Rexford Industrial Realty Inc

NYSE:REXR

Earnings Call Transcript 2019-Q3

[Operator]

Greetings, and welcome to the Rexford Industrial Realty Third Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Steve Swett of ICR. Thank you, sir. You may begin.

[Stephen Swett]

We thank you for joining us for Rexford Industrial's Third 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 filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future.

In addition, certain information presented on this call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP reconciliation 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'll open the call for your questions.

Now I'll turn the call over to Michael.

[Michael Frankel, executive]

Thank you, and welcome to Rexford Industrial's third quarter 2019 earnings call. We are extremely pleased with our third quarter performance, which reflects both the ongoing strength of the Rexford Industrial operating platform as well as our focus within the infill Southern California industrial market. In terms of results, it's been a tremendous quarter and an exceptional year so far. Adeel will elaborate on our financial results and guidance. But from an operational perspective, the team has been firing on all cylinders.

We signed 91 leases for approximately 1 million square feet. Our leasing spreads were 31.2% on a GAAP basis and 19.4% on a cash basis. On new leases, our spreads were 38.2% on a GAAP basis and 26.1% on a cash basis. And at the end of the quarter, our stabilized same-property portfolio was 97.7% occupied. We completed approximately $227 million of acquisitions in the quarter, and including transactions closed after quarter end, our year-to-date investment volume is $773 million, with 75% of this year's investment acquired through off-market or lightly marketed transaction, leveraging our proprietary originations platform. Further, our acquisitions as well as our completions from our value-add repositioning work continue to generate strong above-market cash yields, which Howard will elaborate upon shortly.

As we near the end of the year, it seems appropriate to reflect briefly on a few key elements that make the Rexford opportunity and our performance somewhat unique. To begin with, the Rexford opportunity is unique by our focus on the largest supply-constrained industrial market in the nation, with the sharpest submarket focus of any industrial REIT. 100% of Rexford's portfolio is located within the exceptionally high-barrier infill Southern California industrial market, where the supply of industrial property is extremely scarce and is generally diminishing over time. Key tenant demand fundamentals within our target infill markets are principally driven by this long-term supply-demand imbalance, which is magnified by increasing urban land value.

Our decades of experience have also demonstrated that this market tends to be more stable through economic cycles when compared to noninfill or secondary industrial markets. Further, as the nation's largest zone of consumption, comprising the largest first and last mile of distribution, infill Southern California is positioned to benefit from the growth in e-commerce and the demand for shorter delivery time frame like no other U.S. industrial market. These dynamics are driving increased demand for warehouses in closer proximity to consumers and businesses, one of many reasons Rexford's portfolio is exclusively focused in submarkets that are among these infill population and business centers.

In fact, a just released CBRE research study found that rental rate growth within Southern California totaled 57% over the prior 5 years for warehouses sized below 120,000 square feet, which represent over 75% of the Southern California infill market as opposed to much lower rent growth of 35% over the same 5-year period for larger warehouses sized above 120,000 square feet, which are more representative of big box, noninfill locations that are not Rexford's focus. However, key to Rexford's strategy is our ability to leverage our proprietary originations platform and creative value-added approach to investing, enabling us to construct a portfolio within infill Southern California, comprised of premier locations with superior functionality.

Consequently, when we acquire vintage assets, we generally proactively renovate and reposition them to enable those properties to outcompete within their submarkets. As a result of this approach, we are constructing an irreplaceable portfolio of superior quality within the nation's largest supply-constrained market.

Rexford's proprietary originations platform conveys significant benefits to the company and to our shareholders. To begin with, our acquisition volume is driven by originations methodology and our ability to catalyze high-volume of accretive off-market or lightly marketed investment. Consequently, we are successfully executing on our mandate to curate a portfolio and incorporate new acquisitions with the capacity to generate lift to NAV and lift to FFO per share over the medium to longer term, irrespective of the capital market cycle.

Second, and more importantly, our originations platform enables us to identify and to execute on value-add and stabilized investment opportunities capable of generating substantially higher cash returns on investment as compared to similar fully marketed transaction. Consequently, our NOI growth profile is also somewhat unique as it is driven by our continuous execution of a significant volume of value-add improvements throughout our portfolio over time. Therefore, at Rexford, NOI growth is not merely driven by market rent growth or the mark-to-market of in-place leases. We are positioned to generate NOI growth through our value-add work irrespective of market rent growth.

With Rexford's market share currently at only just over 1% of the SoCal infill market and with over 1 billion square feet built prior to 1980 within our target markets, our ability to leverage our originations platform to identify and invest in accretive value-add opportunities is substantial into foreseeable future. As a result, Rexford is also uniquely positioned as a growth company. On a historical basis, we have grown consolidated NOI by a full 38% on average every quarter since our 2013 IPO on a year-over-year basis. And on a go-forward basis, we are positioned for accretive growth given the magnitude of our internal and external growth prospect.

Finally, Rexford's greatest differentiator is our team. We'd like to thank each one of our Rexford staff for your outstanding dedication and commitment to building our great company.

I'm now very pleased to turn the call over to Howard.

[Howard Schwimmer, executive]

Thanks, Michael, and thank you, everyone, for joining us today. The infill Southern California industrial market remains exceptionally strong with the supply-demand imbalance that continues to drive rents and occupancy levels, benefiting owners of well-located industrial real estate. Our target markets, which exclude the Eastern Inland Empire, ended the second quarter at 2% vacancy, with asking rents up 7.8% on a weighted average basis over the past 12 months.

With regard to recent investment activity, during the third quarter, we completed 9 acquisitions totaling approximately $227 million, adding 943,000 square feet to our portfolio. In aggregate, in-place rents for these acquisitions are estimated to be 13.9% below market, and all the ones in our low coverage sites with excess paved land for container or vehicle parking, which is ideal for last mile e-commerce use. 7 of these transactions, about 78%, were off-market or lightly marketed and sourced through our proprietary research and broker relationships.

In July, we acquired Eastgate Drive, a 27,000 square foot building on over 3 acres of land in the Central San Diego submarket for $8.2 million. The 22-foot clear building has only 21% site coverage with a large paved yard and was leased long-term during escrow to a national tenant, stabilizing at a 6.2% yield on total cost. We acquired the fee interest in the land lease for a 1 acre paid parking lot at the Rexford-owned Glendale Commerce Center located within the L.A. San Fernando Valley submarket for $3 million.

In August, in sale-leaseback transaction, we acquired East Ana Street, a 106,000 square-foot building on 6.1 acres of land located within the L.A. South Bay submarket for $18.8 million, equivalent to just land value. The initial yield is 6.1% and at lease roll, we plan to implement a value-add plan to reduce the building size and add 25 loading positions, creating a low-coverage logistics facility. We acquired Main Street, a 42,000 square foot low-coverage industrial site also in the L.A. South Bay submarket for $6.8 million. The property is fully leased on a long-term basis and generates an initial yield of 4.4%, increasing to 5% by year 3 and growing from there. We acquired Avenida Del Oro, a 312,000 square foot fully leased last mile distribution facility on 38.6 acres within the North San Diego County submarket for $73.6 million. The modern 32-foot clear building has 99 dock positions with excess paved land and is leased long term at an initial yield of 5.6%.

In September, we acquired Bellflower Boulevard, a 5.9-acre industrial land site, with 54,000 square feet of buildings and substantial excess land in the L.A. Mid County submarket for $16.3 million. The property is leased to an entrenched tenant nearing their lease expiration, and we plan to either renew the existing lease or execute a redevelopment of the site. The projected stabilized yield on total costs for the renewal or redevelopment is approximately 6%.

We acquired Imperial Highway, a 3.7 acre trucking and container storage yard in the L.A. Mid County submarket for $10.5 million. We acquired the property in a short-term sale-leaseback and following lease roll and value-add enhancements, we expect to stabilize the property at an approximately 5.5% yield on total cost.

We acquired Storm Parkway, an 8 building 268,000 square foot modern Industrial complex within the L.A. South Bay submarket for $66.2 million. Project contains buildings from 20,000 to 38,000 square feet and is 91% leased to 12 tenants at rents estimated to be 13% below market. The initial yield of 4.1% is projected to increase to 4.4% in year 2 and grow from there.

Finally, in September, we acquired Teller Road, a 126,000 square foot multi-tenant complex located in Newbury Park within the Ventura County submarket for $23.3 million. The property is 93% leased to 14 tenants at rents estimated to be 19% below market and generates an initial yield of 4.3%, projected to increase to approximately 5.3% upon stabilization.

Subsequent to quarter end, we completed 3 transactions for $60.8 million. We acquired Slauson Commerce Center, a 336,000 square foot investor complex located within the L.A. Central submarket for $41.3 million at an initial yield of about 5%. We acquired West Manville Street, a 60,000 square foot building in the L.A. South Bay submarket for $11.5 million at an initial yield of 5.3%. We also acquired Crestmar Point, a 56,000 square-foot building in the Central San Diego submarket for $8 million at an initial yield of 4.5%.

With regard to asset sales, in July, we sold 1 property for $1.3 million and subsequent to quarter end, we sold a property for $11.2 million. Year-to-date, we have completed $24 million of dispositions, and we expect to continue to pursue asset sales opportunistically to unlock value and recycle capital.

Turning to our repositioning activity. Year-to-date, we have stabilized 5 projects, totaling 414,000 square feet for an aggregate return on total cost of 7.1%. We currently have 1.4 million square feet of space under repositioning for future development with several completions targeted by year-end.

Finally, we continue to leverage our deep industry relationships and our proprietary research, as we add to our pipeline of acquisition. We currently have $198 million of new investment under LOI or contract, subject to completion of due diligence and satisfaction of customary closing conditions. We will provide more details as the transactions are completed.

I'll now turn the call over to Adeel.

[Adeel Khan, executive]

Thank you, Howard. Beginning with our operating results. For the third quarter 2019, net income attributable to common stockholders was approximately $9.7 million or $0.09 per fully diluted share. This compares to $6.3 million or $0.07 per fully diluted share for the third quarter of 2018. For the 3 months ended September 30, 2019, the company share of core FFO was $33.9 million as compared to $26.1 million for the 3 months ended September 30, 2018, representing a 30% increase. On a per share basis, company share of core FFO was $0.31 per fully diluted share representing a 10.7% increase year-over-year.

Consolidated property NOI was $50.9 million, up by 24% on a GAAP basis and 22% on a cash basis year-over-year. Same-property NOI was $38.8 million in the third quarter, which compares to $36.8 million for the same quarter in 2018, an increase of 5.2%. Our same-property NOI was driven by a 4.8% increase in same-property rental revenue and a 3.7% increase in same-property operating expenses. On cash basis, same-property NOI increased by 6.8% year-over-year.

Turning now to our balance sheet and financing activity. As we continue to seek opportunities to drive long-term growth, we intend to maintain a strong liquidity position, balance sheet capacity to allow us maximum flexibility and favorable access to capital. During the third quarter, we issued approximately 1.2 million shares of common stock through our ATM program at a weighted average price of $44.24 per share. This resulted in net proceeds to Rexford of approximately $51.1 million. In September, we closed on an $86.3 million offering of 5.625% Series B preferred stock. Net proceeds will be used to fund near-term acquisition and repositioning activities.

At the end of the third quarter, we had approximately $197.5 million of cash, full availability on our $350 million credit facility. We also entered the quarter with $483.1 million, full availability on our ATM program. At September 30, we had no debt maturities until 2022, and our liquidity position is strong, with a net debt-to-EBITDA ratio of 3.4x, equating to about 11.2% debt to total enterprise value.

With regard to our dividend. On October 28, 2019, our Board of Directors declared a cash dividend of $0.185 per share for the fourth quarter of 2019, payable on January 15, 2020, to common stock and unitholders of record on December 31, 2019. Additionally, our Board of Directors declared a Series A and B preferred stock cash dividend of approximately $0.37 per share for the fourth quarter of 2019, payable on December 31, 2019, to our preferred stockholders as of December 13, 2019. Also, our Board of Directors declared a Series C preferred stock cash dividend of approximately $0.39 per share pro rata for the third quarter and for the fourth quarter of 2019, payable on December 31, 2019, to our preferred stockholders at December 13, 2019.

Finally, we're increasing our full year 2019 guidance for company share of core FFO to a range of $1.20 to $1.22 per share from our previous range of $1.19 to $1.21 per share. Our new guidance range is supported by the following updated assumptions. Same-property NOI growth to range from 5.5%, 6.5% from our previous range of 5% to 6.5%. For G&A, we anticipate a full year range from $29.5 million to $30 million from a previous range of $29 million to $30 million. The rest of our guidance assumptions are unchanged and detailed on Page 24 of our Q3 2019 supplemental information tab. Please note that our guidance does not include the impact of any transactions or capital market activities that have not yet been announced nor our acquisition costs, other costs that we typically eliminate when calculating this measure.

That completes our prepared remarks. With that, we'll open the line to take any questions. Operator?

[Operator]

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

[James Feldman, analyst]

Great. I guess just to start, looking at your retention rate in the quarter, down to 62%, can you talk about how we should think about that versus what it's been in prior quarters? Were there any particularly large move-outs or anything we should be thinking about?

[Howard Schwimmer, executive]

Jamie, it's Howard. Nice to hear your voice. No, this past quarter was fairly typical. There weren't really any larger move-outs. It was just a bunch of blocking and tackling, as usual. And as you might recall, the retention bounces around from quarter-to-quarter, but it seems, typically, at the end of the year, averaging somewhere in the range of 70%. And don't forget, part of our strategy has always been to actually push tenants out of our spaces when we can capture substantially higher rents from some of our repositioning work. So that actually has quite an influence on the retention. So all in all, it's actually probably not a good indication of what's happening within the portfolio because of some of these forced vacates.

[James Feldman, analyst]

Sorry. I was on mute. Yes, I was on mute. I had a great question. So no, I was just going to say the -- in your supplemental, it shows expiring leases placed into repositioning and that was actually 0. So wouldn't that say most of these were actual move-outs instead of forced move-outs?

[Michael Frankel, executive]

Yes. Jamie, it's Michael. It's really about when a tenant expires, they're not necessarily going into repositioning. So that was probably not really capturing the entire essence of the activity. But more often than not, when a tenant doesn't renew, it's not because they didn't necessarily want to stay, it's because we saw an opportunity to re-tenant at a much higher rate, and more often than not, that doesn't require repositioning, maybe just carpet and paint, a little fluff up with the space or just remarketing of the space. So I think that probably gives you a little more clarity.

[Adeel Khan, executive]

And Jamie, just to add to what Howard and Michael just added, absorption is very important. If you take a look at our absorption number for the quarter, it was flat, but that's also a very telling sign, and I think that kind of nails -- drives the nail in the coffin and that solidifies what we were just talking about is that absorption and where the occupancy levels are, that also gives you that -- while we're not renewing, we're absorbing.

[Howard Schwimmer, executive]

And also, Jamie, not all of the spaces that we push tenants out of to capture those higher rents, land on the repositioning page. The space has to be down for a minimum of 6 months and hit a certain size threshold, I think it's about 35,000 feet right now. So that really doesn't capture a lot of the repositioning and value-add work we're doing just only looking at the repo page.

[James Feldman, analyst]

Okay. And then, I guess, bigger picture, I mean, your markets are clearly in high demand. We've seen downward pressure on cap rates. You guys -- it sounds like you're doing a lot of investment stabilizing in kind of the mid-5, low- to mid-5s. Can you just like help us talk through kind of strategically what gives you guys comfort to kind of continue on this plan given how aggressive pricing has become in your markets?

[Michael Frankel, executive]

Sure, Jamie. First, I think when you talk about pricing, you're talking about market pricing on marketed transactions, and that's the bulk of what gets reported into the trades and whatnot. And I think it's important to realize that as we stated in our comments, about 75% of our acquisitions this year have been through off-market and lightly marketed transactions, which directly translates into better than market cash yield. And I think key to our business is that we focus and are able to continue to catalyze a lot of value-add opportunities that are able to generate substantially higher yields than marketed transaction. And also, from time to time, you'll see us buying some stabilized opportunities and our mandate is when we combine it all together, they deliver to the market at substantially better than marketed yields in the best industrial market in the nation.

And we also believe that there is a place in our portfolio for stabilized assets that may be slightly lower yields than our value-add opportunities because we do know that in our portfolio, we have a lot of product that is multi-tenant, which -- where we're continually capitalizing on opportunities to create value, and so that creates transitions throughout our portfolio over time.

And when we have those transitions, it's very nice to have more stabilized product that is continuing to deliver on very consistent, maybe more moderated cash flow growth, but consistent cash flow growth through periods when we're having transitions and maybe driving space vacant for a short period of time to create some value. It's also a great edge against the general economy or to the extent there could be a correction at some point in the future, although we don't see any signs today. So we really do see a place in our portfolio for a blend some of the value-add products as much of that as we can find, frankly as well as stabilized product. Does that help answer your question?

[James Feldman, analyst]

Sure. That is helpful. And then, I guess, just last from me. Thinking about your same-store growth rate, we've seen a moderation on a quarterly basis, certainly, this quarter. Can you just talk about as we think about next year, like what are the key drivers that could keep you at either at a similar level or maybe it has to go lower just based on where occupancy is and where leasing spreads are?

[Adeel Khan, executive]

Yes. Jamie, thanks for the question. And first of all, I think I'll start with how we drive our guidance for the full year. Our guidance is based on a full year that takes into consideration what the lease roll might look like quarter-over-quarter for the full year, right? And it's on a GAAP basis. So having said that, when we first started with the guidance at the beginning of the year, we knew there was going to be a lot of expirations coming in Q3 and Q4. As a matter of fact, when we first launched the guidance, we had stated about 70% of our roll was going to take place in Q3 and Q4, fairly spread out between the 2 quarters. And if you kind of slice that back for the same pool, it was about 63% or so. So that's what you're seeing essentially here in Q3. And a lot of this roll that took place in Q3 was on the back part of the Q3, so you didn't see the full benefit of it.

Now that being said, Q4 should pick the pace back up, but you're going to see the re-leasing spreads that we did in the quarter and for the year, that's going to benefit the next few quarters in 2020 to your point. We'll provide more guidance, but the lease trajectory that we've seen in terms of our ability to renew leases and new leases at the GAAP re-leasing, from the cash re-leasing spread naturally will pay off in the future quarters ultimately leading to 2020 guidance, so we're very optimistic about that. So what you saw in the quarter, it was just simply a product of how the leases are rolling and nothing more than that.

[Michael Frankel, executive]

And Jamie, just to add to that a little bit. I mean, I think over half of the renewals during the quarter occurred during the third month of the quarter. And so that's pretty impactful, considering that the quarter was already very top-heavy in terms of the annual expirations for the company and for the same-store pool. And if you were to normalize for that, meaning, if you just take it even on a weighted average through the middle of the quarter in terms of weighted average expiration and renewal time frame, I think you'd see -- it normalizes to be pretty consistent with what we've been delivering in the last several quarters.

[James Feldman, analyst]

Okay. Great. And just to clarify, you guys talk in terms of GAAP. If we were to think in terms of a cash same-store number, what would that look like versus to your GAAP reported number?

[Adeel Khan, executive]

Well, I think the cash same-store number was reported. So I think what you're seeing is certainly a cyclical in that those leases are expiring. So I think that's also a trend, which is kind of matching what the re-leasing spreads are seeing. So you're seeing the cash expiring rents are higher. So I think that's what you're seeing essentially. I think in terms of our guidance, I think we continue to provide guidance, I think that -- on a GAAP basis, I think that's naturally the one thing we've done. So I think you're seeing a trend, the expiring cash rents and they're pointing and aligning themselves pretty nicely to what the re-leasing spreads you're seeing consistently. And on the re-leasing spread, we tracked our 8, 10, 12 quarters, and they've been very consistent, now in the 30s, and on the GAAP side in the high 20s or low 20s in the cash side.

[James Feldman, analyst]

Right. No, I was asking on a same-store basis. Same-store NOI, the delta between cash and GAAP, what does that look like these days?

[Adeel Khan, executive]

Well, I think, Jamie, I think that is a product of how the leases are rolling. I think it can flip the other direction. I bet if you were to take a look at a couple of years ago, I think the GAAP was probably a little higher. So I think that's what you're seeing here. That's simply a product of how the rolls takes place. And now naturally, if all else being equal, if you had a similar kind of product of in-place portfolio, you can see a similar trend come up 3.5, 4 years from now. I think that's all you're seeing in that. I think -- so I think we've seen early on in 2014 and '15, the trend go the other direction, the GAAP is higher. So I think that's all you're seeing. I think obviously, GAAP is, in my opinion, it's a more normalized number to be able to see, but I think the cash is simply what that is under the leases on the last leg of your cycle or the last leg of your tenure.

[Operator]

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

[Emmanuel Korchman, analyst]

Just wondering, does the lack of widespread institutional ownership of assets in your markets, that certainly helps your acquisition pipeline, but does it hurt rental rate growth for those private owners less sophisticated committed to push -- can they push -- can they -- do they lag pushing rents versus what institutional owner might be pushing?

[Howard Schwimmer, executive]

Manny, it's Howard. Well, I wouldn't say, we only buy from noninstitutional owners. One of our largest transactions this year was from an institutional seller. And that being said, they don't push rents as hard either as we're able to do. But keep in mind, on these nonprofessional owners, which really gets to the heart of a lot of the off-market transactions we do, most times what we find is people are trying to solve for keeping tenants in buildings long term. And the easiest way for these private owners to do that is to not push the rents, and they tend to avoid investing capital into the properties, whereas if you look at what Rexford does when we buy a property, we go ahead and modernize and really unlock the value, so we're able to achieve a market rent on the space. So you are correct. These people just don't push those rents. A lot of it is also due to their length of ownership of property, and they don't really need to. They're more interested in consistent cash flow versus squeezing the last nickel out of our rent.

[Michael Frankel, executive]

And by the way, Manny, it's very interesting out there, it's Michael. When we talk to private sellers and owners as well as institutional sellers and owners, we hear from both camps, some instances where they're pushing rents, but just because they're institutional, also doesn't mean they're pushing rents. So that creates tremendous opportunity for us. And I think that the driver of rent growth in our market is not so much, the owner behaviors today. It's really about availability or the lack of availability of space.

And when you drill down to Rexford's portfolio and mandate, which is to create and deliver the most functional product in each submarket that we operate in, that's really, at the end of the day, how we are able to outcompete, not just today, when things are going really well, but even more importantly, at some point in the future, when the market plateaus or we see corrections. That's when you see flight to quality, and that's when we're really going to be able to outcompete even further as we did during the great recession, frankly.

[Emmanuel Korchman, analyst]

In your remarks, you talked about a few assets that had excess land. It sounds like you're going ground up in a lot of that. What should we expect in terms of timing of those projects? And I assume that they would be sort of more speculative in nature where you're just going to build inventory and given the tight market also or would you look to have leases done before you went ground up?

[Howard Schwimmer, executive]

Actually, really, all the transactions we did in the third quarter are assets that we may modernize buildings. We may -- one I mentioned, we're going to tear a piece of the building off, none of them are going to be ground up. And the reason why -- what we're finding in our markets, there's -- it's really all about the movement of goods and getting product closer to the consumer, and that requires more parking for vehicles and containers. So we're finding there's an extraordinary amount of value being created just to deliver sites that have this excess land that can be used for the tenants that are, frankly, driving most of the demand in the marketplace. So we build a building here and there. We've got a few things, we're about to come out of the ground with. But in the infill markets, it's not only about development if you have some excess land.

[Operator]

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

[Blaine Heck, analyst]

So I know access to capital is not an issue for you guys whatsoever. But just given the high cost of properties in your markets, especially core properties that have been renovated or redeveloped, have you guys considered expanding your disposition program and maybe taking some profits on some of the buildings that you guys have done such a good job of redeveloping and stabilizing?

[Michael Frankel, executive]

Blaine, it's Michael. Thanks so much for your question. You know on the one disposition that we announced recently on Valley Boulevard is a great example of that, where we were able to harvest cash flow, and also dispose an asset that was little bit more management intensive, more multi-tenant in nature. So it contributes also to our operating margin in a sense. But we do continually look at our portfolio, frankly, on a continuous basis, and look at where we might prune and create some incremental value through recycling capital. So you're going to see us do that, I think in a similar fashion than we've done in the prior year or so. I wouldn't underwrite any more acceleration in that per se, but we continue to do that.

And if you look at the portfolio going forward, there's a tremendous amount of internal growth to be harvested. I think we estimate our expirations through the end of next year to be about 18% or so below market. This is an indication. And if you look at the NOI growth profile of the company today or at the end of the quarter, assuming we didn't buy another asset, pretty interesting. I mean we looked at having about 19.7% embedded NOI growth in the in-place portfolio as of the end of the quarter. And the biggest component of that, the 2 biggest components that starts with the repositioning. So that's a great indication of how we're going to be able to continue to create value in these assets. And repositionings don't only come from new acquisition. A lot of the repositionings we'll do, over time, come from legacy acquisitions where we just couldn't get to the space because a tenant had to expire for some times, sometimes many years.

The second biggest component of that NOI growth comes from leasing spreads. And by the way, reposition is $14.5 million over the next 18 months or so of contribution incrementally and leasing spreads using a very conservative estimate of leasing spreads about, frankly, half of what we've been doing generates about $13.6 million of incremental NOI. And so it's just indicative of some of the embedded value in the portfolio that we intend to unlock, so -- and that's across the board, by the way. So we're pretty excited about the portfolio and our ability to create a lot more value going forward. But we will continue to prune as it makes sense as well. Does that help answer your question?

[Blaine Heck, analyst]

Yes. That helps. And then just following up on spreads and rent growth. I think a few quarters ago, you guys talked about how you were seeing and starting to push kind of 4% on annual rent bumps on some of the leases. Have you guys seen that become more of the norm at this point? Or maybe given those high increases in rent on expiration, are you seeing any push back on those annual escalators? I guess how do you guys think about balancing each of those rent drivers?

[Howard Schwimmer, executive]

This is Howard. Yes, in selected instances, we are pushing the 4%. But I think for us, we're not going to give up our ability to maximize the initial rent because we want a 4% increase. So in some instances, we're able to get them. But I wouldn't say it's commonplace in the market now. Other landlords are trying it selectively as well. And it really just depends on the fundamentals of the market. Obviously, when you have low vacancy like we do with -- about 2% in all our infill markets, it's going to be easier to push. But the markets are quite large, and it's really more selected pockets that have the tightest vacancy, so we're trying to push it in a little bit harder.

[Operator]

Our next question comes from the line of John Guinee with Stifel.

[Joab Dempsey, analyst]

This is Joab Dempsey on the line for John. Just had one question for you. It looks like you purchased a land parcel in the San Fernando Valley this quarter. Could you just detail how many open unencumbered lots you have now? And how should we think about the potential square footage that could be developed on those lots?

[Howard Schwimmer, executive]

This is Howard. Yes, that parcel was something that was part of a 0.5 million square foot business park we operate in the San Fernando Valley market, and it was really just an opportunity to buy the fee interest out. We had a long-term ground lease that parking lot was operating on. And interestingly, the in-place rent we're paying, the purchase price equated to 5% return, but that rent was going to kick up to about 7.6% in terms of return on that cost within the next 18 months. So for us, it was an opportunity to really just to control cost in operating that project.

As far as other parcels that we have for development, we don't have a substantial land bank. The infill markets, as you know, have very limited land opportunities, but we do have the ability to build, probably right now, somewhere in the 700,000 square foot range of new product, which is in our pipeline at the varying phases of entitlement. We're about to start, actually, a couple things in the next quarter. And occasionally, we find opportunities to buy land, but land is very expensive. And typically in the infill markets, when you look at construction cost, it is very difficult to deliver product on a core lease basis.

So for us, it's really -- sometimes we'll find land at a substantially below market price that we can be able to put those numbers together and work. Sometimes, it's a site that we buy that has excess land that the land is undervalued, that we're able to add a little square footage. But for the most part, the market is very challenged in terms of the opportunities.

[Operator]

Our next question comes from the line of Tayo Okusanya with Mizuho.

[Omotayo Okusanya, analyst]

Yes. Just a question regards to the acquisition side. Again, just given that cap rates, again, continue to be very tight, and you guys have a pretty low leverage. Just curious your thoughts around using incremental leverage to kind of juice returns on the acquisition side?

[Michael Frankel, executive]

Tayo, it's Michael. It's a very good question, and you're right. We have deliberately maintained a very low leverage profile for the company, and we think that's very appropriate, particularly in general, just at this time in the cycle. And we don't really have it as a current strategy to, as you said, engineer higher returns through increased leverage. That's really not a part of the near-term or medium-term thinking or business model for Rexford. And I think what you're looking at Rexford is an exceptional business model that's performing in a way where we can deliver sector-leading FFO per share and FFO growth without needing to increase those returns through increased leverage. And that's a luxurious position to be in, and we're simply capitalizing on that. And we think that, over time, everybody, all owners, all shareholders of Rexford are going to be very happy with our low leverage profile of the company.

[Omotayo Okusanya, analyst]

Got you. And then just going back to Jamie's question from earlier on. Again, when I take a look at the same-store NOI guidance for the year, 5.5% to 6.5%, again, when I kind of take a look at the first 3 quarters of the year where you were kind of high -- low single digits, high double digits, that kind of number, it kind of seems to still suggest that same-store NOI growth will further decelerate in fourth quarter. And I think I heard Adeel say, it was going to accelerate. I just wanted to kind of make sure I was kind of looking at this correctly. And if it is indeed decelerating in fourth quarter, what's kind of like the drivers of the further deceleration in the quarter?

[Adeel Khan, executive]

Tayo, this is Adeel. So when I was talking about the same-store accelerating in Q4, it was a byproduct of a big quarter in terms of expirations that came in Q3. Obviously, with us, doing a good job in renewing or getting new tenants in that space, Q4 is going to benefit from that. And as Michael pointed out, a lot of that roll took place latter part of the quarter. So Q3 didn't benefit necessarily from the full impact, but Q4 will. So what you saw in Q3 in terms of the same-store year-over-year is certainly going to look better in terms of Q4. Now Q4 is still a pretty heavy quarter in terms of roll. But again, I point everybody to our ability to get great re-leasing spreads on a GAAP and cash basis. So ultimately, we are doing a great job in building a new NOI base, which is going to be beneficial to all the future quarters. So that's what I meant earlier when I said it's accelerated just because of that.

[Omotayo Okusanya, analyst]

Okay. That makes more sense. And then just one more from my end. The same-store occupancy for the stabilized portfolio is about 97.7% and for the total portfolio is about 95%. Clearly, you have this fairly large gap because of a lot of the asset in repositioning. Is that what we should be on looking -- should we be looking for that gap, which again is at a historical wide really to start to close in 2020 and become a meaningful driver of earnings growth in 2020?

[Howard Schwimmer, executive]

Tayo, it's Howard. Well, I think to put it in perspective, we operate single tenant buildings and multi-tenant buildings. I think today, we're about 65% multi-tenant projects. So those projects typically have a little bit shorter lease term than some of the single tenants. And so that overall portfolio occupancy, really, I think, is more in line with how we would encourage people to underwrite the portfolio. And quarter-over-quarter, it's going to vary. But in terms of gaining occupancy, pushing the overall substantially higher, I don't think we'd encourage you to underwrite that.

[Adeel Khan, executive]

And Tayo, one data point that I'll add, obviously, the consolidated occupancy will bounce around based on our acquisitions in the current year. This year was an interesting year is that about $98 million of our 2019 acquisitions are going to be key drivers because of repositioning efforts, and that's about 770,000 square feet called on our repositioning piece. So yes, absolutely, to your point, that is going to be a driver for future earnings in a very meaningful way, and that's also the contributing factor to why the overall consolidated occupancy is little lower than the stabilized same-store occupancy.

[Operator]

Our next question comes from the line of Eric Frankel with Green Street Advisors.

[Eric Frankel, analyst]

First time caller, longtime transcript reader. Just a couple of questions for you. Talking about the redevelopment activities again and just escalating land values, had you ever -- maybe you're actually remarked on this earlier in the call, is there a larger shadow pipeline in your portfolio of larger buildings that are maybe older vintage you bought a few years ago with the land value to come up enough, and there's not a lot of high-quality product out there that it's worth doing a more full-scale redevelopment that's not reflecting in the redevelopment portfolio?

[Howard Schwimmer, executive]

Eric, it's Howard. Welcome, first time caller. We appreciate you being here. That's a great question. And we look at our expirations and consider redevelopment each time, we have a single tenant building that's expiring. And what we typically find is that there's a bit more yield to be achieved in some of the repositioning work versus going ahead and performing a full-on redevelopment to construct a new building. That said, there are a few things that -- because of the functionality, we may go ahead and build some new buildings here and there, but the market is so tight, and there's such a lack of space, the demand is still there.

And I think when you're thinking about redevelopment versus new, you're probably asking a question of the functionality, the clear heights and so forth. And in the infill markets, that -- those basic factors aren't necessarily as important as if you're in a noninfill market, for instance, like the Inland Empire East, where you can have a building that's probably an A quality building in the infill markets, but it's going to be a B or C out there. So the dynamics function very differently. But that said, we're still able to achieve these superior returns in our markets because of the demand profile.

[Eric Frankel, analyst]

Got you. Next question, just regarding -- obviously, you guys seem to source of a lot of kind of lightly marketed off-market opportunities. You just have really intensive canvassing efforts. But have you seen cap rates for marketed transactions to trend in any direction this year? Do you think the investment activity to be more intense than cap rate for highly marketed deals have trended even lower over the last couple of quarters?

[Howard Schwimmer, executive]

Well, certainly, on larger transactions obviously, we've all seen some of these larger portfolios transact, and the product that's within Southern California, we certainly see those cap rates come in, one-off, single buildings, we've seen the cap rates tighten a bit. But for the most part, I think it's a bit hard to generalize some of the cap rates unless you're talking about a newer building with a fully valued lease on a comparative basis. But what we tend to find and what really we're able to arbitrage upon in our acquisitions is the fact that rents are all over the board, and a lot of the people we buy from don't push rents.

So depending on where the rents are on a property in terms of below market, the cap rate could be lower or higher. So we find that it's a little harder to really just sort of put it all into one pot and try and make those comparisons. But in general, we haven't seen the typical transactions that Rexford is buying these $20 million to $40 million deals have any substantive cap rate compression. It's more on the larger stuff.

[Eric Frankel, analyst]

Got you. Just one final question. Obviously, from a human standpoint, the toughest days and the wildfire that are brewing in southern and northern California, can you talk about how that might impact your business though positively or negatively or in terms of insurance rates or whatever have you?

[Michael Frankel, executive]

Yes. Eric, we haven't yet seen any real impact to our insurance rate. Obviously, we'll go into that next year. But the bigger impact for insurance rates historically have not been so much buyers in Southern California. They've been other actually much larger events throughout the country related to wind and whatnot. So we haven't seen that so far.

And in terms of the potential to displace tenants, which could have an actual impact on our markets, we really have been fortunate. We really haven't seen any industrial areas that are hit in that way. I think it has something to do also with the topography because Rexford's focused more on these infill markets. So they're less surrounded by fuel for fires, for instance. And so we haven't really seen that as an impact either.

[Adeel Khan, executive]

Eric, and just to second, Michael's thought earlier part of the question and the answer, as I discussed the insurance and when we have the discussions with our carriers, Rexford is considered a great risk for their profile. And a lot of times, it's just the capacity worldwide and what the world is seeing in terms of calamities and all the issues in terms of tornadoes and hurricane and so on and so forth. So we definitely are a better risk profile for the carriers, but when we see increases but not necessarily anything contributing because our portfolio is just a general capacity across the world and how it impacts us.

[Operator]

Our next question comes from the line of Chris Lucas with Capital One.

[Christopher Lucas, analyst]

Just maybe a follow-up on the last question as it relates to a slightly different approach, which is, on these preventative power outages that the utilities have been running, have you had any properties that have been impacted by those?

[Howard Schwimmer, executive]

Chris, it's Howard. We haven't heard of anything. And most of these outages are all in Northern California. Southern California, there's been some discussion of some power outages, but we haven't heard anything yet that's impacted any of our buildings.

[Christopher Lucas, analyst]

And then I'm assuming that your tenants have BI insurance, it's a requirement for lease?

[Howard Schwimmer, executive]

Yes.

[Christopher Lucas, analyst]

Okay. And then, I guess, taking a step back, just wanted to understand the capital markets activity decisioning in third quarter, you did a nice execution on the 15-year private placement bond and you did a preferred offering as well. It's a pretty healthy spread and the cost of those 2, and given the length of the 15-year bond that was -- the payback period sort of between the 2 seems to be pretty far out there. Just kind of curious as to why you chose the mix you did during the quarter.

[Michael Frankel, executive]

Chris, it's Michael. I think the quarter is indicative of our goal, which is to have a balanced capital structure and to have a diverse array of tools at our disposal to grow the company. And that's a great question about the preferred. But we think that there is a place for the preferred in our capital structure. We think it's accretive to common, actually, day 1 even though it does provide a little bit of a hit to free cash flow and FFO per share on day 1. And in particular, for Rexford as a growth company because when you think about the fact that those equity investors on the preferred are captive to a 5.625% yield forever, and if you compare what we have been generating in terms of a return to common well in excess, multiples of that type of a return. So everything above a 5.625% goes right to common and we've done the analysis in terms of how that's impacted us on our prior preferred, and it's really a tremendous benefit to common, also, given the type of investments we're able to make that are adding value to the portfolio and giving us growth.

So we believe that there's a place for preferreds in the portfolio. We think they're actually accretive to common day 1. And -- but I understand the question, and I think that a lot of folks, if they have a very short-term horizon, they may view a preferred as diminishing our current FFO per share or cash flow, but the longer term, your horizon is, the longer term your view is, the more one, I believe, would tend to view those preferreds as equity because they're permanent capital for us and no repayment requirement and a fixed coupon. So very attractive for our company in particular, and we do think there's a nice place for the capital structure.

All right. And with that, we'd like to thank everybody for joining us this quarter. We wish everybody a wonderful holiday season, and we look forward to reconnecting in about 3 months. Thank you, everyone.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.