Rexford Industrial Realty Inc

NYSE:REXR

Earnings Call Transcript 2020-Q3

[Operator]

Greetings, and welcome to the Rexford Industrial Realty’s Third Quarter 2020 Earnings Conference Call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

At this time, we’ll turn the conference over to Steve Swett of Investor Relations. You may begin.

[Steve Swett, IR]

We thank you for joining us for Rexford Industrial’s third quarter 2020 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 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 Rexford Industrial’s Co-Chief Executive Officers, Michael Frankel and Howard Schwimmer; together with Chief Financial Officer, Laura Clark; and our General Counsel, David Lanzer. They will make some prepared remarks and then we will open the call for your question.

Now, I will turn the call over to Michael.

[Michael Frankel, Co-CEO & Director]

Thank you and welcome to Rexford Industrial’s third quarter 2020 earnings call. We hope this call finds you and your families well and healthy. Today, I’ll begin with a brief summary of our third quarter operating result and Howard will then cover our market activity, we're also very pleased to welcome Laura Clark who joined Rexford on September 1 as our new Chief Financial Officer. Laura will provide more details on our financial results, balance sheet and outlook. We will then open the call for your questions.

We are very pleased with our strong third quarter results to which we credit the hard work of our entire Rexford team and the extraordinary resilience and overall quality of our tenant base within infill Southern California. Highlights from the quarter include the following we increased company share of core FFO by 20% to $40.6 million and generated a 6.5% increase in core FFO per share to $0.33. Consolidated NOI grew by 23.8% on a GAAP basis and by 22.2% on a cash basis. Our state stabilized same property NOI grew by 4.4% on a GAAP basis and our stabilized same property cash NOI grew by 5%.

We signed 101 leases for 1.6 million square feet during the third quarter and achieved leasing spreads of 26.8% on a GAAP basis and 17.4% on a cash basis. And we achieved 98.4% occupancy in our stabilized same property portfolio. During the quarter we also acquired five properties for approximately $69 million. And subsequent to quarter end we acquired one additional property for $22 million bringing our year to date investment volume to $375 million.

With regard to rent collection suffice it to say that third quarter and now October are all tracking essentially very close to strong pre pandemic levels. The strength of our collections is truly a testament to the high quality of our infill tenant base particularly in light of the fact that many of our tenants have the unilateral right to defer rent under unique California mandates due to COVID. Laura will provide additional color regarding our collections.

We also completed the quarter with a low- a low leverage fortress like balance sheet at 2.9 times net debt to EBITDA which equaled about 9.7% debt to total enterprise value. We ended the quarter in a very favorable position with upwards of $1 billion of liquidity as we move forward. The company's outperformance has been exceptional rivaling our strongest pre pandemic quarters.

As a result, we are very pleased to be increasing our guidance which Laura will be describing in more detail. Rexford has grown to become the third largest and fastest growing publicly traded logistics we focused on the nation's strongest market.

Looking forward we believe Rexford is very well-positioned into 2021 and beyond. With regard to internal growth we are positioned to capture about 18% NOI growth embedded within our in-place portfolio over the next 12 to 24 months principally driven by entrepreneurial value add asset management strategies.

Our external growth prospects are also strong. The ongoing benefit of our proprietary research driven originations continues to increase the volume and quality of our investment pipeline. We see a very substantial opportunity to consolidate well beyond our current 1.5% market share within our highly fragmented exceptionally large Infill Southern California Industrial Market.

We believe a principal reason our market is the most highly valued and sought after industrial market in the country is due to operating history that demonstrates our infill so-called tenant base to be the strongest tenant base in the nation driven by a range of key factors.

To begin with our infill locations are generally mission critical for our tenants. Their businesses depend upon our infill location as they generally serve regional consumption and would not be able to do so if located outside infill Southern California. Further due to extreme constrained supply within infill Southern California our tenants will be challenged to find similar quality space.

Further due to extreme constrained supply within infill Southern California our tenants will be challenged to find similar quality space anywhere else within our submarkets. Meanwhile, tenant demand continues to expand driven by growth across a range of sectors from consumer staples and food distribution, healthcare and medical products, renewable energy and electric vehicles, space exploration and aerospace technology among many other growth sectors.

Further the dramatic growth in e-commerce which has been accelerated by the pandemic continues to drive unprecedented new demand for space within our target infill markets as we are positioned within the largest first mile as well as the nation's largest last mile of goods distribution and consumption in the United States.

As a result of these dynamics, tenant demand is as intense as ever. In fact CBRE now projects industrial market rent growth in Los Angeles County to increase a full 41% through 2025, which equates to 7.1% per year compared to only 2.9% per year projected for the rest of the nation's major industrial markets.

Finally, we are tremendously thank you to the entire Rexford Industrial team as we express our appreciation for their superior performance and as they continue to prove themselves as the most effective team in our business.

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

[Howard Schwimmer, Co-CEO & Director]

Thank you, Michael and thank you everyone for joining us today. Despite the impact of COVID-19 and associated shutdowns, markets fundamentals in the infill Southern California industrial market remain very healthy in the third quarter. They can see how markets remains persistently low and demand accelerated as we have seen increased leasing from both traditional industries and e-commerce growth.

As a result, we continue to see strong rental rate growth and net absorption in infill Southern California. Our target markets which exclude the Eastern Inland Empire ended the first quarter at 2.6% vacancy with asking rents up year over year despite COVID. During the quarter we experienced our largest volume of new leasing which speaks to the incredibly high demand for our quality well located generic warehouse and distribution product.

We generally achieved or exceeded our pre COVID projected lease rates resulting in aggregate leasing spreads at pre COVID levels. COVID dynamics are directing activity toward vacant move-in ready space and are driving increased rent growth as demonstrated by our 1 million square feet of new leases signed at an impressive spread - impressive spreads of 38.9% on a GAAP basis and 25.5% on a cash basis.

Turning to acquisitions in the third quarter we acquired five properties for a total cost of $69 million adding approximately 386,000 rentable square feet to our portfolio which are projected to deliver a 5.5% aggregate unleveled yield. Close quarter end we completed one acquisition for $22 million. Details on acquisitions can be found in our recent press releases and supplemental posted to our Website.

In the next few weeks we expect to complete the non-contiguous acquisition of Gateway Point Industrial Park in the LA mid County submarket for $297 million. The modern 989,000 square foot four building complex is 100% leased at rents estimated to be 21% below market. The project is strategically located in proximity to the central Los Angeles mid counties and West San Gabriel Valley submarkets.

The buildings are 32 foot clear at first day with an elevated dock loading ratio excess container parking and currently serve the high demand e-commerce and last mile distribution sector. The initial stabilize field is 3.6% and using conservative rent growth projections close to over 4% with mark-to-market upside as leases roll over the next several years.

Additionally, it is important to note that this project is one of the highest quality industrial properties in one of our strongest submarkets and it is ideally positioned to capture the excess market rent growth projected by CBRE that Michael mentioned earlier which is not incorporated in our underwriting. As you may recall, our investment strategy is to acquire a blend of core, core plus, and value-add opportunities and Gateway Point fits squarely into our core bucket, which provides cash flow growth and stability in future periods when some value-add projects may be in transition.

We continue to leverage our information advantage through our deep market knowledge and a research-driven platform which has enabled us to complete 77% of our acquisitions this year through off market or lightly marketed transactions. As we look ahead, our acquisition pipeline remains strong with approximately $675 million of new investments under LOI or contract including Gateway Point. These acquisitions are subject to the completion of due diligence and satisfaction of customary closing conditions. We will provide more details as transactions are completed.

Regarding dispositions, as announced last week we sold three properties totaling $44 million dollars during the third quarter. The proceeds will be used to tax efficiently fund a portion of the Gateway Point acquisition and moving forward we expect to continue to sell assets opportunistically to unlock value and recycle capital.

Finally, I'd like to provide an update on our value-add repositioning program. Our repositioning projects have remained on track through COVID with only nominal impacts from slowed permit processing. During the third quarter, we've stabilized or pre-leased four repositioning projects totaling 349,000 square feet at an aggregate unleveraged yield on total cost of 5.8% in light of recent increase demand for our vacant space and amid a backdrop of very low vacancy. We feel very good about future performance for the 1.4 million square feet of projects that are planned or currently under repositioning or development.

I'm pleased to now turn the call over to Laura.

[Laura Clark, CFO]

Thank you, Howard. I am excited to join the Rexford team and to be with you all today. Over the past eight years Rexford highly differentiated strategy irreplaceable high quality properties leading internal and external growth all supported by a best in class balance sheet have solidified Rexford leading platform and the industrial sector. The future opportunities ahead for Rexford are great and I am excited to be a part of our next level of growth.

Today I'll begin with the highlights of our operating results. In the third quarter stabilizing property NOI was up 4.4% driven by a 5% increase in rental revenue related to higher occupancy and leasing spreads offset by bad debt expense. Property operating expenses increased 6.9% which was mostly related to some repair and maintenance expenses that were delayed into the third quarter due to the pandemic. On a cash basis same property NOI was up 5% in the quarter.

Regarding rent collections and deferrals we are pleased with third quarter cash collections at 96.8% near pre COVID levels and 920 basis points above the second quarter. October collections are tracking in line with the third quarter at this point in the month at 91.7%. It's important to note that nearly all deferrals had burned off in the quarter to these strong collection numbers are true testament for the health of our tenant base and a strong infill Southern California market dynamics.

In regards to rent deferral we've executed approximately $4.6 million of base rent deferrals including $700,000 in the third quarter or 20 basis points of ADR with an average deferral period of one and a half month. And in the third quarter we collected $160,000 of deferral rents representing 100% of amounts due. As of October 19 we have collected approximately 85% of the $1.5 million deferred rent due in October with $220,000 remaining to be collected. About $3.6 million or nearly 80% of all deferrals are scheduled to be paid back in the fourth quarter.

Turning now to our balance sheet and financing activities. At Rexford we have a commitment to maintain a leading best in class low leveraged balance sheet. Our strong balance sheet has allowed us to capitalize on our value add model over time as we have produced sector leading growth while at the same time maintaining a low levered balance sheet a true testament to our internal and external value creation. We have never been better positioned for the future growth opportunities ahead while at the same time being well positioned for any future disruption.

At the end of the third quarter we had approximately $286 million of cash on hand which includes $42 million of 1031 proceeds related to our third quarter disposition. We remain in a very strong liquidity position with no debt maturities until 2020 $500 million available on our revolver and approximately $260 million available under our ATM program.

As Howard discussed we anticipate closing on the acquisition of Gateway Point in the coming weeks for approximately $297 million. We will initially use cash on hand and our revolver to fund this accretive acquisition. We estimate that this transaction will contribute approximately $0.07 per share to core FFO in 2021.

Before turning the call over for your questions, I would like to discuss our updated 2020 guidance. Given our performance to date, including the order visibility we now have on collections as well as the announced acquisition of San Fernando Road and the imminent closing of Gateway Point, we are increasing guidance for core FFO per share to a $1.29 to a $1.31 per share from our previous guidance range of a $1.26 to a $1.29 per share.

As a reminder, guidance does not include assumptions for prospective acquisitions, dispositions or capital transactions that have not yet been announced. We have also increased our expected 2020 same-property NOI growth range to 3% to 3.5% driven primarily by occupancy gains to date as well as lower than expected bad debt expense in the third quarter as the overall health of our tenant base remains solid.

Our updated guidance range includes the assumption of bad debt expense of approximately 180 basis points for the full year. While we continue to be very pleased with collection levels, we do feel that it is prudent to remain cautious given the uncertainty of the current environment.

Lastly, we anticipate year-end stabilized same property occupancy will be in the range of 97.5% to 98% and no change to our previous G&A guidance range of $36.5 million to $37 million, which includes $12.5 million of non-cash equity compensation.

With that, I would now like to turn the call over to the operator for your questions.

[Operator]

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Emmanuel Korchman with Citi. Please proceed with your question.

[Emmanuel Korchman, Citigroup]

Hey everyone. Good morning and afternoon. Maybe this is one for Howard or maybe Laura, have you thought about the change in guidance from 2Q to 3Q obviously the occupancy and same store assumptions changed significantly in a positive way. Just maybe what did you or didn't you see happen during the third quarter that drove that change in straight door projections or sentiment for fundamentals?

[Laura Clark, CFO]

This is Laura. I'll start with that one. So I think it's really important to go back to the time when our prior guidance was set. So if we can all remember back to July when we were experiencing a new wave of that shutdown and much uncertainty remains. So fast forward three months and while uncertainty in stock certainly continues.

We have much more visibility and so leasing demand as demonstrated by our record leasing levels this quarter and as well as record absorption levels that are at pre-COVID. Our updated guidance ranges really reflect what we're seeing in regards to the demand for our portfolio as well as what we're seeing from a collection standpoint. When you see our cash collections at nearly 97% and the collections of our deferrals that we're really pleased with at nearly 85%.

[Emmanuel Korchman, Citigroup]

Great. And Laura, on bad debt I think you gave guidance for the year of 180 basis points, could you just give us actual numbers for 3Q and where you are year to date.

[Laura Clark, CFO]

Yeah absolutely. Year to date bad debt expense is approximately 120 basis points of revenue. And then in the third quarter that was it was $1.5 million or 170 basis points of revenue. On a same property basis bad debt impacted our 3Q same property NOI growth by approximately 200 basis points or $1.1 million. So as I mentioned in my prepared remarks we anticipate bad debt expense for the full year to be in the 180 basis point range.

[Operator]

Thank you. The next question comes from the line of Jamie Feldman with Bank of America. Please proceed with your question.

[Jamie Feldman, Bank of America]

Great. Thank you. I guess just to confirm on the bad debt expense. So you've taken 120 basis points year to date and there is a 180 basis points in the guidance that mean there is 60 basis points more to go I just want make sure we're thinking about this in the right way.

[Michael Frankel, Co-CEO & Director]

Yeah absolutely. So if kind of think about think about how it rolls. So we've taken 120 basis points to date and we're estimating that to get to 180 basis points for the full year. So that would mean that you know 4Q -- our 4Q estimate on amount of bad debt is higher than what we've experienced in the prior quarter. So I think it's important to dive in here a little bit and talk about what we're seeing in terms of the drivers of our increase in bad debt expense.

So as you can see with our cash collections at 97% we're actually doing pretty well. And we've always taken a very conservative approach in regards to our watch list in our bad debt. And you know despite the fact that some of the tenants that are on our watch list today are actually quite healthy and are taking advantage of the moratoriums in place.

So when I think about the drivers of the debt increase. I think the drivers can really those tenants can really be broken down into two buckets It’s first tenants that are following the California moratoriums that are in place. And then it is there's a bucket of about half of that is tenants that are struggling. So in terms of the first bucket that represents about half of the nonpayers, these are generally healthy tenants but are following the California municipal moratoriums that have given them the unilateral right to defer rents. Once the moratoriums left, we do believe that these tenants will pay rent again and pay back the amount that they owe.

The second bucket of tenants are those that have businesses that have been impacted by the pandemic and may be struggling post-COVID. So we certainly are looking to the opportunity to proactively work to take up back up space as that will allow us to release to better quality tenants at higher rents and we have the opportunity to do that this quarter as well. So I think what's really important when you think about our bad debt and what I would say is really a cumulative impact of our conservative approach to our bad debt reserve is how we account for bad debt.

So regardless of the reason a tenant isn't paying rent either with the moratorium or credit risk, if a tenant accrues more than two months of base rent, we fully reserve for the rent and our bad debt expense. So for example, if you have tenants that are following the moratoriums that are in place our bad debt expense will continue to grow until those payments commence again.

So we're continuing to evaluate our policy as we gain further insight into new information that we have into our overall collections as well as with the visibility we have into deferral payments. But again I think it's important to note that that list of tenants are watch list and that aren't paying is relatively small as you can see in our nearly 97% collection levels that are near pre-pandemic levels.

[Jamie Feldman, Bank of America]

Okay. Thank you, that's helpful. And then you have a large acquisition coming soon. Can you just talk about how the acquisition market is changed during the pandemic I mean there is a lot of potential seller you've been speaking to for years. Do you think that they're going to be more willing to sell in a downturn or it's just not a downturn and it's not really going to matter.

[Howard Schwimmer, Co-CEO & Director]

Sure yeah. Hi Jamie. It's Howard. Well first of all from the results we've put up this quarter if you didn't know the word COVID you'd probably be thinking things were just pretty typical in terms of our business. So that carries through to the entirety of our market. So there is a significant amount of demand in the market. Vacancy is still incredibly low and the amount of tenant spreads in our portfolio as Laura just described that are having trouble paying rent or just taking advantage of the moratorium is fairly small.

So when you really look at the entirety of the market there is not really any distress that's out there. There is few things going on here and there. But no that's not leading to sellers strictly because of the pandemic they need to sell their real estate. And I think if anything they've seen rents increasing dramatically and values as well through some of the recent transactions and some that are about to hit. So the market has been incredibly strong and we don't really see any signs of any financial issue that would create any more selling in that respect.

[Jamie Feldman, Bank of America]

Okay.

[Michael Frankel, Co-CEO & Director]

Jamie. It’s Michael I do think it's a great question and just to add that I think we are seeing continued maybe growing interest for instance from potential [indiscernible] property contributors the other some very major long term trends in the market that arguably could be accelerating a little bit we've tracked well over a 1 billion square feet owned by these private owners who own small and large portfolios and that activity is -- we did a $210 million deal for instance in every transaction earlier this year and we have a lot of those in the hopper and we are seeing some interest from some of the corporate owner users on the sale leaseback which you know over the years we've been pretty active on the sale leaseback promo probably seeing incrementally a little more activity there but hard to say that that's directly tied to the pandemic.

[Jamie Feldman, Bank of America]

Okay. Thank you. And I know you kind of mentioned from gateway point in 2021. I assume that's putting cash to work in your revolver to fund it. But how do you think about either long term debt on that or something I think you said you're also going to fund with disposition. So can you talk about like cap rate disposition just the moving pieces to get to that $0.07?

[Michael Frankel, Co-CEO & Director]

Yeah. Thank you. Based on our position today assuming no other capital transactions that's what the circumstances based upon in terms of the acquisition of gateway point. It's really a steady state $0.07. But we have a strong pipeline of near-term acquisition opportunities of about $675 million including Gateway that are under contract or LOI.

So the capital structure is obviously somewhat fungible in terms of our go forward funding. So we'll continue to evaluate really a full range of debt and equity options available to us. And importantly we're committed to maintaining our low leverage balance sheet and investment group - great profile as we move forward.

[Laura Clark, CFO]

There's 5.1 million square feet that are in 2021 but the largest is maybe a 200,000 foot building. The rest of them are hundreds and less. So nothing dramatic. In fact we're in discussions with expirations right now with these expiring tenants. We've already sent them more renewal work with the remaining 2020 expiration at the end of the quarter there were 733,000 remaining and as of today that's about 548,000. And it's actually even lower when you break it down because more than half of that remaining square footage goes into our repositionings.

And so today we're now starting full-bore tackling those 2021 expirations. And I think in the top 20 of those I think we have activity and discussions and renewal taking place probably within the range of more than 30% of those occupants. And so I think from a renewal standpoint, we feel pretty good about where we sit in the market. As you know we tend to have the best quality product in each of these submarkets and there's just limited options for tenants in terms of relocating and moving. So we're excited about the discussions that are already taking place on some of those earlier renewals.

[Jamie Feldman, Bank of America]

Okay. All right. Thank you.

[Operator]

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

[Blaine Heck, Wells Fargo]

Great. Thanks. Good morning out there. Can you comment on the October collections a little bit? First of all how does the pace of regular rent collection compare with prior quarters? And then second on the deferral of repayments, do you have any sense of kind of what that 84% collections at this point in the month means for your ability to collect the rest of these deferrals that are in October?

[Michael Frankel, Co-CEO & Director]

Yeah. Hey, Blaine. Thanks for joining us today. So yeah in terms of kind of where we are in October so October to this point is at 91.7%. And when we look back over Q3 that's really right in line with where we were at this point in the month and the prior quarter. So we've visibility and seeing those October collections we’re at or near where we were in Q3.

In terms of the deferral payments, I actually just got a note from our team this morning and hot off the press that we actually got another deferral payment this morning. So we're now at deferral collections about 88% compared to the 83.4% that were reported last evening. So that leaves under -- about under $200,000 to be collected in October and we have it's still relatively early in the month from that standpoint.

So we've pretty good visibility into those deferral collection percentages to be pretty in line with what our contractual doing collection percentages are in that 95% to 96% 0 percent area.

[Blaine Heck, Wells Fargo]

Okay. That's helpful color and congrats on that additional collection. And then just following up on one of Jamie’s questions, you guys didn't issue any shares on the ATM this quarter which is pretty atypical but you clearly had the capacity to increase leverage a little bit. I think we calculated leverage including the $297 million portfolio deal, it still remains in the low 4% on a debt to EBITDA basis.

So the question is looking forward, how much additional capacity do you think that affords you before hitting kind of the top of your leverage comfort targets? And how should we think about ATM issuance going forward as well?

[Laura Clark, CFO]

Yeah, Blaine. So in terms of our ATM issuance this quarter I think know it's important to note that we had a pretty significant cash balance sheet, cash on our balance sheet this quarter and ended the quarter with $286 million. So we had - we really had ample capacity to fund our need -- our needs this quarter. So that really drove kind of the lack of ATM activity.

In terms of your question on our balance sheet strategy we believe our balance sheet is really one of our core competencies and our competitive strengths and maintaining that strong investment grade profile is really a key objective of ours. So our little leverage balance sheet today we certainly have ample capacity and that provides us with what I think is ultimate flexibility to execute on both our internal and external growth opportunities and thus position us well for what could be future disruption.

And I think that if there's anything that this and other downturns have taught us is that it doesn't take much disruption to move leverage considerably. So we feel like we've never been better positioned than we are today given the low levers can drive our balance sheet and expect to continue to maintain the strategy going forward.

[Operator]

The next question comes from the line of Dave Rodgers with Baird.

[Dave Rodgers, Baird]

Yeah. Michael, Howard, maybe I start with you a question on the tenant demand that you're seeing both in the quarter and I guess what you're seeing here into the fourth quarter. Can you talk about the mix or the breadth of the tenant demand that you're seeing. I think national numbers have quoted 40% from e-commerce and you know up to 40% from Amazon in the first half of the year. Are you guys seeing something similar and can you give us more color on the breadth of the tenants you're talking to.

[Howard Schwimmer, Co-CEO & Director]

Hi, Dave. It’s Howard, in the prepared remarks we mentioned that demands coming not just from e-commerce there is a lot of demands from traditional tenants that have been in the marketplace. Some of it clearly is pent up demand because they weren't in the market in the second quarter. But look the business - some businesses are doing great and they're growing and expanding.

Some of them for obvious reasons might be taking a little bit more space to have a bit more inventory on hand. But really a lot I think can be spoken to with just even the productivity. If you think about it, the ports were down I think a little over 11% for the first half the year. And with all the activity in August they're down only about a little over 7% in August a record breaking periods for imports for both the ports that they've never been more import volume in the history of those ports.

So a lot of products coming in from California and that's creating incremental demand whether it's e-commerce commerce or even traditional retailers. They need a place to put the product. And so as demand I think pretty diversified and then you talk about Amazon and so forth and I mean Amazon has been one of the largest takers of space in all of our submarkets and certainly contributed to helping the market maintain the exceptionally low vacancy rate we have.

So it's exciting and then as far as our e-commerce demand this was one of our highest quarters as well. I think we had over 50% of our leasing that occurred new lease and they had some e-commerce relationship which is a pretty significantly from what you've seen in the past quarters which seemed to average more in the 30% 35% range. So e-commerce is clearly a driver, but it's not just an Amazon, its companies we've all never heard of before and every business you can think of that knows now that bringing their sales online is more than a revenue generator. It's an insurance policy.

[Michael Frankel, Co-CEO & Director]

Hey Dave, it’s Mike. I think it's a really great question. Just adding a little bit of color to Howard’s comments another way to think about demand in our markets, in our portfolio is when you look at just how low vacancy our markets are hovering a little over 2% on average. But realize that these are very big markets and so of that 2% plus vacancy in the market the product that actually competes with us is probably half of the actual vacancy out there maybe even less because again we're - our mandate is to acquire the best locations and if they're not the most functional most submarkets when we buy them we practically make it.

So in terms of product that actually competes with the Rexford portfolio you're probably looking at half or less than half of the market vacancy out there. And I think it's reflected in our portfolio by the way. I think our vacancy numbers are materially higher. Our vacancy numbers are about half of what the submarkets are where we operate. And so you layer in the dynamic that Howard is talking about and the portfolio and the business is exceptionally well positioned from a demand perspective. We're way above what we have considered structural occupancy.

[Dave Rodgers, Baird]

Great. Thanks a lot Michael. That’s really helpful.

[Michael Frankel, Co-CEO & Director]

Yeah.

[Dave Rodgers, Baird]

And then I wanted to follow up Laura on the security devices you guys have applied in the last quarter or so. Are you collecting those, are those part of the deferrals that come back in this year. So that's something that we should also be looking at in those numbers?

[Michael Frankel, Co-CEO & Director]

Yeah. I mean that's when we look at that deferral of base rent that we're reporting that does not include the replenishment of the security deposit. That number that 80% -- close to 90% number that I just talked about in the last question that we've collected in October is just the deferral of base rent.

[Dave Rodgers, Baird]

Okay. That's helpful. Thank you.

[Operator]

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

[Michael Mueller, JPMorgan]

Yeah. Hi. I think you mentioned opportunistic dispositions, and I'm curious how you're thinking about dispositions today versus equity issuance given where the stock is trading? And then I guess what are the characteristics of those disposition candidates?

[Howard Schwimmer, Co-CEO & Director]

Hi, Mike. It’s Howard. Thanks for joining us today. As far as his positions, our thought process on them hasn't really changed much from quarter-to-quarter or even year-to-year. We're always looking deep in the portfolio and looking for dispositions that either can outperform cap rate values where we might sell to some owner users which was an example of during the quarter or more management-intensive properties requiring more capital in the near term that we don’t feel that will be paid an incremental return on.

So served some multi-tenant product as well and we took advantage of new capital coming into the market frankly that is hungry for industrial assets, less sophisticated and significantly outperformed on exit on one multitenant building that we sold in San Diego. And that -- dispositions will continue to be a part of how we operate and yeah we do have some others in mind to provide more information on those as we transact.

[Michael Frankel, Co-CEO & Director]

You know Mike just adding again to that it’s Michael when you look at the portfolio and particularly look at the expirations for instance next year the portfolio from expirations perspective is about [Technical Difficulty] they're being below market. And in the aggregate that portfolio is probably over 10% mark to market. So yeah there is a lot of value creation to be had throughout the portfolio. But so we're going to be opportunistic is probably the right way to clarify. But I think we're really focused moreover on value creation.

[Michael Mueller, JPMorgan]

Got it. So it is maybe the way to think of it dispositions are going to be what they're going to be given the situation and any excess equity requirement that you would need to fund whatever investment you make would come from traditional equity issuance as opposed to that and when you like digital cap rates more than the stock price today.

[Michael Frankel, Co-CEO & Director]

I think that's a fair statement.

[Michael Mueller, JPMorgan]

All right. Okay. That was it. Thank you.

[Michael Frankel, Co-CEO & Director]

Thanks Mike.

[Operator]

[Operator Instructions] Our next question comes from the line of Eric Frankel with Green Street Advisors. Please proceed with your questions.

[Eric Frankel, Green Street Advisors]

Thank you for taking my questions. First I guess Howard for you sol leasing activity is obviously pretty good this quarter. Can you just clarify the difference in the leasing spread between new and renewal leases were the new building - the new leases on rehab buildings and rehab spaces/

[Howard Schwimmer, Co-CEO & Director]

The new leasing was on some of it obviously were gone so the repositioning we've mentioned that we've stabilized for repositioning projects in the quarter where we achieved about 5.8% recurrent on total cost. And others were just space obviously that had been vacant. What's interesting is I think just testament to the demand in the marketplace we had a few lease terminations in the quarter which for the most part were driven by us trying to get them pay.

We had one that was one of our larger expirations that was going to occur toward the end of the -- at the end of the year for 200,000 foot building where we were able to talk to the tenant relinquishing about 100,000 feet and had a tenant in hand to take that. We had another one that was a 135,000 foot building expiring next year that we're able to do the same thing and bring a tenant into that space. So a lot of the new lease -- and by the way those are an incredibly strong rent payers as well.

So a lot of the new leasing is being created by ourselves in terms of trying to get to the value in that space. You heard us talk in the past about trying to get at some of these tenants even some of the ones they weren't paying us rent get them out of the spaces because the market has been strong that we can replace them quickly and produce those high leasing spreads a lot of this now being done without any substantial capital work in terms of the value outside as well.

[Eric Frankel, Green Street Advisors]

Interesting. That's the good color. Appreciate that. Albeit we haven't closed on it yet. But just the Gateway deal, obviously that it was a pretty -- it's pretty purchasing it for you guys and I've clarified. I didn't quite get it -- I didn't quite hear your comments well earlier in the call. But did you guys say you expect to receive - achieve a 4% yield on that deal and when would that exactly occur?

[Howard Schwimmer, Co-CEO & Director]

There's a lot of rule right now in the leases on that product. There's a 105,000 square feet lease that expires this year, in the next couple of months. There's another 77,000 square feet that expires I think in mid - like around May next year. And so if you look at the product there was about 20% in aggregate about 21% below market rents and that's based on some of our more conservative underwriting. And it's interesting to think about because if you look at the some of the projections CBRE recently put out with 41% projected rent growth over the next five years that averages about I think on a compounded basis a little over 7% per year.

We obviously didn't underwrite anything near that. But the gateway product really is in the bull's eye of the highest demand product in the marketplace right now. It has probably about a 50% excess back high door count compared to typical buildings in the market. It is 32% first day, it’s for sprinklers. It's got container parking and the location is just right in the bull's eye for e-commerce last mile type delivery.

So we're really optimistic that that product is going to outperform a lot of the Classic A products that we've bought over the past few years is substantially outperformed our rent projections just because there's a dearth of the product in the market, half of the greater Los Angeles market was built for 1980. And so you can imagine when you look at a market like Southern California today there just isn't enough space to supply the demand that's out there.

In fact even construction this construction pipeline in greater LA is down probably 30% quarter over quarter. So there is a shortage of space and they'll continue to be it. So gateway we're real excited about it. We think it's got all the elements of the type of product that at the end of the day will perform very, very strongly and potentially outperform even our [indiscernible].

[Eric Frankel, Green Street Advisors]

Yeah. They look like very good buildings. No doubt about that. I appreciate all that color. And final question I think one of your peers alluded to this on their earnings call yesterday but I guess the cat is still out of the bag in terms of industrials fundamentals and its attractiveness as an investment class and so I think you're marking this in your disposition opportunities. But do you foresee any issues obviously you guys Kansas is the market sell thoroughly do you see any issues in terms of just increased competitiveness identifying investment opportunities going forward versus say six months ago.

[Michael Frankel, Co-CEO & Director]

Hey Eric it's Michael. Thanks for joining us today. And our market has been competitive or arguably hyper competitive for a very long time. And there and it's - we see new capitals coming in our markets frankly consistently for many years. So I wouldn't say it's necessarily an increase in demand from investors. I think it's people acknowledged that industrial is a great asset class. And I think what's amazing frankly about our market is that infill Southern California is probably only about 7% owned by all industrial REITs all public REITs.

The vast majority of our market is mom and pop, probably upwards is 70% of our market is mom and pop. And then those mom and pops that are not real estate professionals. And so despite the heightened interest in the asset class arguably, it's still a highly fragmented market. And what I find astounding is in the vast majority of our transactions we're not competing with institutional capital.

I think we Herman [ph] noted about 77% of our transactions this year were through off market and lightly marketed transactions that we catalyze through our research and our broker efforts in-house. And so it's really just that we create a fundamentally different playing field by creating this information advantage throughout several prized varied originations capability.

And that frankly when we started this company a couple of decades ago we started with the fundamental premise that it wouldn't be a very exciting business if we're relying on third parties namely brokers to bring us our growth opportunities, because they're highly competitive. And so we've created the machine at Rexford that’s capable of by and large generating our own investment opportunities. And that translates directly into better economics, better cash flow growth and better return on equity.

[Operator]

Next question comes from the line of Chris Lucas from Capital One Securities. Please proceed with your question.

[Chris Lucas, Capital One Securities]

Good afternoon for me and good morning for you guys. Just a couple of follow-up questions, just Howard great new leases in this quarter. I guess I was curious on the five segments that you guys sort of building up in terms of the disclosure. Is there a segment that has the most opportunity to push rents from that right now or is that very specific to the assets?

[Michael Frankel, Co-CEO & Director]

I think if you look at the market and the low vacancy throughout there's just a shortage of space, so do you even think about the smallest kind of space to weigh on the cost to replicate those makes it impossible to deliver any of that product, so if you look back for quite a few decades and for instance Greater LA with the tough market. There hasn't been any of that product. So there's a shortage of that product.

We've seen leasing spreads pretty evenly distributed throughout that quarter to quarter. I don't think there's anything dramatically different this quarter versus others. I mean we can point to some of our larger leases that we did have some large spreads. But there's still a whole bunch of flat leases that are now worthy of even speaking to that had a very strong exposure as well.

So it's I think if you look at our portfolio though the smaller spaces today don't make up as much as larger in terms of this ABR they contributed probably almost half of the portfolio now. ABR comes from spaces above 50,000 feet and I think it's in the 9% range is even some of the smallest spaces.

So yeah, I think from - if you look at some of the assets we've been buying, you don't also see us buying a lot of some of these small product type spaces and in fact the majority of what we've been selling this quarter to quarter has been taking advantage of a strong market and selling some of those more management intensive multi-tenant product as well. So over time I think our percentage of ABR derived through some of the larger tenancies you'll see increasing as well.

[Chris Lucas, Capital One Securities]

Great. And then I guess just in terms of the time process that tends to take to make decisions about leasing is that's been changing at all this year. And again I don't know how much COVID impacted it, I don't know whether or not it's recovering at this point. Can you give us a sense of what are you seeing from tenants in terms of their responsiveness?

[Howard Schwimmer, Co-CEO & Director]

Yeah. Well certainly people slowed their process as COVID hit during the second quarter. Know we certainly saw leasing pull back because people didn't know how to react. But obviously in the third quarter and even part of the latter part of the second quarter leasing really rebounded and is really not slowing down or is about showing any signs of slowing down.

I think what [ph] you start off from our leasing in this past quarter was first of all our highest quarter ever in terms of new leasing. I think that was about 45% higher in the new leasing that occurred in this quarter than our prior peak amount of new leasing. And so what that is that people are focusing on vacant space for obvious reasons concerning the pandemic. And those decisions are happening a lot quicker when they're looking at a vacant space.

So for instance we had almost half of the move outs -- right I’m sorry almost half of the new leasing this quarter was really from three move outs or we have almost a little over 450,000 square feet. And I think there was about 34 days of downtime on those and they were released during the quarter. So that's hopefully a testament to the market.

But in terms of leasing decisions, we've always seen leasing -- really it really depends on the size of the space. And so most of the products in our portfolio of the leasing is fairly quick. Somebody is out in the market. They need space. They want to sell or lease and they move in right away. And that's really I think what we saw the new leasing side this quarter was really I think solidifying that thought process and demonstrating it.

[Chris Lucas, Capital One Securities]

Thanks for the color Howard. That’s all I have for today.

[Howard Schwimmer, Co-CEO & Director]

Thank you.

[Operator]

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

[Michael Frankel, Co-CEO & Director]

This is Mike. On behalf of the entire Rexford industrial team I want to thank everybody for joining us today. We hope you and your families remain safe and healthy. And we look forward to reconnecting next quarter. Thank you.

[Operator]

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.