Relations section on our website at www.rexfordindustrial.com. Today's call, management's remarks and answers to your questions contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review our 10-K and other SEC filing. Rexford Industrial assumes no obligation to update any forward-looking statements in the future. In addition, certain financial information presented on this call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP reconciliations and an explanation of why such non-GAAP financial measures are useful to investors.Today's conference call is hosted by Rexford Industrial's Co-Chief Executive Officers, Michael Frankel and Howard Schwimmer; together with Chief Financial Officer, Adeel Khan. They will make some prepared remarks, and then we will open the call for your questions.I will turn the call over now to Michael.

Thank you, and welcome to Rexford Industrial's Second Quarter 2019 Earnings Call. I will begin with a summary of our operating and financial results, Howard will then cover our transaction activity, Adeel will follow with more details on our financial results, balance sheet and guidance. We will then open the call for your questions. Our team just completed another exceptional quarter. Rexford's target infill Southern California markets remain strong and tenant demand continues at historic levels driven by robust growth of regional consumption, business activity, e-commerce and the continued push for shorter delivery time frames.Despite this intensity of tenant demand and historically low vacancy within our infill markets, permanent barriers limit new construction even as the market continues to lose supply that is being converted to other uses. As a result of these superior fundamentals and the high barriers that constrained supply growth, our target infill Southern California market is also the most highly valued industrial market in the nation by a substantial margin. Scarcity of supply has driven rental rates to levels that have consistently been about 80% higher than the average of the next 10 largest U.S. markets.As a consequence, first square-foot building values are about 3x higher than the average of the next 10 largest markets. What we find interesting is that, in addition to the nation's highest rents, rental rate growth in our markets has increased by about 9.4% on average over the prior 5 years. Our market rent growth has been nearly double the national average according to CoStar, driven by the unique supply/demand dynamics within our markets. However, Rexford's performance reflects more than the unique dynamics of our markets. More importantly, it is a direct result of the strength of our team and the consistent execution of our value-driven strategy.Our exclusive focus in the infill Southern California industrial market enables us to penetrate more deeply and other less focused investors, which translates into favorable cash flow growth, value creation and what we consider to be the attributes of what makes for a great business. First, these qualities include our ability to identify and source investments through off-market or lightly marketed transactions, representing about 70% of transactions completed since our 2013 IPO, which translates into better economics and superior cash flow and NAV growth. Second, these include our creative capacity to increase cash flow and value through modernization and repositioning of underutilized industrial property.And finally, our vertically integrated operating platform enables us to outcompete on leasing, asset management and customer service. We believe our operational excellence drives outperformance over time and through cycles. Now turning to our second quarter results. We increased company's share of core FFO by 40% and increased core FFO per share by 11% to $0.30 per share over the prior year quarter.Our same property NOI grew by 6.8% on a GAAP basis and by 11.1% on a cash basis. Excluding the impact of space under repositioning, our stabilized same-store NOI growth was 3.9% on a GAAP basis and 7.9% on a cash basis. Our stabilized same-property portfolio closed the quarter at approximately 98% occupied. Our leasing performance reached record levels during second quarter. We signed 106 leases for 1.7 million square feet. Our leasing spreads were an exceptional 39.4% on a GAAP basis and 22.3% on a cash basis.On new leases, our spreads were 45.6% on a GAAP basis and 28.4% on a cash basis. Our retention rate was 85% for the second quarter and net absorption was about 431,000 square feet. With regard to our external growth, we completed approximately $340 million of acquisitions during the second quarter, bringing our year-to-date investment volume to $489 million with 77% of this year's investments completed through off-market or lightly marketed transactions. To support this growth, we continue to maintain a fortress like low leverage balance sheet, providing us with maximum flexibility to capitalize upon emerging opportunities.Our net debt-to-EBITDA ratio was 3.2x at quarter end, which equates to approximately 11.1% debt to total enterprise value. As a result of this outstanding execution by our Rexford team, we are pleased to announce that we are increasing our full year guidance and now expect company's share of core FFO in the range of $1.19 to $1.21 per share. As we reflect upon the company's performance and unique market position, we couldn't be more excited about our future growth opportunities.Although we've grown our portfolio over fourfold to 24 million square feet since our IPO six years, our portfolio only represents a 1.2% share of the infill Southern California industrial market. In addition, with about 1 billion square feet built prior to 1980, our value-creation opportunity through renovation and repositioning of existing buildings is extensive. Consequently, we are exceptionally well positioned as a value-driven consolidator of industrial property within infill Southern California, the nation's largest and most sought-after industrial market. Finally, our comments would not be complete without acknowledging and thanking our Rexford team for their tireless dedication, creativity, teamwork and excellence that have enabled our success and achievement.I'm now very pleased to turn the call over to Howard.

Thanks, Michael, and thank you, everyone, for joining us today. The infill Southern California industrial market remains exceptionally strong with a supply/demand imbalance that continues to favor owners of well-located industrial real estate driving rents and occupancy levels. Our target markets, which exclude the Eastern Inland Empire, ended the second quarter at 1.9% vacancy, with asking rents up 8.4% on a weighted-average basis over the past 12 months.With regard to recent investment activity, during the second quarter, we completed 10 acquisitions totaling approximately $340 million adding 1.8 million square feet to our portfolio. Approximately 70% of these transactions were off-market or lightly marketed and sourced through our proprietary research and broker relationships. In April, we acquired East 15th Street, a 238,000 square-foot industrial property located in the LA Central submarket, in exchange for partnership units through an UPREIT transaction valued at $28.1 million.We completed a new 10-year lease with a quality tenant shortly after closing and stabilizing the asset at an approximately 6.1% yield. We also acquired a 3-building portfolio, containing 456,000 square feet for $76.6 million located in the San Gabriel Valley, Orange and San Diego counties. The portfolio generates an initial yield of 4.3% with a projected stabilized return on total cost of just over 5%. We acquired Rancheros Drive, a 49,000 square-foot, 100% leased industrial property located in the North San Diego submarket for $7.9 million.The property generates an initial yield of 6.1%. In our largest off-market transactions this quarter, we acquired San Fernando Business Center, a 5-building, 88% leased industrial park, containing 592,000 square feet located in the LA San Fernando Valley submarket for $118.1 million. The initial portfolio yield is 3.6% with in-place leases estimated to be 20% below market on average. After lease roll and implementing certain value-add enhancements, we project a year 3 return of approximately 4.7% and growing thereafter. In another off-market transaction, we acquired Waples Court, a 106,000 square-foot vacant high image industrial building located in the Central San Diego submarket for $21.3 million.We intend to demise the 31-foot clear building into 2 units to create higher rental value space, and our projected stabilized return on total cost is 5.3%. We also acquired Susanna Road, a 53,000 square-foot, 23 dock position transload facility located in the LA South Bay submarket for $13.5 million. The property is fully leased to a single tenant and generates an initial yield of about 5%. In May, we acquired Oxnard Street, a 71,000 square-foot, 4 or 5 freeway frontage industrial property located in the LA San Fernando Valley submarket for $16.8 million.+The property is fully leased to a single tenant at an initial yield of 5.3%. We also acquired 9750 San Fernando Road, a 2.7-acre paved industrial land site located in the LA San Fernando Valley submarket for $7.4 million. The property is fully leased to a single tenant at an initial yield of 6% and offers the potential for future development of a new distribution building. We also acquired Turnbull Canyon Road, a 191,000 square-foot, 30-foot clear industrial building with 44 dock doors, located in the LA San Gabriel Valley submarket for $27.1 million.The property is fully leased to a single tenant at an initial yield of 4% with in-place rents estimated to be approximately 30% below market. Finally, in June, we acquired a 15.5-acre fully entitled development site in the Inland Empire West submarket for $18.2 million plus an additional $5 million of holdback to be released to the seller upon meeting certain development milestones. The seller will serve as the fee developer for construction of a 334,000 square-foot, 6-building industrial complex, comprising state-of-the-art warehouse space.The project is scheduled to be completed in the second quarter of 2020 for a total all-in cost of $56.7 million and is expected to yield about 5% at stabilization. Turning to our repositioning activity. During the second quarter, we stabilized West Carson Street in the Los Angeles South Bay submarket with a 10-year, 44,000 square-foot lease to a credit tenant, achieving a stabilized return on total cost of 6.3%. At midyear, we have 1.5 million square feet of space under repositioning or future development with several completions targeted for the second half of this year.With regard to dispositions, in June, we sold a 62,000 square-foot, 2-building industrial complex in Orange County for $6.8 million, achieving a 13% IRR. We will continue to pursue asset sales opportunistically to unlock value and recycle capital. Finally, we continue to leverage our deep industry relationships and our proprietary research and technology as we add to our pipeline of acquisitions. After a strong first half of the year, we have another $324 million of new investments under LOI or contract subject to completion of due diligence and satisfaction of customary closing conditions. We will provide more details as transactions are completed.I'll now turn the call over to Adeel.

Thank you, Howard. Beginning with our operating results. For the second quarter 2019, net income attributable to common stockholders was approximately $12.8 million or $0.12 per fully diluted share. This compares to $5.2 million or $0.06 per fully diluted share for the second quarter of 2018. For the 3 months ended June 30, 2019, company's share of core FFO was $32.1 million as compared to $22.9 million for the 3 months ended June 30, 2018. On a per share basis, company's share of core FFO was $0.30 per fully diluted share, representing an 11% increase year-over-year.Same-property NOI was $38.8 million in the second quarter, which compares with $36.3 million for the same quarter in 2018, an increase of 6.8%. Our same-property NOI was driven by a 5.2% increase in same-property rental revenue, and same-property operating expenses were essentially flat, increasing by just 0.4%. On a cash basis, same-property NOI increased by 11.1% year-over-year.Turning now to our balance sheet and financing activities. As we continue to seek opportunities to drive long-term growth, we intend to maintain our strong liquidity position and balance sheet capacity to allow us maximum flexibility and access to a well-priced capital.During the second quarter, we issued approximately 5.7 million shares of common stock through our ATM at a weighted-average price of $38.21 per share, which resulted in net proceeds to Rexford of approximately $213 million. At the end of the second quarter, we had approximately $183 million of cash and full availability on our $350 million credit facility. We also ended the quarter with $535 million of availability on our ATM program. At June 30, we had no debt maturities until 2022, and our liquidity position is strong with a net debt-to-EBITDA ratio of 3.2x.In July, we closed on a $100 million private placement, including $25 million of 10-year unsecured notes with a rate of 3.88% and $75 million of 15-year notes with a rate of 4.03%. The proceeds will be used to fund near-term acquisitions and repositioning activity. With regard to our dividend, on July 29, 2019, our Board of Directors declared a cash dividend of $0.185 per share for the third quarter of 2019. Payable on October 15, 2019, to common stock and unitholders of record on September 30, 2019. Additionally, our Board of Directors declared a preferred stock cash dividend of approximately $0.37 per share for the third quarter of 2019, payable on September 30, 2019, to our preferred stockholders as of September 13, 2019.Finally, we're increasing our full year 2019 guidance for company's share of core FFO to a range of $1.19 to $1.21 per share from our previous range to $1.18 to $1.20 per share. Our new guidance range is supported by following updated assumptions: same-property NOI growth to range from 5% to 6.5%, up from our previous range of 4.5% to 6%; year-end same-property portfolio occupancy of 96% to 97%, up from 95.5% to 96.5%; and year-end stabilized same-property portfolio occupancy of 97% to 97.5%, up from 96.5% to 97.5%.The rest of our guidance assumptions are unchanged and detailed on page 23 or our 2Q 2019 supplemental information package. Please note that our guidance does not include the impact of any transactions or capital market activities that have not yet been announced, our acquisition cost or other costs that we typically eliminate when calculating this metric. That completes our prepared remarks.With that, we'll open the line to take any questions. Operator?

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

Great. Thank you. I guess just to start I want to talk about - ask you about the San Fernando business park. Can you just talk about the potential occupancy upside? What you're seeing in terms of tenant demand? And then, I think you said it was a stabilized 4.7% return. So kind of what gives you comfort at that number after you've done all the work?

Jamie, it's Howard. Thanks for the question. So the San Fernando Business Center is really a Class A project in that market. It's been a bit mismanaged. So there's some deferred maintenance and some - really some modifications we can do to drive rental value there. It had a bit of vacancy. It's really one building, and what we're doing on that building is we're actually demising it into 3 units.We've actually - I think we're pretty close to setting a deal on one of those units, and I expect probably we'll end up leasing the other 2 units pretty close to when construction is completed. But looking at that project, the in-place rents were 20% below market. So there is some great upside. The 4.7% yield is really just looking at the initial lease-up and then some role that's happening. So that's a project that will climb over 5% in the not-too-distant future after that 4.7% stabilization.

And Jamie, this is Michael. I'll just add that when you hear us project out future yields, typically, we're not assuming anything close to the market rent growth as has been occurring. So there is room for outperformance. But frankly, that's just how we like to under rent.

Okay. That's helpful. And then can you talk about you've got expirations next year from cosmetic labs and command logistics. Any early read on those leases?

Yes, it's Howard again. So we're making a lot of progress actually on those expirations. If you look at I think the top 14 expirations next year in terms of revenue that represents about 35% of 2020 expirations. And we're already in discussions with I think 60% of those top 14. And if you even look at what we've done this past quarter, 60% of our renewals were for expirations that occurred starting after January 2020. So we're well ahead of our efforts in terms of those expirations. And I think we're trending also some of the lease term as far as those renewals - those are terming out. I think our average lease term this past quarter was about 6 years, which is well above what you've seen in the past.

So those 2 are on your top tenant list? Is there anything specific about those 2 leases?

Well, as far as cosmetics, we've been talking to them. They actually - it's a 300,000-foot building. They've subleased out 100 of it. And from the early discussions we've had already, they and their subtenant don't really intend to leave. Frankly, there is nowhere for them to go in that marketplace even if they wanted to leave. So yes, we're fairly comfortable at this point that we'll be able to renew them, but we - it's not 100% of it.

And then command logistic services that are a top tenant also?

Yes, same story there. The South Bay market has 0.6% vacancy rate. So that's a largest market in the Southern California region like 212 million to 215 million square feet. And again, nowhere to go. We had them in some temporary space for a short time. They actually downsized earlier this year. They have moved out of 100. And I think they're pretty comfortable in the building that's there. And the tenant we put into the 100 is actually interested in their space, if they do leave. So we're pretty confident in our ability to maintain an income stream out of that space as well.

Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed.

Hey, guys. Good morning. So clearly, there have been some large transactions in the market recently and aggressive bidders on industrial properties. Does any of that deal flow change the way you guys think about your business or your capital recycling strategy?

Hi, Blaine, it's Michael. Thanks for the question. Good to hear from you. There have been some larger portfolio transactions. Really, frankly, doesn't impact how we see our business or our business model or how we're underwriting transactions. I think if you see our transaction activity, it's indicative of the same strategy we've been executing ever since we went public about 6 years ago. And yes, we find that every few years you get a little surge in the institutional portfolio trading focusing to mark-to-market in their portfolios. So it's not unusual. The activity we've seen this year is not unusual. It's sort of more than last year in terms of large portfolios, but certainly indicative of what we've seen many years prior.

And also, Blaine, it's Howard. I think what's interesting and very comforting is to see what kind of yields we're hearing those larger portfolios are trading for, which does indicate that the Southern California pieces in them are trading at extraordinarily low yields, most likely below a 4% or perhaps even well below a 4% yield.

All right. Okay. That's helpful. And then retention was very high this quarter at 85%, and you guys continue to see extremely strong rent spreads. But I guess, how do you think about the desire to keep steadily high occupancy versus maybe pushing rents even harder on the renewals?

Blaine, it's Michael. As we've talked about this in the past and we're aggressive, we work hard, we have a tremendous leasing team that works with our listing brokers and often works directly with our tenants. And we think they're doing a great job at maximizing our rents. And there's a balance. And I think in some quarters, you've seen us roll more tenants and not renew tenants who wanted to stay because we could re-tenant at much higher rates.And it's just hard to predict quarter-to-quarter how those percentages of those we keep who want to stay and those we roll might fall in place. But I think what we're seeing today, as Howard mentioned, is an exceptional level of occupancy in these markets. Tenant demand that is truly at historic levels and tenants who have very few options in these markets. So you're seeing retention this quarter really performing for us.

Do you guys have any specific expectation for retention in 2019?

It's really tough to say. We have a lot of expirations through the end of the year still and commencement activity. So it's hard to speculate. But - and I wouldn't - and we don't believe that retention also is a primary metric for us because we've been creating so much value by - from time to time rolling tenants and rolling to hire paying tenants. So it's just - we have a tremendous number of small, medium-sized leases rolling through the end of the year. So in terms of your modeling, I wouldn't encourage you to necessarily model 85% retention. But I think we've been averaging probably closer to 70%, plus or minus.

Our next question comes from the line of Manny Korchman with Citi. Please proceed.

Hey, everyone. Just wondering if there were other grounds of development opportunities out there that you're looking at, either in the same structure where you thought the seller is building it for you or where you do it yourself or hire someone to do it?

Manny, it's Howard. We've closed similar transactions of that in the past. We've closed something in the Ventura County Market last year. It was a smaller building. It's 57,000 feet. And it was a fairly similar structure where the development - developer finished out the project and we were able to actually lease that one prior to completion and I think we stabilized that at about 5.7% return. Yes, we're talking to some of the developers out there. But I think a lot of them have the opinion right now that there shouldn't be any difference in pre-selling of project even with no leasing in place versus what a stabilized Class A project would sell for.And what I mean by that is, some of the conversations I've had, they seem to think they're worth 4% returns on - forward commitment on a vacant building. So that's not something that Rexford believes in. And obviously, when I described that we expect to stabilize this project that we transacted on at about a 5% return, that's very attractive compared to what other people feel these are worth. So yes, for us, occasionally, we're going to come across something where a developer needs to close - this particular developer did need to close. They had this thing tied up for quite a while. It's actually part of a little bit larger developing.There's a retail component, which they intended to keep. So this actually helped them and it enabled us to achieve a much higher return on a stabilized basis. But it's also interesting, and I might point out to you, we decided to do a deep dive this past quarter and take a look at the amount of construction that's occurred in our markets. And you also have heard us mention how much product is being removed from the markets. And what I found really interesting was just looking at the greater Los Angeles marketplace, which is about half of the market in Southern California, little over 1 billion square feet is in that market.And over about 8.5 years, we had net new supply added of about 8 million feet, and that's the difference between - I think it was about 20.6 million square feet added and the rest of the market removed. Whereas you look at - on the other side of that, the Inland Empire, today, there's 28 million square feet under construction and 140 million square feet was added in that time line. So yes, it's rare to find any type of development in our infill markets that makes a lot of sense when especially the type of product that Rexford focuses on, which is the sort of a mid-bay or smaller bay for lease product, there hasn't been much of that built in the past 20 years, in fact. It's been mostly the bigger box product.

And by the way, Manny, to put that in perspective, the 8 million square feet or so that has been developed in infill Southern California is dwarfed by the amount of product that has been taken out of the market and converted to other leases. So it's just a very unique marketplace.

Just - it looks like the larger portfolio that you bought in the quarter came from an institutional fund. Are they more or less likely to such a fund, especially they hit their time lines of maturities to go off-market? Or do you think that you could sort of become their relationship buyer if the product set matches what you're looking for?

We're pursuing a lot of product in the marketplace from those types of sellers. It's pretty unusual, you find one that is willing to actually do an off-market deal, but we ask all the time. We have relationships with them. So occasionally, you're going to see us be able to transact like that. But it's more typical with an institutional seller internally being required to expose a property to the market so that they run a process.They were comfortable because of their broker relationship between ourselves and them, and we just often agree on a number that for us we were very comfortable with and we're very deep in the market. This was - this transaction was in the San Fernando Valley. We own over 3 million feet there. So we have the ability to see forward a little better than most buyers or, frankly, even most owners on the product. And so for us, it was just a unique opportunity.

And Manny, it's Michael. It's a great question. And I think part of that - what I'm hearing your question, I think part of the question is, are there portfolios out there in general that we can take off-market and acquire without a fully marketed process. And I think it's important to step back and we think about the overall market. Because the institutional ownership in our market is actually the smallest percentage of ownership, smallest market shares. The largest market share by far is in private hands, individuals, non-real estate professional owners.And that represents probably upwards of 1 billion square feet or so that we're tracking that are owned by non-institutional private owners. And we have a range of conversations ongoing with them that we believe will be productive. And it's really interesting, the commonality that you have with a lot of the private owners and some of these institutional owners is at the end of the day they're more or less passive owners.They're not striving to eke out every last dollar value in their portfolios. They're not necessarily aggressively looking forward and investing in their portfolios to create value. And so there's a tremendous opportunity of embedded value-creation opportunity for us, both among the private ownership and the institutional ownership within our infill markets. So again, that's just an integral part of our business model.

And next question comes from the line of Chris Lucas with Capital One. Please proceed.

Hey, good afternoon, everybody. Actually, Howard, you did a great job of talking about the dynamics in the market as it relates to rents and new supply. I guess I'm just kind of curious as to sort of you've had a number of years now of really robust rent growth. And are we getting to a point where industrial displaces on from higher or better use opportunities for land? Is there anything that changes that you see, say, in the next year or two, the existing dynamics of strong rent growth and very meager supply changes?

Well, we're still going to lose industrial supply. There's just no more land in these markets, and to put a high-rise residential project on a site, hotel, retail, it's just - it's worth more to be converted than some of the industrial values even at these higher rents. Yes, we do need more supply and part of our strategy is sort of unlocking the value and really the additional capacity in some of the older buildings that we're able to buy.A great example is - just by upgrading the fire sprinkler suppression systems; we're able to create 50% to 70% more capacity within the building on a cubic basis because of fire codes. But back to your question on the rental rates, keep in mind, the land values have skyrocketed. So although rental rates have moved up, it just doesn't mean that everywhere you look, you might be able to do some development. You've seen land go from - or right now, we saw it in the past year, a year or 1.5 years, all of a sudden escalate up into the $70, $80 a foot range in some of our tighter infill markets, which makes development all the more challenging.So the floodgates aren't going to be unlocked in the near future to create a lot more development. But we needed and continue to see it sporadically. And we'll try and be a part of some of that development when we find some opportunities that make sense so we can stabilize them at more attractive yields.

So are you getting - I guess, maybe, then the follow-on for me would be just on your existing portfolio on some of the assets you talked about value creation. I guess are you getting to a point where it's more than just systems upgrades, but actually, a point where rents are getting to where you would take the building off-line and either demolish and rebuild or expand in some way in order to sort of capture that value?

Yes. That's a good question. First of all, these infill markets function a lot differently than markets that are not land-constrained and non-land-constrained markets, you always have a risk of new development, everybody's always looking for the best in quality and modern features. But then you move into the infill markets, where you can't supply that type of product. We claimed a term really to help understand it, we call it relative functionality.What we find is the user is looking for the best building on a work to solve for their needs and in these markets - on the infill markets, Greater LA, for instance, had a 1.3% vacancy rate. So options are fairly limited. So the value of the existing supply of buildings for the most part still is higher than the underlying land value. That's not to say that some of the buildings we own, we don't think about these acquisitions for long-term covered land place. And down the road, you may see us replace a building or 2 here and there. But yes, for the most part, it's not really changing dramatically.

Chris, this is Adeel. The only thing I would add that Howard just added, if you take a look at our repositioning page on the supplemental, we not necessarily have to take a building completely off-line, but we consistently look at our spaces and do repositioning that doesn't meet the definition where it's down for 6 months or more, right? So we're constantly tweaking the buildings - existing buildings there to unlock the value that Howard just talked about and you can kind of see the activity that takes place.

And Chris, just not to belabor the subject, but a great example of what you're asking, we had just bought the property in downtown LA, 235,000 feet, that was an UPREIT transaction. And we had grandiose plans to put that on our repositioning page and have the extensive program plan. But we leased the building within I think about 60 days after buying it and stabilized it at 6.1% return. And that's I think a better example of really what's happening in the market space. It's just so rare that tenants are willing to pay up, and it made more sense for us to capture that transaction. We leased it 10 years and, I think, I mentioned at 6.1% yield versus going ahead and taking it down for an extensive period of time.

Okay. Great. That's really helpful. And Adeel, while you chimed in, maybe - I want to ask you a question just about the balance sheet and the leverage ticked up a little bit, obviously, you over acquitised a lot in the first quarter, more balanced in the second quarter. Just thinking about the back half of the year, given the robust activity levels, should we be thinking about the leverage sort of flat here or trending back toward your sort of goals? Or how should we be thinking about leverage back half of the year?

Yes. Thanks, Chris, for the question. So just some basic facts, right? We ended the quarter with $183 million of cash and post quarter, as we discussed in the earnings opening remarks, about $100 million private placement. So we have effectively around $283 million of cash plus full availability under our credit facility, right? So - and if you kind of put those 2 numbers that gives you, the $283 million plus $350 million, about $633 million of liquidity. If you kind of put that against a $324 million of Esko right it kind of gives us a very nice place to start.So I - and the other point that I think we've talked about in the prior call is we like the balance sheet the way it is. I think that is strength and we like to operate if we can at those levels. So we will just try to maximize the best social capital that's out there. When we saw an opportunity in the private placement, we did that. But just keeping the strength of the balance sheet is very important for us, especially at this part of the cycle, and I think that is something that we'll continue to try to maintain in the grand scheme of making sure that all the other points of reference like the FFO accretion and the NAV is working along just fine. So I think that is part of the strategy. We'll try to manage that to the best of our ability.

Our next question comes from the line of Michael Mueller with JPMorgan. Please proceed.

Yes, hi. Just curious, when tenants don't renew and they leave, I mean, what are the common reasons for it? I'm assuming it's probably not rate considering occupancy in the market is so high. Is it just - and the space doesn't work, functionally, it doesn't work anymore for them?

Mike, it's Howard. Yes, it's going to be a lot of reasons. At this point in the market cycle, people are still growing. So a lot of times, we can't accommodate their need in that building or even expand them in a larger project. So sometimes they're taking more space. Sometimes their business model is changing. And yes, a lot of times, what you see happen is the rent that we feel a space is worth, a tenant really isn't able to pay in their business.Those are some of the more - lighter manufacturers and so forth that the rent is more sensitive to them than the typical logistics company today. But yes, no real trends that we're seeing in the market or whatnot. But a lot of that - a lot of the vacancy, as we've pointed out in the past, is really forced on our end just to be able to capture more value out of the real estate.End of Q&A

We have reached the end of our Q&A session. Allow me to hand the floor back over to management for closing remarks.

We just want to thank everybody for joining us today and your continued support of Rexford. And we look forward to connecting in about 3 months. Have a great summer, everybody.

Thank you. This concludes today's conference. And you may disconnect your line at this time. And thank you for your participation.