Rexford Industrial Realty Inc

NYSE:REXR

Earnings Call Transcript 2021-Q2

[Operator]

Greetings. Welcome to the Rexford Industrial Realty Second Quarter 2021 Earnings Call. [Operator Instructions] Please note that this conference is being recorded.

At this time, I'd like to turn the conference over to David Lanzer, General Counsel. Mr. Lanzer, you may now begin.

[David Lanzer, General Counsel]

We thank you for joining us for Rexford Industrial Second Quarter 2021 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.

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

In addition, certain financial information presented on 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 our Co-Chief Executive Officers, Michael Frankel and Howard Schwimmer, together with Chief Financial Officer, Laura Clark. They will make some prepared remarks, and then we will open the call for your questions.

Now, I turn the call over to Michael.

[Michael Frankel, Co-CEO]

Thank you, and welcome to Rexford Industrial's Second Quarter 2021 Earnings Call. Today, I'll begin with a brief overview, Howard will then cover our markets and transaction activity and Laura will discuss our financial results. We will then open the call for your questions.

Our team continued to deliver exceptional results through the second quarter. We closed $257 million in new acquisitions. And from an operational perspective, a robust 2.2 million square feet of leasing produced 98.2% occupancy in our stabilized portfolio. Re-leasing spreads continued at extraordinary levels, averaging 21% on a cash basis and 34% on a GAAP basis. As a result, our strong internal and external growth produced year-over-year core FFO growth of 36% and 22% on a per share basis.

As we enter the second half of the year, the California economy shows robust growth and continued reopening. Industrial tenant demand remains at historically high levels, driven by strong secular growth across a wide range of industry sectors. In addition, the acceleration in e-commerce is driving shifts in supply chain and last mile distribution strategies. Further, emerging e-commerce and technology-enabled new businesses are intensifying the growing need for infill locations.

From our vantage point, we believe that we are still in the early stages of these long-term market shifts, which are expected to drive ongoing growth. Our portfolio is particularly well positioned as our properties generally represent mission-critical locations for our tenants. And as rent typically represents a very small share of our customers' economics, we continue to see a favorable degree of price elasticity in terms of our ability to drive rent growth.

On top of historic rent spreads and rental rate acceleration, we are increasingly obtaining contractual annual rental rate increases above the historical 3% norm. For example, more than half of the second quarter's leasing activity achieved contractual annual rental rate increases above 3% and as high as 4%.

As we scale our Rexford operating platform and deepen our market penetration, we are harvesting the benefits of more strategic relationships with our customers and expanding our proprietary access to high-quality investment opportunities within infill Southern California. We also expect to see the company's operating margins continue to increase as we leverage our sector-leading NOI and cash flow growth.

Looking forward, from an internal growth perspective, we project approximately 20% embedded NOI growth equal to $64 million within our in-place portfolio over the next 18 to 24 months, not including additional acquisitions. We are also pleased with our near-term external growth prospects with over $650 million of new investments under contract or accepted offers.

The magnitude and quality of our growth opportunity is substantial as we grow beyond our current 1.8% market share. To put this into perspective, our target infill Southern California industrial market is exceptionally large and would rank as the fourth largest market in the world, behind only the entire United States, China and Japan in size. Our market is also highly fragmented with about 50% of our 2 billion square foot market built prior to 1980, which translates to an expansive opportunity to create value by enhancing the functionality and cash flow of the nation's highest demand industrial locations.

Finally, as our team's performance speaks for itself, we'd like to acknowledge and thank the entire Rexford team as you continue to prove yourselves as the most dedicated and high-performing team in our sector.

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

[Howard Schwimmer, Co-CEO]

Thank you, Michael, and thank you, everyone, for joining us today. For the second quarter, Rexford's leasing performance was outstanding, reflecting the high quality of our portfolio and the strength of our infill markets. Across the nearly 2.2 million square feet of leases signed in the quarter, we achieved cash and GAAP spreads on new leases of 25% and 39%, respectively and 19% and 31%, respectively on renewal leases.

We continue to see rental rates accelerating at unprecedented levels. Based on our internal portfolio metrics, market rents within our portfolio increased by 16.8% over the prior year. Looking forward, the company is well positioned from an internal growth perspective. Our consolidated portfolio weighted average mark-to-market for cash rents is estimated at 19%. Mark-to-market for the 1.8 million square feet of leases expiring through the end of the year is estimated at 24%.

With essentially no land availability within our Southern California infill markets, supply constraints have driven vacancy rates to all-time historical lows. According to CBRE, our target markets, which exclude the Inland Empire East, ended the quarter at 1.5% vacancy. Remarkably, over half of the infill market ended the quarter with vacancy below 1% and as low as 0.4% in some of our larger submarkets.

Turning to external growth. Year-to-date, including transactions closed since quarter end, we've completed 21 acquisitions for an aggregate purchase price of $470 million. 86% of these investments were acquired through off-market or lightly marketed transactions, enabled through our proprietary research-driven sourcing methods.

For the second quarter, we completed 10 acquisitions, which included 800,000 square feet of buildings, plus 15 acres of low coverage outdoor storage sites and land for future redevelopment. Half of the investments came in with meaningful cash flow at an initial inbound estimated weighted average yield of 4.6%. The remaining 50% of our acquisitions are value-add with little to no initial cash flow. Our second quarter investments are projected to generate an aggregate stabilized yield on total investment over time of 5.2% with anticipated growth thereafter.

After quarter end, we completed 2 acquisitions for $49.2 million, comprising 15 acres of income producing covered land and a pre-leased vacant industrial outdoor storage site with a combined near-term aggregate stabilized yield on total investment projected at 5.1% with growth thereafter.

Looking forward, over $650 million of new investments are under contract or accepted offer, which are projected to close during the second half of the year. These transactions are subject to customary due diligence with no guarantee of closing. We will provide updates as transactions are completed.

Turning to redevelopment activities. We stabilized 2 properties totaling 395,000 square feet during the quarter, achieving an aggregate stabilized yield on investment of 7.1%. These included the renovation and lease-up of Arthur Street, a 61,000 square foot building in a Mid-County submarket, where we achieved an initial unlevered stabilized yield of 7.9% on total cost and the construction and lease-up of the merge, a 334,000 square foot 10-unit industrial complex in the Inland Empire West, where we achieved an initial unlevered yield on total cost of 7%.

The merge is representative of Rexford's innovative business model and the incredible strength of our markets. Our vision was to create product position to satisfy substantial unmet tenant demand in the market by delivering modern 20,000 to 45,000 square foot warehouse spaces. Rental rate growth has been so dynamic that we marketed the spaces without asking rents and experienced significant competition from tenants driving rental rates up 47% over 6 months of lease-up.

At this time, we have approximately 3 million square feet of current and planned value-add and redevelopment projects across our portfolio. Of these, current projects encompass 1.2 million square feet of buildings and 9.5 acres of outdoor storage sites, which are detailed in our supplemental and are estimated to deliver an aggregate return on total investment of over 6%, representing substantial value creation compared to the below 4% cap rates in today's market.

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

[Laura Clark, CFO]

Thank you, Howard. I'll begin today with details around our strong operating and financial results. Second quarter stabilized same-property NOI growth was ahead of our expectations at 10.1% on a GAAP basis and 22% on a cash basis, driven by strong portfolio performance.

Compared to prior year, average occupancy is up 100 basis points to 98.5%. Leasing spreads are up 35% on a GAAP basis over the trailing 12-months and bad debt as a percent of revenue in the same-property pool was a positive 40 basis points compared to a negative 130 basis points in the second quarter of last year.

As a reminder, the bulk of our short-term deferral agreement, although nominal, were granted in the second quarter of last year, positively impacting this quarter's cash same-property NOI year-over-year comparison. Adjusting for these impacts, cash same-property NOI growth was a robust 11.3% in the quarter and 9.4% year-to-date.

Our tenant base continues to perform extraordinarily well. Rent collections continue at pre-pandemic levels with second quarter and year-to-date collections of contractual billings at 98.6% and 98.7%, respectively. Bad debt reserves as a percent of revenue for the quarter were a nominal 10 basis points of revenue and 30 basis points year-to-date. These strong results collectively enabled us to grow core FFO per share by 22% to $0.39 per share.

Turning now to our balance sheet and financing activities. We continue to maintain a best-in-class low leverage balance sheet, which supports our opportunistic internal and external investment activities. As of June 30, net debt to EBITDA was 3.8x, below our target leverage of 4x to 4.5x, with net debt to enterprise value at 12%.

During the quarter, we executed a number of accretive capital markets transactions. In May, we completed a forward equity offering for expected gross proceeds of $500.4 million. We also issued $15.6 million of equity on a forward basis through the ATM program. In June, we repriced our $150 million unsecured term loan, reducing the spread by 50 basis points over LIBOR, equating to annual interest savings of approximately $900,000.

Finally, we increased the borrowing capacity on our unsecured revolving credit facility by $200 million to a total of $700 million, further bolstering our strong liquidity position. Subsequent to quarter end, we announced the redemption of our $90 million Series A cumulative redeemable preferred stock carrying a coupon of 5.875%. At quarter end, we had approximately $1.2 billion of liquidity, including $64 million of cash on hand, approximately $395 million of forward equity proceeds remaining for settlement and full availability on our $700 million credit facility. We also have approximately $508 million available under our ATM program and no debt maturities until 2023.

Now, turning to guidance. We are increasing our full year projected core FFO range to $1.48 to $1.51 per share from our previous range of $1.41 to $1.44 per share. The revised midpoint of our guidance range represents 13% year-over-year growth. Consistent with our practice, guidance does not include acquisitions, disposition or balance sheet activities that have not yet closed to date. Note that the aforementioned preferred redemption is included in guidance, given that notice has already occurred. A roll forward detailing the increase in our guidance is included in the supplemental package.

Highlights include the following: same-property NOI growth has been increased by 200 basis points at the midpoint to 5.75% to 6.75% on a GAAP basis and up 225 basis points at the midpoint on a cash basis to 9% to 10%, driven by our strong performance to date and expectations for the remainder of the year. Average occupancy in the stabilized same-property pool is up 50 basis points at the midpoint and is now expected to be 97.75% to 98.25%. Consolidated bad debt expense as a percent of revenue is projected to be 70 basis points for the full year near historical averages and improved from our prior projection of 110 basis points of revenue.

Other notable drivers include a contribution of $0.04 per share from the acquisitions closed during the quarter and subsequent to quarter end, $0.01 per share from incremental NOI related to redevelopment and repositioning projects coming in ahead of expectations, plus $0.01 per share related to the preferred redemption occurring in August.

Before we welcome your questions, I would like to highlight another significant second quarter accomplishment for our Rexford team. In April, we issued our annual Environmental, Social and Governance report, demonstrating Rexford's continued commitment to leading ESG practices and disclosure.

ESG is at the core of Rexford's purpose, as our differentiated business model of reinventing industrial property within Southern California's dynamic infill market uniquely positions Rexford to deliver value-add environmental, economic and social benefits.

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

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Blaine Heck with Wells Fargo.

[BlaineHeck]

One probably for Laura to start out. You guys were pretty conservative in the way you accounted for deferred cash rents and their effect on same-store cash NOI in 2020. But as we look at this year's results, obviously that headwind of missed cash collections has turned into a tailwind as you recover those deferred rents. We appreciate the added disclosure around this quarter's results and the benefit from those repayments, but can you also quantify how much those repayments might be contributing to full year 2021 cash same-store NOI guidance?

[LauraClark]

Yes. Blaine, thanks so much for joining us today. So in terms of our cash same-property NOI and the year-to-date -- quarter-to-date as well as the year-to-date and our guidance. So on a -- in 2Q, COVID-related deferrals impacted -- as you mentioned, did impact our 22% reported number. So if we exclude those COVID-related deferrals, cash same-property NOI would have been a strong 11.3% compared to that 22% we recorded and 9.4% year-to-date, and that compares to the 14.8% that we reported.

For the full year, COVID-related deferrals represent about 150 basis points of the 325 basis point spread between our cash and same-property NOI growth guidance. So excluding those COVID-related deferrals, our same-property NOI cash guidance is in the 7.5% to 8.5% range.

[BlaineHeck]

Great. That is very helpful. And then second question for me, maybe a little bit more of a big picture question for either Howard or Michael. Can you guys talk about the regulatory environment, especially in light of the newly proposed emissions rules in the Inland Empire that require operators to offset their trucking pollution? Number one, do you see those types of rules and added operator expenses hampering any of the future rent growth you guys are expecting in your markets? And number two, do you think this is just a one-off type of regulation or kind of a foreshadowing of what's the common markets across the country?

[MichaelFrankel]

Hey Blaine, it's Michael. Great to hear you today. Thanks for joining. So numerous embedded questions in there. But number one, the emissions, it's an indirect tax basically targeting trucking use and trying to minimize emissions from trucking use into warehouses, and it's indirect in the sense that they're taxing operators inside the warehouses, by the way, not landlords. It's actually the tenants.

And furthermore, to qualify for the tax, you have to be operating in at least 50,000 square feet within a building that is at least 100,000 square feet. Incidentally, for Rexford, our tenants, we have about 90 tenants out of our 1,500-plus tenant base that would be potentially impacted. So for the record, there's really no impact to Rexford.

That having been said, we think the maximum tax for those tenants could be about $1 a square foot. However, there are many ways that tenants can mitigate the costs. For instance, by instituting various energy efficiency, programs within the property and within their operations. And so that we expect the tenants themselves will be able to substantially mitigate the potential of the $1 per square foot per year tax. So we don't see the absolute cost to tenants as being material, and we don't really see an impact to our forward rental rate growth within our markets, certainly given the extreme scarcity of product.

[Operator]

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

[Manny Korchman, Citigroup]

Just looking at the redevelopment schedule you have in the sub, there are bunch of projects where yields jumped up significantly. I assume that's driven by rental rate growth. Was just hoping that you could confirm that, that's the reason they've gone up. And also just give us an idea of how you think about rental rates when you put out those pro forma yields? Is that in place now or are those based on where the yields or where the rents could be once those projects deliver or stabilize? Thanks.

[HowardSchwimmer]

Hi, Manny, it's Howard. Yes. So on those yields, we do adjust them quarter-to-quarter, and that's based on where we see rents in the market today. We don't adjust those as far as being forward-looking once they're on the repo page. And it's interesting. When you look at a repositioning page, there's about 3 million square feet in there in terms of the current and some of the future plan projects and about 0.75 million square feet of that 3 million is already either pre-leased or leased and will be some -- a lot of -- quite a few of those will be stabilized and reported next quarter that have happened during -- even in the third quarter. I think I got all your questions. Did I miss anything there?

[Manny Korchman, Citigroup]

No, I think that was that. And then just looking at the pipeline of deals you have coming, you guys have been buying a lot of, I guess, covered land plays or maybe they're better than covered, given the rents you're getting on them. But how much of the pipeline is made up of those types of deals versus more of your traditional warehouse or logistics stuff?

[HowardSchwimmer]

Without getting into too much detail because some of these transactions may or may not close, we do probably see a little bit of an uptick in some of the covered land plays. We've identified some opportunities that are providing substantial cash flow. The one thing I might also point out is, in our markets there's been a lot of development in previous years of some of these low-rise office structures on industrial zone land, and we're starting to put a little bit of focus into buying a few of those, one deal we closed after quarter end in San Diego about [Indiscernible]. We present some data on that in the reporting on roughen road. That deal has some improvements on it that we're going to be basically waiting for the burn off, but we bought it at a 5.5% yield. And so those are pretty attractive opportunities we're buying them basically at land value. And so you'll see us starting to report a few of those as well.

[Operator]

Our next question is coming from the line of Dave Rogers with Baird.

[DaveRodgers]

Maybe I'll start with Howard. On the lease diversity front, in the past you've given some color on kind of where the leasing is coming from. Curious more on the changes that you're seeing into the second quarter, if any, versus where you were in the first quarter and how you finished 2020?

[HowardSchwimmer]

Well, I'd say if anything, we're seeing even more diversity of uses that are coming into the properties. Obviously, e-commerce type leases are abundant in that. But just in the last quarter, I mean, looking at sort of our leasing, we did some food and beverage type transactions, restaurant supply. There was an entertainment lease, home improvement, construction materials, furniture, medical, biotech, 3PLs. You name it, it's showing up in our product. And we're just lucky to be in one of the most diversified markets in the country and not reliant really on any one industry that's supporting a lot of the leasing activity.

[DaveRodgers]

Thanks for that, Howard. I think, Michael, you made the comment in your prepared remarks regarding tenants and doing more with existing customers and existing tenants. I guess, I was curious on one front, is that doing more leasing with existing customers? And I guess, what's the percentage of return visits with your customers or was that with regard to maybe doing more sale-leaseback or purchase transactions with some of the customers you have, and I was curious around that front as well?

[MichaelFrankel]

Dave, no, I appreciate the question. And we are seeing an uptick in existing tenant expansions within the portfolio. So that's very encouraging. But I think it's also a function of our scale in the market. So naturally, as we increase our scale in the market and our market share, we should expect that to increase.

But I think fundamentally, what I was also referring to was Rexford is taking a much more proactive approach, given our scale, leveraging our scale in the market. And an example of that would be the establishment of our customer solutions capability. We created a new division last year during the pandemic. And the mandate there is to, through our own research, to identify emerging tenant demand in the market. And some of that is existing tenants and a lot of that is our tenants and companies who are not yet Rexford tenants. And that -- and so we're becoming much more proactive within the market, and that's an exciting development for the company, frankly.

We're already seeing tremendous results, where we're no longer just talking to a tenant, whether they're an existing tenant or a new tenant about one space or an expansion of a single lease. We're in strategic discussions with a range of tenants now whose needs are 20 or 30 spaces within infill Southern California. And so it's a really terribly exciting time for us from that perspective.

And to Howard's comments in terms of where that demand is coming, I mean, it is truly expansive. I mean, Howard mentioned the building industry. I think just take the building industry as one data -- one example. In California, the local municipalities currently have a mandate to increase the housing stock by 20%, and that's not something that gets done in a year. That's not something that gets done in 5 years. That's going to be a long-term project, literally on a municipality-by-municipality basis. They're putting incentives out there to drive development.

And whereas historically, we might have thought of that as more of a cyclical or seasonal business almost. We're looking at some very long-term demand growth in that sector alone. Think about the electric vehicle market. And there are a range of emerging businesses and technologies that are enabling legacy retailers compete more effectively with Amazon. They're also enabling the emergence of new businesses that didn't exist, that weren't even in our demand pipeline 2 or 3 years ago, and they're looking for a substantial amount of space within our markets.

So I would say that the infill distribution market for the last mile is an incredibly dynamic environment right now. And I think, as I mentioned, we really are seeing ourselves right now at the early, very early stages of these shifts and exciting for the company because it's really just driving enhanced value for our spaces and for our portfolio.

[HowardSchwimmer]

And Dave, I'll add just a little bit more to that. We did 1.2 million square feet of new leasing and 1/3 of that were expansions of existing tenants, about 400,000 square feet. So we're really doing, I think, a really superb job of working with our existing tenants and identifying their needs, and it really smooths the transaction process where we already know a tenant. We're not trying to bring somebody new in the portfolio as well. So it's really a benefit to both sides of these lease transactions.

[MichaelFrankel]

And related to that, I think what we're seeing are probably one of the drivers of our kind of outsized NOI growth, if you will, has been literally a little lack of downtime, when we need to renew a tenant or rather than we need to re-tenant the space. And also, we have a range of spaces that were slated to go into redevelopment or repositioning but the existing tenant was able to pay such a high rent, just so they could stay in the market and stay in our space that the yields on those extensions of the leases compelled us to keep the tenant and not go into repositioning. So that just gives you a sense for just how dramatic the demand is, both from in-place tenants and new tenants.

[Operator]

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

[JamieFeldman]

I guess, the first question is just maybe if you could provide a little bit more color on just how things have changed with the reopening so far. I know we may see mass coming back. Just as we think about kind of the fluctuations in the return, how has your business changed? How has demand changed? And how do you think we should be thinking about what's ahead?

[MichaelFrankel]

Well, I think it's a very -- go ahead, Howard.

[HowardSchwimmer]

I'll start just talking about the demand and then turn it back over to Michael. Hopefully, what came through in our earnings and some of the commentary is just the fact that we are just in unchartered territory in terms of demand. Demand is outstanding. There's tenants competing on every space we put out there. So COVID has not done anything but improved the amount of demand in the marketplace and that continues.

So the talk about what's happening now with some of the new mass requirements, we're not really seeing that going to have an impact at all on demand. Even today, I was talking to one of our leasing people in Orange County, we decided to put space on the market a bit early with a tenant who's going to vacate and we already have 3 offers on it. People are competing, and it's going to lease well above the projected rents that we had in mind.

So there's just no space and there's incremental demand in the market. And that's why on that project in -- when I progressed that I described our lease-up that we're starting to not even price assets in terms of -- on the leasing side because rent growth is just so dynamic and the demand is so strong that each deal literally is setting new market highs in rents?

[LauraClark]

Jamie, it's Laura. One thing that I'll add and its certainly is reflected in our financial results and our lower bad debt was really driven by a couple of factors, and one of those is the decline in watch list tenants and reserves, and that certainly speaks to the health of our tenant base. They're performing well as evidenced by our strong collections. Our collections are now sitting at nearly 99% of pre-COVID levels and certainly sitting at extremely high occupancy levels as well. So this all resulted in lower reserves, lower number of watch list tenants.

The other thing that we're seeing out of the tenant base and I think certainly speaks to the health as well as the demand in the market is that we've had tenants that were in industries that were maybe more impacted by COVID. And those now with -- those tenants now with the reopening are performing, they're doing well and they're paying back amounts that were due really even before required under the moratoriums that still remain in place.

[MichaelFrankel]

I think I'll just add just briefly, Jamie. I mean, I think also what we're seeing is employers, who've been experimenting with the return to office scenarios, its safe to say that a significant percent of employers are opting for some version of a flexible strategy with respect to letting people work from home, at least, some of the time, if not all the time. And frankly, we're seeing tremendous pressure as we recruit new people that one of their -- sometimes their most important issue is their flexibility and ability to work from home. And hence we've heard even more important than comp.

And so I think the market is really acknowledging or maybe the market will further acknowledge as things open up post-COVID, that structurally things are going to be a little bit different and the need to distribute goods to the homes as opposed to just offices and everything that comes with that, maybe here to stay at least at some substantial levels.

[JamieFeldman]

That's an interesting point. Are you -- are there new submarkets that you're considering that maybe you wouldn't in the past?

[MichaelFrankel]

Well, our market is the largest regional population in the country. It's the largest zone of consumption in the country. It's by far the largest industrial market in the country. So we don't really -- and you know where we focus here, Greater LA, Orange County is probably 70% of our activity on average and then the Ontario market. So I think you're just going to continue to see the same focus as we dig deeper and just become better at what we do within our markets.

[JamieFeldman]

Okay. And then, Michael, you had commented that rent's a very small share of customer economics, which provides good price elasticity. Can you talk a little bit more about, from a percentage basis, what does that really look like, the small share?

[MichaelFrankel]

Yes. And the reason we don't give specific percentages is because it really does vary substantially depending on the type of business. And for example, if you're just a pure distribution business and all you're doing is moving cargo and boxes in and out then your rent may be a slightly higher percentage of your overall expense or economics. However, typically, even in that scenario, the transportation cost of the goods are substantially higher.

Then if you go to the other end of the spectrum, you talk about a branded company that's got their own product being distributed to the market. Their distribution costs, their warehousing costs are very small, exceedingly small percentage of their overall economics, probably that's made well under -- I think in the aggregate, people estimate well under 5% of the expense structure for most companies, on average. But it varies widely. So that's why we're careful about putting percentages out there more specifically.

And I think just empirically, the level of rental rate acceleration is nothing short of astounding. And I think if you think about the industrial market in a longer context, for instance, historical context, going back for the last 40 years, our markets have, on average, had rental rate growth of around 3%. Some years, a little below. Some years, slightly ahead.

And I think to a great degree, we're playing catch-up, and catch-up is being driven by the extreme lack of supply and you just cannot cure. You cannot add any material level of supply in our markets, and we have a critical mass of motivated institutional sort of proactive owners in the market like Rexford who are pushing on price. And the tenants are not showing really any indication of fatigue at this point. So I think between the empirical experience and data that we're having and seeing and the knowledge that we have on our tenants expense structures and whatnot, there seems to be a pretty robust runway ahead.

[JamieFeldman]

Okay. And then just following up to the prior conversation you were having, you talked about electric vehicles as an avenue of growth. As you think about your portfolio and what your tenants might be doing on that front? Do you think there'll be material CapEx to prepare for that or how should we be thinking about that? Or maybe that's a strategic advantage that you can have within your portfolio, how do you think about that transition and what it means?

[MichaelFrankel]

Well, Rexford's business model is to focus on low finish generic industrial space. And so typically, we're not investing in or developing to or solving to through TIs, heavy manufacturing, heavy CapEx type use. When we -- and if you look at our CapEx numbers, they're very low on a per square foot basis through the years. And so that's not a real material part of our business model.

And the electric vehicle business is everything from the storage and distribution of vehicles themselves. It's the components. It's the assembly of components. It's the battery assembly. It's all -- the entire ecosystem, if you will, that comes with the electric vehicle industry. I mean, we're looking at an entire industry that is growing it from a very early stage. And so no, I think the short answer is we don't see that being driven by sort of heavy CapEx or what you would consider sort of auto manufacturing type uses.

[HowardSchwimmer]

I think also in terms of how we prepare our buildings, Jamie, for market, and back to the original question a while back about the ATM deal rules and how tenants can mitigate some of those incremental costs that they're being subjected to, part of that is electrifying their fleets.

And so today, when we renovate existing buildings or we're going to construct some new buildings, we're adding heavier power components to those buildings. We're providing conduits that bring that electricity to the exterior of the buildings and to points in those yard areas that they are further away from the buildings, just allowing for the future functionality that people are going to need as they need more electric in different places on the exterior of the building to supply power for charging those vehicles.

[MichaelFrankel]

And that's a great point that Howard makes, because remember, we're the largest distribution market in the country. We have more truck miles per year than any other market in the country by far. So you'd expect that this market to benefit like no other market in terms of the emerging demand for space for the electric vehicle industry.

[Operator]

Our next question is coming from the line of Vince Tibone with Green Street Advisors.

[VinceTibone]

I have a follow-up for Laura on the bad debt side. You mentioned bad debt was about 30 basis points of revenue year-to-date, but you're expecting it to be probably closer to 70 basis points full year or applying more than 100 basis points in the second half. Just was hoping you could provide a little color on the reason for the jump in the back half? And maybe what's the best way to think about normalized bad debt for the portfolio once all the COVID-related noise passes?

[LauraClark]

Hey Vince, great question. Thanks for joining us today. Yes, as you mentioned, our forecast for the full year bad debt and the total consolidated portfolio is 70 basis points of revenue, and that does imply a bad debt expense in the second half of the year at about 100 basis points.

So our second half assumption of bad debt assumes reserves that are to similar levels of what we experienced in the second quarter, but what we've excluded from that assumption is any recoveries that could come through in the second half of the year. It's difficult to predict recoveries quarter-to-quarter, especially with the ongoing pandemic and the moratoriums that are in place. So that 100 basis points is in line with the reserves ex those recoveries that I talked about earlier.

[VinceTibone]

Got it. That's really helpful. And then like going forward, just as we're starting to think about '22 and beyond, like is 100 basis points of revenue probably a decent assumption for bad debt? Just some of the cadence --

[LauraClark]

Yes, pre-COVID, we were bad debt expenses in the 50 basis point area. So -- kind of getting through this year and as we move through COVID, would expect that we should tick back down to levels that are more in line with historical averages.

[VinceTibone]

Got it. That's helpful. One more for me, switching gears. Can you just discuss your thought process and rationale for doing forward equity offerings versus just issuing equity through the ATM when you need it?

[LauraClark]

Yes. So we actually -- we're actually issuing equity on a forward basis to the ATM as well. Really -- it really depends on the timing -- the capital needs that we have in front of us and the timing of those needs. I really like the ability to issue on a forward basis, it certainly gives us the ability to better match fund. Our proceeds -- those proceeds with the use of capital with the use in our acquisition pipeline.

So we always look to take and -- we take a really opportunistic approach to capital raises. So taking advantage of attractive capital sources debt and equity to fund our near-term pipeline, which is $650 million at this point. So it really -- we really are focused on maintaining that low leverage investment-grade balance sheet. And that's another tool in the toolkit that allows us to do that.

[VinceTibone]

So it sounds like you're just trying to basically lock in your cost of capital, is that fair? Like you're under contract for 650 of acquisitions, and you just want to lock in that basic funding cost of capital now, is that fair?

[LauraClark]

Yes. I mean we're -- when we think about -- when we buy an asset, we think about the purchasing an asset and we're going to hold it forever, right? So not necessarily focus at the pricing at a point in time because we know we're going to create value over the long term. So -- and that those assets are going to give us growth and drive positive NAV accretion over the years -- over the many, many years of owning that asset. So not as focused on the pricing, but more focused on funding that activity, that near-term activity that's in the pipeline.

[Operator]

Next question is from the line of Mike Mueller with JPMorgan.

[MikeMueller]

I just have a quick question on the preferred picking of the Series A. Why -- what was the trigger for picking the Series A and maybe not looking at the B or C or are they earmarked for at some point further down the road?

[LauraClark]

Yes. Mike, it's Laura. Thanks for joining us today. The Series A is callable on August 16, that's the first available call date. And that Series A has a pretty high coupon relative to other cost of capital for us today. The coupon is 5.875%. So -- we thought that it was beneficial to take out that Series A at this point, given the cost of capital. In terms of our other preferreds, those are not callable at this point. They become callable over the next couple of years.

[Operator]

That completes our question-and-answer session. I will now turn the call back to management for closing remarks.

[David Lanzer, General Counsel]

On behalf of the entire team at Rexford, we want to thank everybody for joining us today. and for your support and interest in the company, and we look forward to reconnecting next quarter. Thank you all, and wish you and your families are well.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.