Earnings Call Transcript - REXR Q3 2020

Operator, 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. 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, Investor Relations

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 questions. Now, I will turn the call over to Michael.

Michael Frankel, Co-CEO

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 results, 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 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, achieving 98.4% occupancy in our stabilized same property portfolio. During the quarter, we also acquired five properties for approximately $69 million. 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 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 company focused on the nation's strongest market. Looking forward, we believe Rexford is very well-positioned into 2021 and beyond. Regarding 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 tenant base to be the strongest tenant base in the nation, driven by a range of key factors. Beginning with our infill locations, they are generally mission-critical for our tenants. Their businesses depend upon our infill locations 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 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, 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, equating 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 thankful 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

Thank you, Michael, and thank you everyone for joining us today. Despite the impact of COVID-19 and associated shutdowns, market fundamentals in the infill Southern California industrial market remain very healthy in the third quarter. Vacancy 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 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 unleveraged yield. Close to 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 height with an elevated dock loading ratio, excess container parking, and currently serve the high demand e-commerce and last mile distribution sector. The initial stabilized yield 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 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 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 stabilized or pre-leased four repositioning projects totaling 349,000 square feet at an aggregate unlevered yield on total cost of 5.8% in light of recent increased 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's highly differentiated strategy with irreplaceable high-quality properties has led to internal and external growth, all supported by a best-in-class balance sheet that has solidified Rexford’s leading platform in 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, so these strong collection numbers are a true testament to the health of our tenant base and strong infill Southern California market dynamics. In regard 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 months. 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 maintaining 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 disruptions. 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 2025, $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 range of $1.29 to $1.31 per share from our previous guidance range of $1.26 to $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%, with 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, 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, Analyst

Hey everyone. Good morning and afternoon. Maybe this is one for Howard or maybe Laura. Have you thought about the change in guidance from Q2 to Q3? 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-store 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 shutdowns and much uncertainty remained. So fast forward three months, and while uncertainty certainly continues, we have much more visibility in leasing demand, as demonstrated by our record leasing levels this quarter and as well as record absorption levels 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, Analyst

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 Q3 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 $1.5 million, or 170 basis points of revenue. On a same property basis, bad debt impacted our Q3 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, Operator

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

Jamie Feldman, Analyst

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 means there are 60 basis points more to go? I just want to make sure we're thinking about this in the right way.

Michael Frankel, Co-CEO

Yeah, absolutely. So if you think about how it rolls, 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 our Q4 estimate on the 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. Our cash collections at 97% indicate that we’re doing pretty well. We’ve always taken a very conservative approach in regards to our watch list and our bad debt. Despite the fact that some tenants that are on our watch list today are actually quite healthy and are taking advantage of the moratoriums in place. I think what's really important when you think about our bad debt is how we account for bad debt. So regardless of the reason a tenant isn't paying rent—either with the moratoriums or credit risk—if a tenant accrues more than two months of base rent, we fully reserve for the rent as bad debt expense. For example, if you have tenants that are following the moratoriums in place, our bad debt expense will continue to grow until those payments commence again. We’re continuing to evaluate our policy as we gain further insight into our overall collections as well as with the visibility we have into deferral payments. But again, it’s important to note that that list of tenants 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, Analyst

Okay. Thank you, that's helpful. And then you have a large acquisition coming soon. Can you just talk about how the acquisition market has changed during the pandemic? I mean, there are a lot of potential sellers 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

Sure, yeah. Hi Jamie, it's Howard. First of all, from the results we've put up this quarter, if you didn't know the word COVID, you would probably be thinking things were just pretty typical in terms of our business. So that carries through to the entirety of our market. 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 are just taking advantage of the moratorium is fairly small. So when you look at the entirety of the market, there is not really any distress out there. There are a few things going on here and there, but that’s not leading to sellers strictly because of the pandemic needing to sell their real estate. If anything, they've seen rents increasing dramatically and values as well through recent transactions.

Jamie Feldman, Analyst

Okay.

Michael Frankel, Co-CEO

Jamie, it’s Michael. I do think it's a great question and just to add, we are seeing continued growing interest, for instance, from potential property contributors. There are some very major long-term trends in the market that arguably could be accelerating a little bit. We’ve tracked well over a billion square feet owned by private owners who own small and large portfolios of industrial properties, and that activity is increasing. We did a $210 million deal, for instance, earlier this year and we have a lot of those in the pipeline. We are also seeing some interest from corporate owners and users on sale-leasebacks, which we’ve been pretty active on over the years, and we are noticing some incrementally more activity there, but it's hard to say that that's directly tied to the pandemic.

Jamie Feldman, Analyst

Okay. Thank you. I know you mentioned 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 you mentioned you're also going to fund with disposition? Can you talk about cap rate dispositions and the moving pieces to get to that $0.07?

Michael Frankel, Co-CEO

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. The capital structure is obviously somewhat fungible in terms of our ongoing funding, so we'll continue to evaluate a full range of debt and equity options available to us. Moreover, we're committed to maintaining our low-leverage balance sheet and investment-grade profile as we move forward.

Laura Clark, CFO

There are 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. 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 expirations at the end of the quarter, there were 733,000 remaining and as of today that's about 548,000. It's actually even lower when you break it down because more than half of that remaining square footage goes into our repositionings. Today, we're now starting full-bore tackling those 2021 expirations. I think in the top 20 of those, we have activity and discussions and renewal taking place probably within the range of more than 30% of those occupants. 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 with some of those earlier renewals.

Jamie Feldman, Analyst

Okay. All right. Thank you.

Operator, Operator

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

Blaine Heck, Analyst

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 what that 84% collections mean for your ability to collect the rest of these deferrals that are in October?

Michael Frankel, Co-CEO

Yeah. Hey, Blaine. Thanks for joining us today. So, in terms of where we are in October, October is at 91.7%. When we look back over Q3, that's really right in line with where we were at this point in the month in the prior quarter. In terms of the deferral payments, I actually just got a note from our team this morning that we actually got another deferral payment. So we're now at deferral collections about 88% compared to the 83.4% reported last evening. About under $200,000 remains to be collected in October, and we still have relatively early visibility into those deferral collection percentages, which are pretty in line with our contractual collection percentages in the 95% to 96% area.

Blaine Heck, Analyst

Okay. That's helpful color and congrats on that additional collection. 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, 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 the top of your leverage comfort targets? And how should we think about ATM issuance going forward as well?

Laura Clark, CFO

Yeah, Blaine. In terms of our ATM issuance this quarter, it’s important to note that we had a significant cash balance sheet with cash on our balance sheet this quarter, ending with $286 million. We had ample capacity to fund our needs this quarter, which drove the lack of ATM activity. Regarding your question on our balance sheet strategy, we believe our balance sheet is one of our core competencies and competitive strengths. Maintaining that strong investment grade profile is a key objective of ours. Our low-leverage balance sheet today has ample capacity, which provides us the ultimate flexibility to execute on both our internal and external growth opportunities, placing us well for any potential future disruptions. If there's anything that this and other downturns have taught us, it’s 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 our low leverage can drive our balance sheet, and expect to continue to maintain this strategy going forward.

Operator, Operator

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

Dave Rodgers, Analyst

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 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 tenants you're talking to?

Howard Schwimmer, Co-CEO

Hi, Dave. It’s Howard. In the prepared remarks, we mentioned that demand is coming not just from e-commerce, but there is a lot of demand from traditional tenants that have been in the marketplace. Some of it clearly is pent-up demand because they weren't active in the second quarter. Some businesses are doing great and are growing and expanding. Many businesses are taking more space to have a bit more inventory on hand. A lot can be highlighted by productivity. For instance, the ports were down a little over 11% for the first half of the year, and with activity how things are up in August, they're down about a little over 7%—a record-breaking period for imports. A lot of products are coming in from California creating incremental demand, whether it's e-commerce or traditional retailers needing space to store products. Demand is fairly diversified, and Amazon has been a major taker of space in all of our submarkets, definitely contributing to maintaining the exceptionally low vacancy rates we have. So it's exciting, and as far as our e-commerce demand, this quarter was one of our highest quarters as well, where we had over 50% of our leasing occur from new leases that have some e-commerce relationship, a substantial increase from the past quarters which hovered around 30% to 35%. So, while e-commerce is a driver, it's not solely an Amazon phenomenon; there are many companies you’ve never heard of before realizing that moving sales online has become crucial.

Michael Frankel, Co-CEO

Hey Dave, it’s Mike. It’s a great question, and just adding more color to Howard's comments, another way to interpret demand in our markets and portfolio is when you look at how low the vacancy is, our markets are hovering a little over 2% on average. However, within that 2%+ vacancy in the market, the product that competes with us is probably half or even less than half of the actual vacancy because our mandate is to acquire the best locations. If they aren’t the most functional in their submarkets when we buy them, we practically enhance them. Thus, in terms of the product competing with the Rexford portfolio, you’re looking at maybe half or even less of the market's vacancy. I think our vacancy numbers reflect this as well. Our vacancy numbers are considerably lower than what the submarkets would show. When you layer in the dynamics Howard discussed, the business is exceptionally well-positioned from a demand perspective and is above what we consider structural occupancy.

Dave Rodgers, Analyst

Great. Thanks a lot, Michael. That’s really helpful. And then I wanted to follow up with Laura on the security devices you've applied in the last quarter or so. Are you collecting those? Are those part of the deferrals that come back in this year? So is that something that we should also be looking at in those numbers?

Michael Frankel, Co-CEO

Yeah. When we look at that deferral of base rent that we're reporting, that does not include the replenishment of the security deposit. The number I referenced earlier, that close to 90% collection we talked about in the last question, is just the deferral of base rent.

Operator, Operator

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

Michael Mueller, Analyst

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

Hi, Mike. It’s Howard. As far as dispositions, our thought process hasn't changed much from quarter to quarter or even year to year. We're always looking deep into the portfolio for dispositions that either can outperform cap rate values, such as selling to owner users—an example we had during the quarter—or seeking multi-tenant properties requiring more capital in the near term without sufficient return. We took advantage of new capital entering the market hungry for industrial assets in one multitenant building we sold in San Diego. Dispositions will continue being part of our operating strategy, and we have others in mind to provide more information as we transact.

Michael Frankel, Co-CEO

You know, Mike, just adding again, it’s Michael. When you look at the portfolio from an expirations perspective, next year the portfolio from expirations has about 10% below market. In aggregate, this portfolio is over 10% mark-to-market. There is a lot of value creation to be had throughout the portfolio, so we're going to be opportunistic, which is probably the right way to clarify it. But we're really focused on value creation.

Michael Mueller, Analyst

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 to fund whatever investments you make would come from traditional equity issuance as opposed to that, and you like digital cap rates more than the stock price today.

Michael Frankel, Co-CEO

I think that's a fair statement.

Operator, Operator

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

Eric Frankel, Analyst

Thank you for taking my questions. First, I guess Howard for you, the 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 leases on rehab buildings and rehab spaces?

Howard Schwimmer, Co-CEO

The new leasing was on various placements, obviously, some were repositioning projects. We mentioned stabilizing four repositioning projects where we achieved about 5.8% recurrent on total cost. Others were just spaces that had been vacant. It's interesting to note that we had a few lease terminations in the quarter that were driven by us trying to get tenants to pay. Those instances created opportunities as we quickly placed tenants into those spaces. A lot of the new leasing, and by the way, those are incredibly strong rent payers, so a lot of the new leasing is created by ourselves to get value in that space. You heard us talk in the past about trying to get some tenants out of spaces in a strong market and quickly replacing them with high leasing spreads without substantial capital work.

Eric Frankel, Analyst

Interesting. That's the good color. Appreciate that. Albeit we haven't closed on it yet, but just the Gateway deal, it seems like it's a pretty substantial acquisition for you guys. I didn't fully hear your comments earlier in the call. But did you guys say you expect to achieve a 4% yield on that deal, and when would that occur?

Howard Schwimmer, Co-CEO

There's a lot of action happening in the leases on that product. There's a 105,000 square foot lease that expires this year, and another 77,000 square feet expiring around May next year. If you look at the product, it's about 20% in aggregate, or about 21% below market rents based on the more conservative underwriting. The rents are projected to increase significantly, and there's a tremendous demand for this type of product right now. Gateway Point is ideally positioned to capture the excess market rent growth projected by CBRE, which we haven’t incorporated in our underwriting. We're excited about this acquisition. When you consider the major gaps in supply within the LA market, the shortage of competitive product will put Gateway in a strong position to outperform standard projections.

Eric Frankel, Analyst

Yeah, they look like very good buildings. No doubt about that. I appreciate all that color. 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 industrial fundamentals and its attractiveness as an investment class. 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

Hey Eric, it's Michael. Thanks for joining us today. Our market has been competitive—or arguably hyper-competitive—for quite a long time. New capitals have been entering our markets consistently for many years. I wouldn’t say there’s necessarily an increase in demand from investors; they've acknowledged that industrial is a formidable asset class. Our market is still highly fragmented, with roughly 70% of the market not being held by institutional owners. Despite heightened interest in the asset class, we find that most of our transactions we’re not competing with institutional capital portfolio purchasers. We noted about 77% of our transactions this year were through off-market and lightly marketed deals, which we generate through our research and relations with brokers in-house. It’s a fundamentally different playing field, enabling us to create better economics, cash flow growth, and return on equity.

Operator, Operator

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

Chris Lucas, Analyst

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 built up regarding your 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

If you look at the market and the low vacancy rates, there's simply a shortage of space. Even the smallest kind of space faces high costs to replicate and deliver new product. There hasn't been any new product for quite a while, and this isn't changing anytime soon. We've seen leasing spreads evenly throughout this quarter; there isn't significantly different spreads this quarter compared to others. Some of our larger leases had incredibly high spreads. However, there's still a lot of flat leases that remain backed by strong demand. Our portfolio primarily derives ABR from spaces above 50,000 square feet and this percentage is increasing over time with our focus on high-quality spaces.

Chris Lucas, Analyst

Great. And then, I guess just in terms of the time process that tends to take to make decisions about leasing—has that 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 you are seeing from tenants in terms of their responsiveness?

Howard Schwimmer, Co-CEO

Yeah. Well certainly people slowed their process as COVID hit during the second quarter. We saw a pullback in leasing 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 rebounded and is showing no signs of slowing down. Our leasing in this past quarter was our highest quarterly volume ever. The new leasing we achieved this quarter was about 45% higher than our prior peak. New leasing went exceptionally quickly, fueled by the appeal of vacant space. We had almost half of this quarter’s new leasing stemming from only three move-outs, with about 450,000 square feet being re-leased within an average downtime of about 34 days. So these rapid decisions showcase that tenants recognize the opportunity available.

Chris Lucas, Analyst

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

Howard Schwimmer, Co-CEO

Thank you.

Operator, Operator

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

Michael Frankel, Co-CEO

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, Operator

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