Q1 2024 Rexford Industrial Realty Inc Earnings Call

Participants

David E. Lanzer; General Counsel & Secretary; Rexford Industrial Realty, Inc.

Howard Schwimmer; Co-CEO & Director; Rexford Industrial Realty, Inc.

Laura Elizabeth Clark; CFO; Rexford Industrial Realty, Inc.

Michael S. Frankel; Co-CEO & Director; Rexford Industrial Realty, Inc.

Anthony Hau; Associate; Truist Securities, Inc., Research Division

Blaine Matthew Heck; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division

Craig Allen Mailman; Research Analyst; Citigroup Inc., Research Division

Greg Michael McGinniss; Analyst; Scotiabank Global Banking and Markets, Research Division

Jing Xian Tan Bonnel; REIT Analyst; BofA Securities, Research Division

John P. Kim; MD & Senior U.S. Real Estate Analyst; BMO Capital Markets Equity Research

Nicholas Patrick Thillman; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division

Nikita Vyacheslav Bely; Analyst; JPMorgan Chase & Co, Research Division

Vikram L. Malhotra; MD, Senior Equity Research Analyst & Co-Head of US REIT; Mizuho Securities USA LLC, Research Division

Vince James Tibone; MD of Retail & Industrial; Green Street Advisors, LLC, Research Division

Presentation

Operator

Thank you for standing by. My name is (inaudible), and I will be your conference operator today. At this time, I would like to welcome everyone to the Rexford Industrial Realty, Inc First Quarter 2024 Earnings Call. (Operator Instructions) I would now like to turn the conference over to David Lanzer, General Counsel. You may begin.

David E. Lanzer

We thank you for joining Rexford Industrial's First Quarter 2024 Earnings Conference Call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and investor presentation in the Investor Relations section on our website at rexfordindustrial.com.
On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined by federal securities laws. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information about these risk factors, please 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 explanations 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. 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 S. Frankel

Thank you, David, and welcome, everyone, to Rexford Industrial's first quarter earnings call. I'll begin with a few remarks, followed by Howard, who will provide market and operational detail, then Laura will provide our financial results and outlook.
I'd like to begin by thanking our Rexford team for your strong results and another quarter marked by substantial value creation across the Rexford platform. On the leasing front, the team completed 3.2 million square feet of leasing activity at very favorable spreads as we continue to monetize the substantial mark-to-market or lease rates within our in-place portfolio. And notably, we extended our largest tenant, which Howard will detail shortly.
On the investment front, our team completed over $1 billion of acquisitions, delivering substantial initial and longer-term accretion. Our activity included a large off-market portfolio purchase acquired from a combination of Blackstone-affiliated entities for approximately $1 billion, comprising over 3 million square feet of highest-quality warehouse products focused within premier Los Angeles and Orange County submarkets, with tenant sizes averaging 43,000 square feet. The transaction is notable for the high quality of assets and significant levels of cash flow accretion contributed to our portfolio. In 2024 alone, the portfolio is expected to contribute an incremental $0.04 of FFO per share, net of funding cost, along with an estimated 25 to 50 basis point increase in operating margin. Additional growth over time will be driven by some value-add improvements as well as the 3.9% embedded average annual rent increases within the portfolio.
The investment was also unique as it was the result of an off-market collaboration between the Rexford and Blackstone teams. We work together to curate the portfolio by selecting assets to optimize the blend of quality, return on investment and accretion to our business. The transaction is a testament to the benefits associated with working principal to principal to drive a superior outcome for both parties. The transaction is also indicative of a range of portfolios that we continue to track which may be catalyzed from time to time by potential seller or market circumstances.
With regard to market conditions, we are seeing some current choppiness, particularly within certain submarkets and size ranges. We expect some ongoing relative volatility within our markets through the near term, principally driven by heightened uncertainty in the interest rate environment, exacerbated by the current global geopolitical unrest. However, despite some relative market uncertainty, we believe our infill Southern California industrial tenant base will continue to prove itself by demonstrating the nation's strongest tenant and supply-demand fundamentals over time. Although we can't predict how our market may perform into future periods, so far, we are seeing a distinct and accelerating differentiation between the stronger relative performance of our infill SoCal portfolio, whether measured by net absorption, change in rents or related metrics as compared to the relative performance of larger product size over 200,000 square feet, primarily located in non-infill big-box markets such as the Inland Empire.
Big box larger space is typically part of a super regional or global logistics network, where space needs are relatively fungible across locations and where demand for any single space can be highly elastic and reactive to short-term demand drivers. In contrast, our smaller infill tenants are generally serving the nation's largest first and last mile of distribution focused on regional consumption within the nation's largest and most diverse regional economy, where performance through cycles has tended to be more durable. Big box markets such as the Inland Empire are also subject to volatility driven by substantial increases in new supply impacting occupancy through cycles as compared to our high barrier infill market, which is subject to an ongoing scarcity of supply with a virtually incurable supply-demand imbalance over the long term. Consequently, and as we've observed through prior cycles, our Rexford tenant base, which averages 26,000 square feet in size and is 100% located within prime high-barrier infill SoCal markets is outperforming the big box market and product type.
Looking forward, the growth opportunity embedded within our existing portfolio continues to be substantial. Over just the next 3 years, we expect cash NOI to increase by $282 million or 47%, growing to $876 million in total NOI. Importantly, this assumes today's rents and no future acquisitions and is comprised of $94 million incremental NOI related to repositioning and redevelopments stabilizing over the next 3 years, $88 million from the conversion of below-market leases to market rents, assuming today's rents and no future market rent growth, $58 million related to acquisitions closed year-to-date and $42 million from the 3.6% embedded contractual rent steps within our current portfolio.
We continue to be positioned to execute upon our expected 11% to 13% 3-year average annual core FFO per share growth through 2026, which assumes no future acquisitions. Please note that we plan to update our long-term core FFO per share growth forecast on an annual basis at the beginning of the year.
With that, I'd like to thank the Rexford team once again for your tremendous dedication and results, and I'm pleased to turn the call over to Howard.

Howard Schwimmer

Thank you, Michael, and thank you all for joining us today. Rexford began the year with strong execution across our value-creation initiatives. During the first quarter, our team completed a very strong 3.2 million square feet of leasing by executing on the increased tenant activity we experienced during the first quarter, driving 140,000 square feet of positive net absorption. Notably, we extended Tireco, our largest tenant occupying 1.1 million square feet into 2027. During the quarter, Tireco's in-place rent increased by 4%, which was carried forward. The extension includes a 4% bump in year 2 and a 2-month rent concession. With this lease execution, we derisked our largest near-term lease expiration, securing favorable and growing cash flow for the next 3 years.
Excluding the Tireco extension, leasing spreads in the quarter were 53% and 34% on a net effective and cash basis respectively, and were in line with our expectations. Concessions increased normally from a weighted average 1.2 to 1.4 months sequentially. Additionally, annual embedded rent steps averaged 4% for the first quarter executed leases, continuing to demonstrate our diverse tenant base's ability to pay higher rent in future periods.
Within our portfolio, with an average base size of 26,000 square feet, we observed market rent growth that was flat sequentially and approximately negative 2% year-over-year for highly functional product, comparable in quality to our Rexford assets. As we have communicated, particularly with respect to select submarkets and size ridges, we expect to continue seeing some near-term fluctuations in market rents. However, as demonstrated by the leasing activity within our portfolio and what we are seeing on the ground today, tenants are evidencing their comfort with today's rent levels plus 4% embedded annual rent steps.
According to CBRE, vacancy in the infill markets increased 45 basis points sequentially to 3.2%. Notably, Rexford's portfolio continues to outperform the market due to our superior quality and functionality. By way of example, Rexford's first quarter net absorption was positive 30 basis points in contrast to the overall market's negative 20 basis points of net absorption. In analyzing net absorption in the market, similar to prior quarters, nearly 80% of buildings that contributed to negative absorption were of lower quality, dysfunctional or obsolete and generally not competitive with Rexford's portfolio. In stark contrast to the market, Rexford's strong new and renewal activity in the quarter drove an exceptional retention plus backfill rate of 87%. We continue to see relatively healthy tenant interest for our higher-quality product with activity on approximately 85% of our vacant spaces.
Turning to Rexford's investment activity during the quarter. We completed $1.1 billion of investments across 3.2 million square feet through off-market transactions. Subsequent to quarter end, we closed one stabilized transaction for $27 million at a 5.5% initial unleveraged deal. Additionally, we have $275 million of pipeline acquisitions under contract or accepted offer, which are subject to customary closing conditions. The near-term pipeline investments, coupled with our year-to-date activity are projected to generate an aggregate initial yield of 5%, growing to a 5% to 7% unleveraged stabilized yield on total cost.
Moving to our acquisition and capital recycling program. Subsequent to quarter end, we disposed of 1 property for $10 million, generating a 13% unlevered IRR. In addition, we have approximately $50 million of dispositions currently under contract or accepted offer, which are subject to customary closing conditions.
Regarding our repositioning and redevelopment activity. During the quarter, we stabilized and leased approximately 40,000 square feet of repositioned property in Central San Diego, achieving an aggregate 10.8% unlevered stabilized yield on total investment. Looking forward, we have 4.6 million square feet of value-add repositioning and redevelopments in process or projected to start within the next 18 months, with the remaining incremental spend of approximately $410 million, which we expect to deliver an aggregate unlevered stabilized yield on total investment of 6.2%.
Finally, I'd like to thank our Rexford team for their innovation and collaboration, driving another strong quarter of results.
Now I'm pleased to turn the call over to Laura.

Laura Elizabeth Clark

Thank you, Howard, and thanks to the Rexford team for your market-leading efforts that drive our strong near- and long-term value creation. First quarter core FFO per share increased a strong 12% over the prior year quarter to $0.58 per share and was in line with our expectations. Same-property NOI growth was 8.5% and 5.5% on a cash and net effective basis, respectively. Leasing spreads over the trailing 12-month period of 71% on a net effective basis and 52% on a cash basis, drove strong rental income growth.
Turning to the balance sheet and capital markets activities. This quarter, we opportunistically leveraged the balance sheet to fund accretive external as well as internal growth opportunities, including funding incremental spend of $455 million related to the near-term pipeline of repositioning and redevelopments that are projected to generate an incremental return of approximately 15%. At quarter end, net debt to EBITDA was 4.6x and we anticipate that embedded internal growth alone will reduce leverage within our target 4 to 4.5x range in the near term.
During the quarter, we executed on a number of capital markets transactions. We completed the issuance of $1.15 billion of 3- and 5-year exchangeable notes at an average coupon of 4.25% and a 30% conversion premium. Let me pause here and take a few minutes to describe the mechanics of these exchangeable notes, also known as convert. Recent changes in accounting rules, combined with the ability to issue converts under the net share settlement method known as instrument C have created a unique opportunity and an additional attractive capital source. Under the net share settlement method, the par value of the convert, which in this case, is $1.15 billion in aggregate, is treated like a bond, whereby Rexford will pay the par value in cash at maturity. Regarding the conversion premium, if Rexford share price at maturity is 30% or more than the price on the date of issuance, the excess conversion value over par is settled at maturity in cash, shares or a combination of the two at Rexford's option. This provides us with maximum flexibility at any future point in the capital market cycle.
The accounting for convert has also been substantially simplified. On the income statement, the coupon, which averages 4.25% for our issuance is reflected as interest expense. In regards to the share count, only the net shares equivalent to the excess conversion value are added to the share count, if and when the stock is trading above the conversion price. Importantly, the par value of the convert has no impact to share count as it is always settled in cash. Under this structure, and with the accounting rule change, there is no immediate dilution upon issuance. And any potential future dilution is mitigated through the net share settlement mechanics as well as the flexibility for Rexford to settle any excess share value above the 30% conversion premium in cash or shares in the future.
Continuing with our first quarter activities and concurrent with the exchangeable note offering, we completed a public offering of 17.1 million shares of common stock to an existing long-only investor based on the West Coast, subject to forward equity sale agreements for a gross offering value of $841 million. And during the quarter, we settled the remaining forward equity sale agreements related to prior offerings for net proceeds of $290 million. We currently maintain substantial liquidity of $2 billion comprised of $837 million of net forward equity remaining for settlement, $185 million of cash on hand, full availability under our $1 billion revolver as well as expected proceeds from our capital recycling program as we harvest value through dispositions. Finally, we have no material debt maturities until 2026, inclusive of extension options.
Moving to full year guidance. As a result of the positive contribution from our first quarter investment activity, we are increasing full year 2024 core FFO per share guidance to a range of $2.31 to $2.34, up $0.04 at the midpoint when compared to our prior guidance. Please note that our 2024 guidance range does not include acquisitions, dispositions or related balance sheet activities that have not yet closed.
In regard to our same property guidance, our forecast assumes a range of expectations and is based upon the market dynamics we are observing today, including leasing activity and demand, current supply and the overall health of our tenant base. To the extent circumstances or markets deteriorate beyond the current levels we are experiencing today, we will update guidance accordingly. Our 2024 cash same-property NOI guidance remains unchanged, and is projected to be in the range of 7% to 8%. Net effective 2024 same-property NOI guidance has been increased to 4.25% to 5.25%, up from 4% to 5%, driven by the strong level of early renewal activity in the quarter that generates higher straight-line rental revenue. Components of our projected same property guidance remain unchanged, and includes full year average same-property occupancy in the range of 96.5% to 97%, which is primarily driven by lease timing and average downtime.
Cash leasing spreads of approximately 50% and net effective spreads of approximately 60%, excluding the impact of the aforementioned Tireco lease extension. Note that leasing spread guidance incorporates current market rents and leasing spreads quarter-to-quarter are impacted by the mix of leases we expect to execute.
Bad debt as a percentage of revenue is expected to be in the 40 to 50 basis point range and in line with pre-pandemic levels and average concessions in the 1.5-month area. Thanks again to the Rexford team for your outstanding work that differentiates our business and enables our ongoing success. We now welcome your questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Blaine Heck with Wells Fargo.

Blaine Matthew Heck

So one of your peers gave incrementally negative view on the timing of a rebound in activity in Southern California, but it seems as though your outlook is pretty consistent with your initial views. Michael, you gave some color earlier, which was really helpful. But can you just talk a little bit more about what might be driving that disparity, whether it be more conservatism in your initial view, just different size segments and/or different submarket exposure?

Michael S. Frankel

Blaine, thanks so much for joining us today. I appreciate the question. It's an important question because I don't think it's just about Rexford having been maybe a little more or less conservative on a relative basis in setting expectations. I think the answer really gets more to the fundamentals of our market and the fact that the fundamentals surrounding the infill markets, where the average tenant size, for example, in our portfolio is under 30,000 square feet, are very, very different than the fundamentals that often drive the larger space, 200,000 square foot or larger space markets, which tend to be more in non-infill markets like the Inland Empire. I think that's really where we get to the crux of it. And it really also gets to the fact there are so many reasons that we designed this business to focus exclusively on infill Southern California. It is a truly differentiated market with its own drivers.
And as I mentioned, our tenant base in the infill markets are disproportionately serving regional consumption. It's the largest first and last mile zone of distribution in the largest regional economy in the country. And that's really the fundamental difference. The big box market is driven by super regional global trade flows, global demand drivers tend to have a bigger impact on that. I think the greatest real-world case study, an example probably came during the great financial crisis. And naturally, we had a dramatic drop in demand globally. But if you saw the way the big box market performed relative to the smaller tenant base like Rexford's was dramatic. For instance, at that time the Eastern and Inland Empire vacancy doubled, tripled or worse depending on the submarket and vacancy was actually relative, and occupancy was actually relatively stable within our infill markets. And that was during the worst of times, nothing like today.
So I think that that's really the key driver in differentiation in terms of performance. And then you layer on the fact that within our infill markets, Rexford, our mandate is to deliver the highest functional, best locations, highest-quality product within our submarket. So even within a submarket and infill market that's going to outperform through cycles, the big box market, within our markets, we should see differentiated positive performance by Rexford within the submarket. So there's a lot to it. I think we've observed it through cycles, through many cycles. I think the data is pretty clear. You can go back almost 11 years and look at our disclosures when we went public. We tracked it then. So I think it's fairly consistent and supported by the data out there.
And additionally, I think we try to take -- we did try to be conservative in how we look forward, and we try not to prognosticate about what may happen in the future. And that's why our guidance and our thoughts on the future really don't incorporate market rent growth and things like that.

Blaine Matthew Heck

Great. Very helpful, Michael. Second question, last quarter, I believe you talked about an expectation for 40% cash rent spreads in 2024. Your spreads this quarter were 33.6%, excluding Tireco. And I think you just mentioned, Laura, that the goal is now 50%, but correct me if I misheard that. So just wondering if you guys can comment on what might be giving you confidence in higher spreads in the second through fourth quarters?

Laura Elizabeth Clark

Yes, Blaine, just to clarify, our cash same property guidance for the full year is 50%, and that's in line with our expectations that we set last quarter. Our net effective guidance for the full year is 60% and also in line with expectations that we set last quarter, excluding Tireco. So all that being said, as you know, spreads in any given quarter can vary dependent upon the leases that are rolling and the leases that are executed in that quarter. This quarter, spreads came in right in line with our expectations for the leases that we expected to sign. As we look forward, we're trading paper on a number of new and renewals that give us comfort that we will be able to achieve our expectations around leasing spreads for the full year.

Operator

Your next question comes from the line of Camille Bonnel with Bank of America.

Jing Xian Tan Bonnel

I have a few questions about your investment strategy. While the cost of capital you raised allows you to transact accretively, how do you balance deploying this capital in a market when rents continue to decline and there's risk to underwriting?

Michael S. Frankel

Camille, thanks so much for joining us today, and thank you for the question. So the key focus around our investment strategy is about value creation and the ability to overcome whatever cost of capital may be. In fact, we take a steady state look at our cost of capital, which means when capital was very inexpensive, we didn't underwrite that in our investment strategy. And the key to our investment strategies are we identifying opportunities to create value that overcome that cost of capital hurdle, if you will, and create value over the medium to long term. And that is the greatest differentiator of our business, frankly, because even in an environment to your question, where you may have nominal or even declining market rents, our investment strategy focused on value creation, where we're increasing the inherent cash flow generating capability of these assets with 0 or even in some cases, declining market rent growth is truly unique and powerful.
And I think that's where you're going to -- the more that markets stabilize or the more that you see markets overall decline, the more Rexford is going to differentiate itself because we're going to continue to do the work, increasing the inherent cash flow generating capabilities properties through the renovations and modernizations that enable us to increase cash flow with 0 or even declining market rent growth.

Jing Xian Tan Bonnel

Got it. And I understand that different points of your ownership, you'll update the business plan. So if we look through to the Tireco lease extension and option you've created in 2027, are there levers you can pull? Or how confident are you in being able to position this asset so it performs in line or better than your initial underwriting?

Howard Schwimmer

Camille, it's Howard. Well, first of all, the Tireco extension was done just after we increased rent 4% under the existing lease. So that option, they had a fixed increase. And so we really only gave up a 4% initial bump, which we pick up again in another year under the lease. So we are pretty happy with that outcome. The lease also has a 5-year option in it, so that we're -- the options at fair market value. So we're able to reset at the exploration to market rent in (inaudible) which from what we see in the marketplace there would be substantially less deliveries in competing product, even looking into expirations that could occur within the marketplace in any product that could come to market. So from our window, it looks like a much better time to be addressing that lease. And so we've left the window open actually to reset and continue the performance of the asset.

Jing Xian Tan Bonnel

Appreciate the added color there. And you've built a lot of excess capital and closed the quarter with quite an elevated level of cash. So can you shed a bit more light on how you're thinking about the cash balance this year and what's been assumed in guidance?

Laura Elizabeth Clark

Yes, Camille, thanks for your question. In terms of our cash and liquidity, as we sit today, we currently have about $2.1 billion of liquidity. That does include our $1 billion revolver. On top of that, included in the $2.1 billion is also $837 million of forward equity remaining for settlement as well as $185 million of cash on hand. So when we look at the uses of that capital, we have about $275 million of acquisitions that are in the pipeline under accepted offer and then -- or under contract. We also have about $250 million of capital to spend just this year on repositioning and redevelopments that are in process. So that leaves us with substantial liquidity of about $600 million on top of the -- with the revolver. And really, when we're thinking about other sources of -- I mean, other uses of capital, we are going to continue to be very selective in terms of investing and driving and executing on our investment strategy to find those opportunities that we can drive value creation, not just today but over -- but into the future on an accretive basis.

Operator

Next question comes from the line of Greg McGinniss with Scotiabank.

Greg Michael McGinniss

I guess based on the data that you guys have showed us, market rents held steady quarter-over-quarter, down a little bit year-over-year, but what about on net effective rents? Have you guys been seeing any increase in free rent or other concessions? And also, how are you determining market rent for the Rexford comparable portfolio?

Laura Elizabeth Clark

Yes. I'll jump in here. Thanks, Greg, so much for joining us today. In terms of concessions, as you can see, I mean, our concessions this quarter were 1.4 months, excluding the Tireco lease. Our guidance for the full year is 1.5 months. I'll note that that's consistent with the guidance that we had last quarter. And concessions we have estimated, as we did at the beginning of this year to increase from 1 month on average in 2023. And really, that's what we think is more consistent with the normalized market in which we're operating in. If you look back to the pre-pandemic years, 2018, 2019, we're assuming concessions more in line with those markets.
When you look at our average concessions guidance, it includes new and -- concessions on new and renewal leases. And so when you look at our activity just this quarter, 75% of our activity was renewals that have lower concessions. Concessions on renewals this quarter were 1.2 months compared to 2.1 months on our new leases. So that's certainly driving the average concessions of 1.5 months for the entire portfolio that we're projecting for the full year. In terms of concessions, it certainly varies. It varies by submarket. It varies by size across the markets and certainly varies, as I mentioned, between new and renewal leases.
In terms of your second question around how we determine market rents and market rent growth within our portfolio, our team does an incredible job every single quarter. Thank you so much to the team, by the way, there are some on the call listening, but they do an incredible job every quarter. Bottoms-up analysis, we have over 1,600 spaces within our portfolio, and we apply a market rent to each space quarterly, and that market rent is the rent that we believe that we would lease that space at today. And then we compare that rent back to prior quarter and the market rent that we thought that we could lease the space at in the prior quarter. And that's how we determine market rent growth for our portfolio.

Greg Michael McGinniss

Okay. And then I guess at the end of the last year, it seemed like there was a greater openness to utilizing dispositions to fund investment activities. Did you end up taking any steps to test the market? And what were you seeing on cap rates? And did that maybe kind of push you to sticking with equity funding and the convert instead of asset sales?

Michael S. Frankel

Yes. Actually, we have increased activity on dispositions this year. We announced a $10 million sale with a $50 million of dispositions either under contract or accepted offer. And so we're actually providing more transparency this year on -- some increase in activity this year actually. And maybe to your point or question maybe reflected to the perception, at least earlier this year, they were in a more stable interest rate environment.

Howard Schwimmer

And I'll just add to Michael's comment, the disposition we completed for $10 million, the in-place cap rate was 4.2%.

Greg Michael McGinniss

Okay. But it's not -- but I guess there's not really any expectation that dispositions will become a meaningful part of the capital structure in terms of how you're raising funds for acquisitions or for the repositioning redevelopment portfolio spend?

Michael S. Frankel

Well, it depends how you define meaningful, but we think it's a very important part of our strategy. It's a very important source of accretive capital. And so it really depends how you define meaningful. And that's why we also provided a little additional disclosure on the immediate pipeline to give folks a better sense of where the activity is.

Operator

Your next question comes from the line of John Kim with BMO Capital Markets.

John P. Kim

I wanted to ask about the pricing of your off-market transaction with Blackstone. The 4.7% initial cap rate seems a little tight just given the limited mark-to-market. It was accretive to you, I realize, based on your cost of capital, but a lot of your competitors don't have that cost of capital. So I was wondering how you came up with that pricing and where you think this would go out in the open market?

Howard Schwimmer

John, it's Howard. Well, we're seeing transactions in terms of the current market of -- there was one that just closed that was literally -- I think it was [2.7%] with some vacancy growing to a 5 in year 2 with some -- with obviously some lease-up risk in it. And there's quite a few other transactions under contract that when they close, I think it will represent a little bit of cap rate compression even just some of the cap rates we've seen recently. But in terms of how we curated this portfolio, it was a balance between finding high-quality assets with great functionality and location that had some growth within them. And so the initial yield, the [4.7%] growing to the [5.6%] had the upside we were looking for. And frankly, it's interesting. In the past, you probably heard us talk about how we conservatively underwrite. The portfolio was actually performing a little bit already. We've had some renewals and some rents that we've been able to put in place that are already outperforming underwriting.

John P. Kim

Did you get a sense that if it didn't go to Rexford then a similar pool of assets has gone to one of your public peers?

Howard Schwimmer

Not necessarily because we really curated the portfolio directly with Blackstone. There wasn't a broker involved. And this was really building upon 10 years of relationship that we have with Blackstone Principles, where we've been seeking to be able to transact with them. And it was a unique opportunity that came up. And it wasn't a scenario where they said, hey, we're bringing something to market. You want an early shot out of it. It was really a collaboration here. So no, it really wasn't something that would have just gone to somebody else. And frankly, if Blackstone had, in fact, decided to market this particular portfolio, the marketplace right now in terms of capital coming back to the market, we think would have transacted possibly a little tighter even.

Michael S. Frankel

And John, just to provide an additional perspective, these are assets that we are very familiar with. We've been underwriting them, offering on them and many of them long before Blackstone even owned them. So that gave us an inherent informational advantage in terms of crafting the portfolio together with Blackstone.

John P. Kim

Okay. I wanted to ask about your redevelopment and repositioning portfolio and the leasing interest that you have on projects under redevelopment and particularly some of the larger assets, including 500 DuPont Avenue, if there's strong demand or weaker demand for larger...

Howard Schwimmer

Yes. So -- well, first of all, I just want to frame how the market here functions. Most all of the assets in Southern California come to market generally on a speculative basis. Typically, there's not a lot of pre-leasing, but it does happen here and there. We have many instances where we've pre-leased some of the assets. So we're on the right path. There's nothing unusual about our repo redevelopment pipeline right now and any of the activity on it. But that said, we just completed the asset you were speaking to, the 275,000 feet in the Inland Empire West. And we do have very good activity on it. We actually have two parties we're trading paper with. And we're encouraged that we might exceed the lease-up time frames with something in the very near future.

Operator

Your next question comes from the line of Craig Mailman with Citi Group.

Craig Allen Mailman

To go back to the rent question. I understand the methodology. I guess if you guys kind of just broad it out to a submarket level in aggregate versus maybe with CBRE kind of is reporting for the quarter, what's sort of the outperformance of your specific pool versus what some of the brokerage firms have put out there? Can you give us a sense of if that spread between where you guys are estimating your market rents are versus where kind of the market view of rents are, if that's held pretty steady in terms of your hit rate on accuracy versus the bigger picture kind of view of the markets that we all kind of focus on here from the headlines.

Michael S. Frankel

Yes, I think it's a great question, Craig. Thanks so much for joining us today. And I think a couple of things. One, the primary difference in how we report rents and versus what you're hearing in the market in general is that the market in general is fundamentally covering a different pool of assets. And I think consistently -- to your question, consistently through time, we've observed that around 80% of the negative net absorption driving those numbers in the market overall is generally driven by very much lower quality, lower functionality, even obsolete product. And this is almost a 2 billion square foot market with over 1 billion square feet built well before 1980. So that is the vast majority of the marketplace. And then in terms of driving our performance, it's a function of the higher quality, higher functionality, better locations. .
And I think what's interesting is that each quarter, we tend to give our view of market rents, which is also informed by our actual leasing activity, but what we've also found is that our actual leasing activity as we move forward has tended to exceed what we thought our rents were for our portfolio. So I think that the answer to your question is we've been pretty accurate and pretty consistent. If anything, actually, and this might be a little counterintuitive, it doesn't necessarily predict the future, we've probably been underestimating very slightly for our portfolio.

Craig Allen Mailman

Okay. That's helpful. And then as we think about the Blackstone portfolio you guys just purchased, could you just go through a little bit kind of the characteristics of it from a submarket perspective, how much of it is kind of traditional, industrial versus maybe R&D? Just any kind of deeper dive into kind of what it consists of?

Howard Schwimmer

Sure. Craig, it's Howard. Well, first of all, as I mentioned in a previous comment, we curated this portfolio with Blackstone. So it is right in the bull's eye of the product that Rexford owns and operates in the marketplace. And what I mean by that is it's all low finish, highly functional industrial. The product is primarily 70% of it was in the L.A. markets, 30% of it was in Orange County and 1 miniscule 33,000 foot building was in Chino, which is Inland Empire West. So it is exactly where we want to own real estate, and it's the best performing markets that we've seen through cycles. So that said, the average size space in that portfolio is 43,000 square feet.
And if you had done some deep research on deliveries to the market, what you'd find is that for decades, no one has been able to deliver space in those size ranges to the marketplace because the math doesn't work between land values, construction costs and rents. And so there's huge barriers in terms of any competition around that type of product. And especially when you get into the quality of the assets, sort of back to Michael's comments about what really comes to the market in terms of age and quality. So -- and then looking at the portfolio of leases that were in place were about 10% below market, in-place rent steps averaged 3.9% and the weighted average lease term is 3.2 years.
So there's this near-term stabilization, which gets us up to that 5.6%, but we're locking in 4% escalators in these leases. So there's a great compounding effect and then there's a little bit of value-add work here and there just to do some light modernization and some functional improvements, maybe a little bit of loading we can add and some fence yard and so forth that will add more value in the future periods and potentially even more value creation down the road.

Craig Allen Mailman

Great. And one last one. Michael, I know you guys, cost of capital, you try to find assets that are accretive to that. And so it's not necessarily dependent on where your stock cost of capital is. But at these levels, would you be a buyer of assets here today at similar cap rates to what you just bought or if there's cap rate compression? Or would we expect to see Rexford kind of move to the sideline until your cost of equity improves?

Michael S. Frankel

We don't give guidance on what we haven't closed yet, but I will tell you that we are going to focus on investment opportunities that we believe give lift to our stock price that more than overcome the cost of capital at the time that we're buying.

Operator

Your next question comes from the line of Nick Thillman with Baird.

Nicholas Patrick Thillman

Maybe touching a little bit on, just scrolling through your leasing activity over the last 5 quarters, around like 20% to 25% of leases expiring have been moved into repositioning or redevelopment. I guess, looking into '24 and '25 expirations, are we expecting a similar level? Or is that just elevated from like the acquisition activity we saw in '21 and '22?

Laura Elizabeth Clark

Yes. I mean, I think we talked a lot about last quarter, the opportunities that we've within the portfolio to be able to execute on our value creation plan, and that comes at the point of acquisition where we set strategic plans around every single asset. And so last quarter, we moved a number of projects -- 10 projects into repositioning and redevelopment into the pipeline. And so we've looked -- we try to look as far deep into the pipeline as possible and give you as much visibility as possible. And so we're incorporating projects that we believe that there's a reasonable likelihood that we'll execute on a repositioning and redevelopment plan over the next 12 to 18 months. You'll also notice that we didn't move any additional projects into repositioning and redevelopment this quarter because we're giving you that forward look, and we included those properties last quarter.

Nicholas Patrick Thillman

So what's in the disclosure is kind of what you planned and what you have visibility today?

Laura Elizabeth Clark

That's correct. Over the next 12 to 18 months. Yes.

Nicholas Patrick Thillman

Okay. And then, Laura, maybe just touching a little bit on bad debt in the quarter. You guys did call up a 1 specific tenant, but then reaffirmed kind of the guide expectations for the year. So just a little bit more color on that would be helpful.

Laura Elizabeth Clark

Yes, absolutely. So our bad debt guidance for the full year is 40 to 50 basis points, in line with pre-pandemic levels. Our tenant health remains very stable. And when we look at our watch list, we have less than 5 tenants on our watch list, and we have over 1,600 tenants within our portfolio, and that's remained very consistent and in line with what we've seen in the past 12 to 24 months. In terms of this quarter, we did see an increase in bad debt. It was isolated to a single tenant. Importantly, that tenant was on our prewatchlist, and that was already incorporated into guidance, which is why you're not seeing us increase guidance. So we feel good about where our bad debt expectations are for the full year. Currently, for Q2 to Q4, that would imply bad debt of about 30 basis points through the rest of the year.

Operator

Your next question comes from the line of Vikram Malhotra with Mizuho.

Vikram L. Malhotra

Maybe just first one, with the Tireco extension this deal with Blackstone, what does that do to sort of your 3-year outlook kind of to get to the 14% to 17% for the next 2 years that you sort of outlined last quarter?

Laura Elizabeth Clark

No change in our outlook as we communicated. This was within our expectations.

Vikram L. Malhotra

So you're still expecting '25 and '26 to be -- for FFO to be about 14% to 17%?

Laura Elizabeth Clark

Well, based on the math, again, going back to our forecast for the next 3 years is an average annual growth of 11% to 13%. This year, we're anticipating growth of 6% on an FFO per share basis at the midpoint. So that would imply higher growth in '25 and '26. And importantly, that's being driven by the repositioning and redevelopments that we have in the pipeline that are -- or projected to start and the delivery of those.

Vikram L. Malhotra

Got it. Okay. That's helpful. Laura, I think you gave us the GAAP mark-to-market as a portfolio. Do you mind just giving us where the cash mark-to-market is today?

Laura Elizabeth Clark

Yes. The cash mark-to-market today is 33%. That compares to 38% at the end of fourth quarter. I'll give you the drivers of that, which I'm sure you'll find helpful. So that's a 5 percentage point change that's being driven by 100 points from leasing that we completed in the quarter, the conversion of the mark-to-market there. As a note, that equated to $7 million of NOI annually that we've been able to capture through the conversion of mark-to-market just this quarter. 100 basis point impact from the -- any vacates within the portfolio, a 100 basis point impact from contractual rent steps of 3.6%, which is our portfolio average and then a 200 basis point impact from our first quarter acquisition.

Vikram L. Malhotra

Okay. That's really helpful. And then just last one, I guess some of your peers have called out 3PL weakness in the broader sort of SoCal market. I know your markets are different, your box are different. But do you have a rough sense of whether these are larger 3PLs or maybe the smaller regional ones? What's the portfolio exposure to 3PL?

Michael S. Frankel

Vikram, thank you again so much for joining us, it's Michael. And again, when we hear peer mentioned 3PLs, they're talking about spaces larger than 200,000 square feet actually averaging closer to 300,000 to 400,000 square feet. So it really is a different type of tenant base. And I think what we've seen within our infill markets is, yes, some movement among 3PLs, but not really dramatic relative to other tenants and other sectors and other industries. It's been pretty balanced, both on the demand side, on a positive and also to the side where there's been any negative absorption. So a little more balanced within our infill markets.

Operator

Your next question comes from the line of Nikita Bely with JPMorgan.

Nikita Vyacheslav Bely

Are you aware of any other fixed renewal situations that are similar to Tireco that you had in your portfolio maybe over the next 12 to 18 months?

Laura Elizabeth Clark

No material at this point.

Nikita Vyacheslav Bely

And regarding the demand, where are you seeing most activity in terms of demand? And maybe specifically, which tenant category, what is driving most of that activity to date?

Michael S. Frankel

Well, I think that's the beauty of our markets and our tenant base. It's extremely diverse. And I think the trend is that there's no strong single trend from a sector perspective, which is a great thing. It's one of the many reasons we focus on infill industrial in Southern California and focusing on generic space, by the way, which enables us to appeal to the widest, deepest, broadest and most diverse tenant base probably in the country, maybe the world. And so the sources of demand are very, very diverse from aerospace, electric vehicle sector, consumer products, the building trades, which we expect -- they've really shown some positive momentum. .
And by the way, that's not surprising given the fact that California has a mandate to increase housing by at least 20%, representing over 1.5 million units of housing. And so that's actually -- we think that's going to give us some great tailwinds in terms of demand for about the next 20-plus years. So extremely diverse set of drivers. Actually, we had a lot of interest and activity in terms of leasing activity from e-commerce-driven tenants, which actually was elevated this last quarter compared to prior quarters in a notable way. And that's not surprising, by the way at all. We're still in the early stages of seeing the impacts of e-commerce on our distribution market.

Nikita Vyacheslav Bely

Got it. That's great. Laura, can I ask you one other question. I think at some point, correct me if I'm wrong, did you -- you talked about maybe the mark-to-market on the portfolio for the future like year-end '24, year end '25. Is that something that you guys are willing or can provide at this point the recalculation of what you think your mark-to-market on the entire portfolio will be over the next several quarters?

Laura Elizabeth Clark

Yes. I mean as we've communicated, we communicated last quarter that we're going to provide the mark-to-market as we see it each quarter because as we know, the mark-to-market changes actually daily. As we sign leases, we're resetting the mark-to-market and moving that -- moving the market into -- will change on a quarterly and annual basis, dependent upon the leases that we signed. So we think that it's most helpful to provide you all with the visibility into the mark-to-market every quarter at a point in time.

Operator

Your next question comes from the line of Anthony Hau with Truist Securities.

Anthony Hau

I noticed that you guys added 4 million square feet of assets into the 2024 secured pool, mostly in the Inland Empire West and LA County, and these assets appear to be under leased compared to the 2023 pool. Just curious if you can provide any color on these assets? And maybe where do you think the occupancy is going to be at year-end?

Laura Elizabeth Clark

Yes. Thanks, Anthony, for your question. In terms of the same-store pool, yes, we did add a number of assets into the same-store pool. There were a few assets in that pool that have lease-up opportunity. We've actually signed a number of leases this quarter that will contribute to occupancy of about 50 basis points actually as we move through the year. So we're excited about the prospects there and the prospects or opportunity for growth.

Operator

(Operator Instructions) And our next question comes from the line of Vince Tibone with Green Street.

Vince James Tibone

Are you starting to see any distressed acquisition opportunities from spec developers in Inland Empire West and would you be willing to actually grow your footprint in IE and take on some leasing risk if the price is right?

Howard Schwimmer

Vince, it's Howard. Nice to hear your voice. I've heard a little bit, but I haven't seen anything in mass in terms of any type of trend like that. As far as our appetite to take on larger vacancy in a market that has that product supply? The answer would be simple no. It's not an area that we're putting any focus. We're more interested if we're going to buy anything in that market in the product that hasn't been delivered to market and is not really easily replicable in terms of the underwriting side of it.

Vince James Tibone

Got it. Makes sense. And then kind of just a follow-up to that. What do you think the stabilized cap rate spread is today between IE West and infill LA adjusted for a similar lease mark-to-market?

Howard Schwimmer

It's hard to say. But from some of the transactions that I think we're starting to see or product that we know is under contract, it's probably somewhere in the plus or minus 50 basis point range.

Operator

That concludes our Q&A session. I will now turn the conference back over to the management team for closing remarks.

Michael S. Frankel

Thank you very much for joining Rexford Industrial on today's call. We look forward to reconnecting with you and wish you well for about the next 3 months.

Operator

This concludes today's conference call. You may now disconnect.