Rexford Industrial Realty - Q3 2023
October 19, 2023
Transcript
Moderator (participant)
Welcome to Rexford Industrial Realty Inc. third quarter 2023 earnings call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce David Lanzer, General Counsel. Thank you. You may begin.
David Lanzer (General Counsel and Secretary)
We thank you for joining Rexford Industrial's third quarter 2023 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. Additionally, 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 turn the call over to Michael.
Michael Frankel (Co-CEO)
Thank you, David, and welcome everyone to Rexford Industrial's third quarter earnings call. I'll begin with a few remarks, followed by Howard, who will provide some additional market and operational color. Then Laura will provide more detail related to our performance and financial results. To begin with, I'd like to thank our Rexford team for delivering a strong quarter across all of our value creation initiatives.
Compared to the prior year quarter, our team grew FFO by 33% and grew FFO per share by 12%, driven by strong same property pool average occupancy of 97.8%, exceptional leasing spreads of 65% on a GAAP basis and 51% on a cash basis, as well as the substantial cash flow per share growth generated from our investments completed over the prior year.
Tenant demand within our infill Southern California industrial markets continues to demonstrate resilience, with market occupancy hovering around 98%, roughly equating to the 2019 market occupancy levels immediately preceding the pandemic. As expected, we continue to see market rent growth normalizing from the unprecedented growth we experienced during the pandemic.
With regard to our Rexford portfolio, providing high quality and prime locations within our submarkets, we continue to experience healthy, diverse tenant demand, as reflected in our strong operating metrics. Although general economic conditions remain uncertain, Rexford remains well-positioned. The company is currently situated with an estimated 33% embedded cash NOI growth within our existing portfolio, realizable over the next two years, assuming today's rents.
Our largest driver of NOI growth derives from our repositioning and redevelopment work, which we continue to grow as we mine our in-place portfolio for incremental value creation opportunities and as we layer in new investments that are delivering strong levels of FFO per share accretion.
Looking forward, as markets nationwide normalize towards their post-pandemic levels of equilibrium and supply, we believe Rexford's entrepreneurial asset management, repositioning and value-add investing programs will enable the company to further differentiate our performance and FFO per share growth.
We also believe, over the near term, that the favorable supply-demand dynamics associated with our infill Southern California industrial markets will continue to drive the strongest tenant demand fundamentals of any major market in the nation.
Further supporting Rexford's favorable outlook, we remain focused on maintaining our investment grade, low leverage balance sheet, ending the quarter at 16.7% net debt to total enterprise value, which provides the ability to both protect the company during uncertain times, while also positioning Rexford to capitalize upon accretive investment opportunities as they may arise.
With that, I'd like to acknowledge our Rexford team once again for your market leading efforts that continue to differentiate Rexford's performance. Now it's my pleasure to hand the call over to Howard.
Howard Schwimmer (Co-CEO)
Thank you, Michael, and thank you everyone for joining us today. Rexford concluded the third quarter with strong results, driven by a high-quality portfolio and execution of value creation initiatives. With regard to market conditions, infill Southern California continues to demonstrate superior long-term demand fundamentals with a virtually incurable supply-demand imbalance.
According to CBRE, in the third quarter, infill Southern California markets experienced 2.6 million sq ft of positive net absorption. The infill Southern California market continues to outperform, with vacancy at 2.2%, the lowest vacancy in the nation. A sequential 30 basis point vacancy increase compares favorably to an average increase of 70 basis points for the other major U.S. markets. Also, supply risk continues to be substantially lower for infill Southern California compared to the nation's other major markets.
Port traffic may also be on track toward normalization following the resolution of the dockworkers contract, with the most recent LA Long Beach port activity reflecting a 20% increase month-over-month and the second-highest volumes in the past 12 months. While in contrast, the East Coast and Gulf Coast ports experienced a decrease in activity. Turning to the Rexford portfolio, third quarter performance continues to demonstrate our favorable position within the infill Southern California market.
Our team executed 1.5 million sq ft of lease activity, driving 100 basis points of positive net absorption and highlighting the sustained demand for a highly functional portfolio. Annual embedded rent steps in our executed leases increased to 4.3%, demonstrating our tenants' ability to pay increasing rent for their mission-critical locations.
In regard to market rents, we observed 3% year-over-year market rent growth for highly functional product, comparable in quality to the Rexford portfolio, impacted by a 1% sequential decline quarter-over-quarter. Interestingly, the 1% decline was principally driven by larger buildings.
Turning to our investment activity in the quarter, we closed six transactions for a total of $315 million, bringing year-to-date investment activity to approximately $1.2 billion. Our third quarter investment collectively generate an initial yield of 5.2% and a projected unlevered stabilized yield of 6% on total cost. In addition, we currently have a pipeline of approximately $400 million of highly accretive investments under contract or accepted offers.
This includes the imminent closing of $245 million of investments in the San Gabriel Valley sub-market that has an aggregate 6.8% initial yield. This pipeline, including the imminent transaction, is subject to customary closing conditions. With regard to our robust internal growth initiatives, we have approximately 4 million sq ft of value add repositioning and redevelopments in process or projected to start within the next 24 months.
These projects are expected to deliver an aggregate unlevered yield on total cost of 6.4%, representing an estimated $500 million of value creation. Lastly, I'd like to thank our entrepreneurial Rexford team for their dedication and for delivering on another strong quarter. I will now turn the call over to Laura to discuss our financial results.
Laura Clark (CFO)
Thank you, Howard, and thank you to our incredible Rexford team. Your exceptional performance and value creation focus continues to differentiate Rexford. In the third quarter, core FFO per share grew 12% over the prior year quarter, driven by same property NOI growth of 9.5% on a cash basis and 8.9% on a GAAP basis.
Third quarter leasing spreads outperformed projections, and year-to-date leasing spreads are 62% and 82% on a cash and GAAP basis, respectively. The portfolio is positioned for significant internal cash and NOI growth into the foreseeable future. Just considering the next two years, value add repositioning and redevelopments, representing our largest driver of growth, are projected to contribute $71 million of incremental NOI.
Annual embedded rent steps of 3.5% for the total portfolio are projected to contribute another $26 million, and acquisitions closed in the third quarter and fourth quarter to-date contribute an incremental $28 million. In addition, the net effective portfolio mark-to-market is estimated at 56%, representing $77 million of incremental NOI over the next two years.
As we look further out, the conversion of the total portfolio net effective mark-to-market equates to $350 million of incremental NOI growth, equal to $1.70 per share of FFO contribution or 79% FFO per share growth. Now to our funding strategy and balance sheet. Our focus remains on internal and external investments that drive near and long-term accretion and NAV growth.
We continue to demonstrate a highly selective, rigorous approach to capital allocation, as reflected in our investments to-date that are driving substantially higher accretion than our prior year investments, inclusive of today's higher cost of capital. We will continue to assess accretive capital sources to fund internal and external growth opportunities, including dispositions.
Our sustained focus on maintaining a fortress balance sheet positions us to capitalize on our value-driven business strategy in the current environment. At quarter end, net debt to EBITDA is 3.7x, and we have liquidity of $1.5 billion. This includes $83 million of cash on hand, full availability on our $1 billion revolver, and approximately $450 million of forward equity remaining for settlement.
Turning to guidance, we are increasing our 2023 Core FFO per share guidance range to $2.16-$2.18 per share, up from our previous guidance range of $2.13-$2.16 per share. Our revised guidance range represents 11% year-over-year earnings growth at the midpoint.
Please note that our guidance range includes the imminent closing of the San Gabriel Valley transaction Howard mentioned. No additional acquisitions, dispositions, or related balance sheet activities that have not yet closed are included in our updated guidance range.
Our projected 2023 cash and GAAP same-property NOI growth remains unchanged at the midpoint compared to our prior guidance, and we have tightened our ranges to 9.75%-10% on a cash basis and 8%-8.25% on a GAAP basis. Average same-property occupancy for the full year is projected to be approximately 97.75%, unchanged at the midpoint compared to our prior guidance.
Other assumptions in our same-property guidance include full year cash and GAAP leasing spreads are now projected to be 60%-65% and 75%-80% respectively, an increase of 500 basis points at the midpoint, driven by higher than expected third quarter executed leasing spreads.
Lastly, bad debt as a percent of revenue is expected to be approximately 35 basis points, in line with our prior guidance and below the historical average of 50 basis points, reflecting the continued health of our tenant base. Further guidance updates, including a roll forward of our revised FFO per share guidance range, can be found in our supplemental package.
Finally, as part of Rexford's continued commitment to creating value through a comprehensive ESG approach, we are excited to announce our target to reach net zero greenhouse gas emissions by 2045, as well as near-term reduction targets. Our emission targets were validated by SBTi and are a testament to our focus on driving substantial environmental value through our differentiated business model. Thank you all for joining us today, and we now welcome your questions. Operator?
Moderator (participant)
Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Camille Bonnel with Bank of America. Please proceed with your question.
Camille Bonnel (Director Equity Research)
Hi, everyone. Can you talk to the change in market net absorption, which turned positive this quarter? Was this driven by any particular submarket? Given today's economic outlook feels very different than it was three months ago, do you expect this trend to continue?
Howard Schwimmer (Co-CEO)
Hi, Camille, it's Howard. Nice to hear your voice. There was an uptick in absorption in the Inland Empire West submarket. That was, I think, mainly responsible for the large amount of absorption.
Laura Clark (CFO)
Hey, Camille, it's Laura. I'll talk a little bit about our portfolio as well. Howard mentioned the market change, but our portfolio did experience an increase in absorption of about 434,000 sq ft. That represents about 100 basis points.
Importantly, you know, we've experienced positive absorption within our portfolio on every quarter this year, certainly outpacing the market and really demonstrating the differentiation of our portfolio in the market, which we've been discussing. In terms of select markets, we actually, if you dive into the absorption, we saw positive absorption in every one of our markets, from Greater LA, IE West, Orange County, and San Diego.
Camille Bonnel (Director Equity Research)
Thank you. It looks like some of the stabilization dates in your redevelopment program were pushed out. What were the factors influencing this, and how is your leasing pipeline tracking?
Laura Clark (CFO)
Hey, Camille,
Howard Schwimmer (Co-CEO)
Oh.
Laura Clark (CFO)
I'll take that, Camille. So in terms of timing pushes, or repositionings and redevelopments, there's a couple of drivers there. One is around the permitting and approval process, which, you know, has continued to impact construction timing. The other is around timing of our lease-up. It's certainly returning to more normalized levels.
If you look back historically, pre-COVID, lease-up timing upon completion of redevelopment was about six months. During the last few years, we saw that timing compress pretty significantly, given the friendly levels of demand. But as we look forward, currently, lease-up timing, we believe, will be more consistent with pre-COVID levels, which is around that six-month area.
Camille Bonnel (Director Equity Research)
Finally, can you please walk through the drivers behind the mark-to-market changes in your lease expiration schedule, as well as the changes in cumulative FFO contribution? It's driven by changes in the overall portfolio composition. Why hasn't the lease expiration schedule remained relatively stable?
Laura Clark (CFO)
Hey, Camille, great question, and I think it's important to walk through the various components that contribute to mark-to-market. First, we're certainly excited to be able to capture the mark-to-market and convert that into FFO and cash flow. But as we've communicated in the past, the mark-to-market is going to decline, and that's going to be driven by a number of factors.
The first and really most significant is that the substantial and better mark-to-market that we're able to recognize today was driven by the incredible market rent growth that we saw. Since 2019, if you look back to the fourth quarter, market rents have grown 80%.
As we convert the mark-to-market into cash flow and FFO, unless market rent growth continued at those same levels, the mark-to-market is going to decline. Second, you know, mark-to-market is impacted by the leases that we're signing, and that conversion of the mark-to-market into FFO.
If you look year-to-date, we've executed on impressive leasing spreads, 5.4 million sq ft of leasing, 82% GAAP spreads, 62% cash spreads. The conversion of mark-to-market represents an incremental $50 million of annualized NOI just this year alone, through three quarters. The last real component that moves around the mark-to-market has an impact is certainly the properties that move in and out of the pool.
For example, when we move a property into repositioning or redevelopment, that property gets removed from the mark-to-market pool, and that value creation is now represented in accreted stabilized yields. Today, our repositions and redevelopments are generating 6.4% stabilized yields. In this quarter, the impact was about 200 basis points to our mark-to-market as we moved seven properties into repositioning and redevelopment. Acquisitions are also part of that move in and out of the pool for mark-to-market and can certainly have an impact.
Camille Bonnel (Director Equity Research)
Thank you for taking my question.
Moderator (participant)
Our next question comes from the line of John Kim with BMO. Please proceed with your questions.
John Kim (Managing Director of Equity Research)
Thank you. On the net absorption, your stats are positive, but it does benefit, I think, from some of your space that you put into redevelopment. I was wondering if you could comment on overall net absorption in the market or demand that you're seeing in your portfolio or in the market overall over the last few weeks, just given the rising interest rate environment and uncertainty in the financial markets?
Michael Frankel (Co-CEO)
Hi, thanks so much for joining us today. This is Michael, and I'm pleased to answer the call. I think with regard to the last few weeks, we really haven't seen much change relative to what we're reporting for the quarter. So really no trend line there that's incrementally different.
Laura Clark (CFO)
Then I'll add to that just around net absorption and the overall market. We've actually taken a pretty deep dive and analyzed every building in the market that's contributed to negative net absorption. Throughout the year, we've been communicating those metrics, and it's been really consistent.
Only about 20% of the buildings that contributed to negative absorption in the overall market is what we would deem to be kind of higher quality, higher functional type buildings. So said another way, 80% of the product that's hitting the market in terms of the negative net absorption throughout the year doesn't directly compete with Rexford.
So this, like I mentioned, this trend has really held throughout each quarter of the year, and certainly speaks to, you know, to the metrics that and to the results of our portfolio, and that differentiation is certainly driving our results.
John Kim (Managing Director of Equity Research)
Okay. I noticed the lease term that you signed this quarter. First of all, are your leasing stats signed or commenced? That's part A, but-
Laura Clark (CFO)
It's-
John Kim (Managing Director of Equity Research)
on the leasing
Laura Clark (CFO)
It's signed.
John Kim (Managing Director of Equity Research)
Okay. It's signed. Okay. The lease terms were 3.4 years, and on renewals, 2.1, which seems low compared to where it has been historically. Just wanted to get some commentary on that.
Laura Clark (CFO)
Yeah, John, I can take that. Our weighted average lease term this year was a little bit shorter. It was driven by several shorter-term deals that were 12 months or less in term, and those were signed in advance of repositions and redevelopments, giving us the ability to capture revenue while we're positioning those for construction start.
John Kim (Managing Director of Equity Research)
Would you characterize that as an aberration, or going forward, are lease terms gonna be shorter in nature?
Laura Clark (CFO)
Yeah, I think it's... It was really, really driven by, there were about 3-4 deals that had a larger impact on the weighted average lease term this quarter.
John Kim (Managing Director of Equity Research)
Okay. Just one final one on the mark-to-market disclosure on page 15. You know, the 7% reduction from 63%-56%, which you clarified. Going forward, the outer years, the projections that you have are down 6% from last quarter, and I'm wondering why it's not the full 7%, including the market rental change?
Laura Clark (CFO)
I think it's important as you think about the, first of all, the calculation there, and you can certainly have various rounding impacts. But I think it's important to look at the disclosure or a few comments there on the disclosure that we provide by year from a mark-to-market perspective, because you'll see that the change in mark-to-market has varied across years.
So that's really driven by the pool of leases that's included in any given year that's constantly changing. That's driven by the leasing activity that we're doing, the acquisitions, the properties we're moving to reposition and redevelopment. So just by way of example, if you have a lease that expired, in the third quarter of 2023, and we executed a new lease, let's say we executed a new lease at a 100% leasing spread, we captured that mark-to-market, and that NOI is now reflected in our cash flow.
Let's say that that lease had a three-year lease term. That expiration is now reflected in our 2026 mark-to-market at the market rent, and that resets the market mark-to-market to zero. So because of those constant changes within the pool across various years that are driven by a number of factors, you will see different impacts, from a mark-to-market perspective.
John Kim (Managing Director of Equity Research)
Got it. Okay. So this quarter, it just happened to be a 6% change per year, but going forward, that could change year-by-year?
Laura Clark (CFO)
Yeah. I mean, if you look at this quarter, the mark-to-market change for 24 and 26 were actually closer to 1,200 basis points.
John Kim (Managing Director of Equity Research)
Right.
Laura Clark (CFO)
The factors that I just mentioned drove those changes.
John Kim (Managing Director of Equity Research)
Thank you very much.
Moderator (participant)
Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
Great, thanks. Good morning out there. So you touched on this a little bit in prepared remarks, but you all continue to be active on the acquisition market with $400 million under contract, but you're getting a little lower on forward equity at $450 million.
You have capacity on the line, but the rate is much higher than it has been, and your cost of equity has increased. So can you just talk a little bit more about how you're thinking about the pace of additional acquisitions, and how much of that funding for future acquisitions could be driven by disposition proceeds?
Laura Clark (CFO)
Hey, Blaine, thanks for joining us today. I'll jump in here as well.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
Yeah.
Laura Clark (CFO)
As we've mentioned, and it continues to be a significant focus, is gonna be on driving accretion and NAV growth through how we deploy capital. So when you think about capital deployment for Rexford, that includes our internal investments, so our repositions and redevelopments that today are yielding a very accretive yield at 6.4%.
Our external investments, today, if you include the pipeline that you mentioned, the $400 million, stabilized yields are 6.4%. So our investments today are accretive. They're driving more accretion today than they did last year, even at our higher cost of capital, and that's driven by our higher initial and stabilized yields.
As we think about sources of capital, going forward, we're gonna continue to assess debt and equity and dispositions of sources of capital in relation to the hurdle rates in which we're solving to today, as well as the embedded growth that those investments are going to contribute over the long term to Rexford.
In terms of dispositions specifically, they will be another potential source of capital. We believe that there's a great opportunity to realize the value creation efforts that we've executed on, and we can redeploy that into higher-yielding assets and grow our overall net asset value. So today, we're currently actively pursuing a number of dispositions in the market, and we'll provide updates on those properties as they close.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
Okay, great. Just to follow up on that, can you talk about kind of the spread between, you know, the stabilized cap rates at which you think you can dispose of assets and the stabilized cap rates you think you can use those funds to invest in?
Michael Frankel (Co-CEO)
Hey, Blaine, it's Michael.
Howard Schwimmer (Co-CEO)
Yeah. Oh, go ahead, Michael.
Michael Frankel (Co-CEO)
No, I was just gonna say that, you know, suffice to say that the reason we're disposing of such assets is because we believe they'd be highly accretive in our recycling capital., and so, you know, we'll disclose those spreads when we close those disposition transactions. Otherwise, it's kind of tough just to speculate.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
Okay, fair enough. Then lastly, I was hoping you could talk a little bit about the types of tenants that are creating the most demand across your portfolio today, and maybe you can touch on tenant size and industry?
Michael Frankel (Co-CEO)
Sure. It's pretty interesting in terms of what we're seeing in the market. Demand is pretty broad-based, and despite economic concerns generally in the overall economy, we see demand from consumer products, food industry, the beverage industry. You know, a lot of incremental demand reflected in the leasing activity during the quarter from those sectors.
We continue to see the electric vehicle market as a very strong contributor towards demand. We continue to see, you know, distribution companies, whether they're e-commerce driven or 3PLs. Obviously, a lot of change in shipping in the 3PL market, given the incredible growth and demand they saw during the pandemic. But nonetheless, we continue to see very healthy demand from the 3PL market and e-commerce players in general.
You know, omni-channel distribution for your traditional retailers is here to stay. It's a path to survival for retailers, and so we continue to see demand from traditional old-time retailers who are building out, continuing to build out their omni-channel distribution capability, requiring warehouses closer to their endpoints of distribution. So pretty broad-based demand drivers, actually, which is, you know, great to see.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
Great. Very helpful. Thank you, all.
Moderator (participant)
Our next question comes from the line of Craig Mailman from Citigroup. Please proceed with your question.
Nick Joseph (Managing Director and Head of the US Real Estate and Lodging Research Team)
Thanks. It's actually, Nick Joseph here with Craig. Maybe just following up on the disposition comments. I was hoping you could quantify maybe how much you have out to market and where they stand in terms of the process.
Michael Frankel (Co-CEO)
Hey, Nick, thanks so much for joining us today. You know, it's similar to our acquisition activity. There's so many factors that contribute to whether or not we close a certain volume of transactions on the acquisition side in any given quarter or year, that, you know, we don't give acquisition guidance.
Similarly, on the disposition front, although we have, as Laura mentioned, a range of properties with potential disposition candidates that are actively in process. You know, there's so many factors that play into when and whether they close and what time frame. So, you know, we just are reticent to give that kind of guidance, but we hope that you'll be pleased when we actually announce closings.
Nick Joseph (Managing Director and Head of the US Real Estate and Lodging Research Team)
Yeah, no, I appreciate that. I guess, you know, not, not necessarily looking for guidance, but I think you obviously talk on the acquisition pipeline, so hoping kind of a similar comment on at least just a broad range of where the dispositions, you know, could be. Are we talking $100 million? Are we talking $500 million? Just, recognize things can fall in or out, of that pipeline.
Michael Frankel (Co-CEO)
Again, with regard, the reason we give a visibility on the pipeline for acquisitions is arguably there are more things in our control, 'cause we're the buyer. On the disposition front, there are fewer things in our control, because we just can't predict how a prospective buyer may behave or may close. We just don't give that kind of guidance, and I apologize, but, you know, we just don't find a big benefit in giving that kind of guidance.
Nick Joseph (Managing Director and Head of the US Real Estate and Lodging Research Team)
All right. Then just one other question on the dispositions. You mentioned, you know, maybe harvesting some of that value. Would it have an impact on the mark-to-market for the existing portfolio or these assets that have maybe been leased more recently, or should we not expect any impact on that number?
Michael Frankel (Co-CEO)
Well, consistent with the notion that we're harvesting our value creation, you know, we wouldn't expect the impact to be terribly material.
Nick Joseph (Managing Director and Head of the US Real Estate and Lodging Research Team)
Thanks.
Craig Mailman (Director and Equity Research Analyst)
Hey, guys, it's Craig here with Nick. Just wanted to follow up on the San Gabriel acquisition. The yield there is almost close to a seven. Could you just talk about the nature of that asset and, you know, what the upside of that could be? Is it just more of a sale-leaseback and future redevelopment, or just, you know, any kind of color would be helpful.
Howard Schwimmer (Co-CEO)
Hi, Craig. It's Howard. Well, I'd love to tell you all about it because it's really an amazing transaction that our team was able to negotiate off-market and, without, frankly, much of any other competition. I think we're gonna wait until we close, and then we'll be happy to provide full details.
Craig Mailman (Director and Equity Research Analyst)
Okay. Just one last one. You guys bought the Tireco building, did the sale-leaseback with them back in 1Q. It's your largest tenant now with a 2025 expiration. Could you guys just talk about the prospects of that tenant staying? Are they definitely out and, you know, where the mark-to-market expectation is today on that versus, you know, maybe when you bought it, closer to the beginning of the year.
Laura Clark (CFO)
Hey, Craig. In terms of Tireco specifically, we are in constant communication with our tenants and Tireco specifically. At this time, and based on those conversations, they currently have no intentions on vacating in 2025.
Craig Mailman (Director and Equity Research Analyst)
Okay, and they have options to stay?
Laura Clark (CFO)
They do. They have options.
Craig Mailman (Director and Equity Research Analyst)
Okay, perfect. Thank you.
Laura Clark (CFO)
Those options are, they have fixed options to stay.
Craig Mailman (Director and Equity Research Analyst)
I know they led to 4% annually, just in perpetuity?
Laura Clark (CFO)
3%.
Craig Mailman (Director and Equity Research Analyst)
3%? Okay, great. Thank you.
Moderator (participant)
Our next question comes from the line of Greg McGinnis with Scotiabank. Please proceed with your question.
Greg McGinniss (VP and Equity Research Analyst)
Hey there. Laura, I have another question on clarifying that mark-to-market disclosure. We're hoping to dig into that 2% quarter-to-quarter impact from portfolio vacates or moving to repositioning slash redevelopment. Is that just a lack of comparable rent on a now vacant asset, so you can't provide the upside and if thinking about that potential mark-to-market was previously greater than 56%, which is why it came down before, why would those properties need to be repositioned or redeveloped anyways?
Laura Clark (CFO)
Well, those can be two separate things. So to your point, yes, on the vacate side, there's not a comparable, there's not obviously a comparable rent. But on the repositioning redevelopments, this can be a different set of properties. So as we, you know, are able to get properties back, and execute on the repositioning and redevelopment plan, then they move out of the mark-to-market.
Greg McGinniss (VP and Equity Research Analyst)
Right. But I'm saying, so is the rent growth, the mark-to-market, assumed on those properties, is that contingent on repositioning?
Laura Clark (CFO)
For those properties that are moving into the repositioning pipe, the repo and repositioning pipeline? Is that your question specifically?
Greg McGinniss (VP and Equity Research Analyst)
Yeah, I'm just trying to-
Laura Clark (CFO)
No.
Greg McGinniss (VP and Equity Research Analyst)
Figure out, like, basically, CapEx requirement on achieving the 56% mark-to-market.
Laura Clark (CFO)
No, that is not... They are not.
Greg McGinniss (VP and Equity Research Analyst)
Okay. Then is there beyond, like, typical second-generation TIs, is there any additional spend that we should be thinking about for achieving the mark-to-market?
Laura Clark (CFO)
No. If a property is in the mark-to-market pool, in that calculation, in the 56%, it's not in our reposition. If a property is in that pool, it would just be your typical TIs leasing commission, you know, capital, recurring capital spend.
Greg McGinniss (VP and Equity Research Analyst)
Okay, great. Then my apologies for what might be an ignorant question here, but we are new to the coverage. How does the 100 basis points of positive net absorption impact reported occupancy?
Laura Clark (CFO)
In terms of the overall portfolio-
Greg McGinniss (VP and Equity Research Analyst)
Right.
Laura Clark (CFO)
—or the same property pool? What specifically?
Greg McGinniss (VP and Equity Research Analyst)
Yeah, overall portfolio. So if you have occupancy changing 10 basis points quarter-over-quarter, but it's 100 basis points of positive net absorption, just trying to figure out where the delta is there and, you know, how it's actually impacting occupancy to have the positive absorption.
Laura Clark (CFO)
Yeah, I can, Greg, maybe it'd be better offline. I can take that with you and walk you through the components of that.
Greg McGinniss (VP and Equity Research Analyst)
Okay, great. Thank you.
Laura Clark (CFO)
Thank you.
Moderator (participant)
Our next question comes from the line of Nick Thillman with Robert W. Baird. Please proceed with your question.
Nick Thillman (Senior Research Analyst)
Hey, just wanted to touch a little bit on economics. It does seem like shorter lease duration. Just curious if you're seeing any more like free rent being given or just more TI associated with your leasing?
Laura Clark (CFO)
Hey, thanks so much for joining us. In terms of concessions or free rent this quarter, free rent was actually 0.7 months, so lower than what we've experienced on the prior quarter. Year-to-date concessions are one month, that's in line with our guidance, and in line with our prior fourth quarter average. If we look back year-to-date, we haven't really seen a material increase, overall in terms of concessions. Looking back, you know, to prior years, concessions have averaged about 1.25 months, so we continue to be inside of that.
Nick Thillman (Senior Research Analyst)
Then more of a technical question-
Laura Clark (CFO)
Then your question-
Nick Thillman (Senior Research Analyst)
Oh, I'm sorry. I'm sorry.
Laura Clark (CFO)
I'm sorry. Your question-
Nick Thillman (Senior Research Analyst)
Go ahead.
Laura Clark (CFO)
Around TIs. Yeah, your question around TIs. No, we haven't seen any material change in terms of TIs.
Nick Thillman (Senior Research Analyst)
That's helpful, Laura. Then maybe just another question related to just GAAP leasing spreads. You guys have been pretty big acquirers over the last 2-3 years. So when we're looking at when you're quoting GAAP leasing spreads, are you guys including the adjustment made to GAAP fair value of those leases, when you're quoting the spreads quarter by quarter? Just kind of seeing which is going to actually be flowing through to FFO going forward.
Laura Clark (CFO)
Yes, that would be included in the acquired leases.
Nick Thillman (Senior Research Analyst)
Okay.
Moderator (participant)
Our next question comes from the line of Vince Tibone with Green Street. Please proceed with your question.
Vince Tibone (Managing Director and Head of US Industrial and Mall Research)
Hi. Occupancy guidance implies about a 75 basis point drop in the fourth quarter compared to third quarter levels. Could you just discuss the drivers there, whether it's a known move-out or just some conservatism in forecasting?
Laura Clark (CFO)
Yeah. Hi, Vince. Thanks for joining us today. In terms of our same property occupancy guidance, yeah, as you mentioned, our guidance for the full year is 97.75%. So we did tighten our guidance range to the midpoint. That occupancy guidance implies a decline in the fourth quarter, about 60 basis points. Just as a reminder, our prior guidance also implied a decline of about 30 basis points in the second half of the year, largely driven by a bit more downtime in some spaces where we are performing some light and moderate repo, and that factored into our prior guidance.
Now, as to our updated guidance, as we have a 30 basis point impact from a space that we got back from a tenant that was on our pre-watch list, and that moved the guidance range to our midpoint. That was a tenant, just a little color there, who went through an acquisition of their business earlier this year. We've had them on the pre-watch list for several quarters now. They had some challenges in the integration of that merger, and so we did get that space back at the end of the quarter.
Vince Tibone (Managing Director and Head of US Industrial and Mall Research)
Great. Thank you. Then since the port labor agreement has been finalized and some of the backups to the Panama Canal have gotten worse, have you seen any pickup in tenant interest or touring activity or other signs that, you know, the SoCal Industrial could benefit from some of these factors?
Howard Schwimmer (Co-CEO)
Hi, Vince, it's Howard. Yeah, we're really pleased to see that increase in port activity. You know, keep in mind that our tenant base is really mainly serving the consumption occurring here in Southern California. So through cycles, we haven't really seen impacts from port slowdowns, shutdowns, et cetera, in terms of that tenant base that we focus on and is in the portfolio.
But you know, the ports are really more reliant, you know, and connected to super regional global trade. So some of those larger buildings that typically you'll see out in the Eastern and even the Western Inland Empire. Absolutely, certainly that's a benefit. There's a lot of revenue generated from ancillary services and so forth throughout Southern California through port volume. You know, it's really nice to see those volumes increase and hopefully that it's a go-forward trend in terms of some further recovery.
Vince Tibone (Managing Director and Head of US Industrial and Mall Research)
Great, thanks. If I could maybe squeeze in one more, I'd be curious to get your view on how the transaction and secured debt markets have changed over the past few months since the Treasury rates moved up pretty substantially here.
Laura Clark (CFO)
Hey, Vince, I'll take that around the transaction market. You know, we continue to see capital flowing into the Southern California market and interestingly, you know, we're seeing new market entrants into industrial. That has been, I'd say, an incremental change over the past quarter or two.
Although, yes, you've certainly seen an increase in interest rates, and certainly availability of that capital, you know, can be challenging. There continues to be, you know, transactions occurring in the market, and cap rates really haven't moved that materially, maybe up about only about 25 basis points.
You know, buyers are still accepting lower cap rates for, you know, for properties that have mark-to-market and are, you know, even taking on waiting some time to get to stabilization. So, you know, there's a property that traded just recently in the North Orange County, Mid-Counties market, about a $50 million transaction.
It's going in initial cap rate of a 3.4%, stabilizing about five years from now, a little over 5%. That was, you know, and that was a new entrant into the market from a buyer perspective. So, you know, there continues to be even with, you know, the increase in interest rates, there continues to be capital flowing into the market.
Vince Tibone (Managing Director and Head of US Industrial and Mall Research)
Great. Thank you.
Moderator (participant)
Our next question comes from the line of Mike Mueller with J.P. Morgan. Please proceed with your question.
Michael Mueller (Senior Equity Research Analyst)
Yeah. Hi, just a quick one. I was wondering, can you talk about the yields that you're expecting on new repositioning starts compared to the overall in-place yield on that pipeline and what you're achieving on acquisitions today?
Howard Schwimmer (Co-CEO)
Hi, Mike, it's Howard. Yeah, those yields vary. You know, some of them are legacy acquisitions that we might have bought at the peak of the market, that might have a bit of a lower stabilized yield, while there's others that have substantially higher yields above that 6.4% rate stabilized yield that we're mentioning.
So, you know, in terms of anything we'd look to buy, we've absolutely reset the targets in terms of those stabilized yields we're seeking. But again, those also have to do with, you know, when we're actually going to get to the asset that we can stabilize.
We've got quite a few examples of assets we've bought recently that had very strong in-place rents, in place where we're able to entitle properties, and then start construction, you know, maybe two, three years down the road, and get to even higher stabilized rates on top of that. We're really selective and, you know, as far as bringing in some of these assets, that strategy definitely is different than it would have been looking back, you know, a year or two years ago.
Laura Clark (CFO)
Hey, Mike, and just... Mike, a little bit more color there. We added seven new projects to our reposition, redevelopment pipeline, or current, or current in process, representing about 600,000 sq ft of properties. On those investments, the yield, the aggregate stabilized yield is 6.5%. So actually coming in, a bit above, the aggregate yield for everything in the reposition, redevelopment pipeline.
Michael Mueller (Senior Equity Research Analyst)
Got it. Okay. Thank you.
Moderator (participant)
Our next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question.
Vikram Malhotra (Managing Director, REITs)
Right here. Hi, thanks for taking the question. Just, two quick ones. So first of all, on the mark-to-market, the changes, you know, if I just run the math sort of forward, I would assume that your -1% rent growth had a lot of variability by market and by size, for there to be like a 600-700 basis point impact.
So given that you said it was larger boxes, can you just also kind of give us a sense of what the ranges were to impact and just if I'm correct, if I roll all that forward, assuming current conditions, I sort of get to your mark-to-market being 25%-30% by year-end 2024. Is that fair?
Laura Clark (CFO)
In terms of the mark-to-market, over the next several years, we actually provide, we actually provide a disclosure around the projected portfolio net effect of mark-to-market by year, assuming current rents and no further rent growth. So that, you know, and by the end of 2023, so by the end of next quarter, it's 52%. By the end of 2024, it's 42%.
Now, as a reminder, you know, there's... As I talked about earlier, there's a lot of different components, right, that can impact that. The leases that we're executing, repositioning and redevelopment opportunities, acquisitions that we're acquiring. But based on the current portfolio and where it sits today, the end of 2024, we would be at a 42%, projected portfolio net effective mark-to-market.
Vikram Malhotra (Managing Director, REITs)
Okay, but just to clarify that -1% market rent growth, if I just flow that through the forward projections that you have made, it's still hard to get to such a, like the 600-point change in, say, 2025. So I'm wondering, is there a lot of variability in that -1% market rent growth?
Laura Clark (CFO)
There's some variability. You know, that's obviously driven by because the change in market rents is not straight-lined across the portfolio. So there's variability in terms of submarket, there's variability in terms of the size of spaces, but as I mentioned before, there's many other factors that are driving the mark-to-market besides the change in market rent.
Vikram Malhotra (Managing Director, REITs)
Okay, fair enough. Then just to follow up on your largest tenant, the Tireco acquisition or expiration. Can you just clarify? I think you said they're automatic renewals, or is it just highly likely they're going to renew? I only ask because it seems like in 2025 there's a step down, and I'm wondering what you have, you know, sort of embedded on renewal for that lease. Thank you.
Laura Clark (CFO)
Yeah. Yeah. They have an option to renew the lease, and that's a fixed option at 3%. So that is impacting our mark-to-market in 2025 because we're capturing that option at 3% and not what would be the fully embedded mark-to-market if we were to get that space back.
Vikram Malhotra (Managing Director, REITs)
Just as it stands today, is that a roll up or a roll down if nothing changes?
Laura Clark (CFO)
In terms of if we were to get the space back, would it roll up or down? Is that your question?
Vikram Malhotra (Managing Director, REITs)
Yeah. I guess you're saying you're not getting the full mark-to-market because of the 3%-
Laura Clark (CFO)
That's correct.
Vikram Malhotra (Managing Director, REITs)
Automatic renewal.
Laura Clark (CFO)
It would roll up.
Vikram Malhotra (Managing Director, REITs)
So it would roll up? Okay.
Laura Clark (CFO)
It would roll up.
Vikram Malhotra (Managing Director, REITs)
Okay, thanks.
Laura Clark (CFO)
That space is below market today.
Vikram Malhotra (Managing Director, REITs)
Okay. Thank you so much.
Laura Clark (CFO)
Thank you.
Moderator (participant)
As a reminder, star one to ask a question. Our next question comes from the line of Nate Crossett with BNP. Please proceed with your question.
Nate Crossett (Real Estate Equity Research)
Hey, good afternoon. Quick one on just recurring CapEx. It's up quite a bit the last couple quarters. Just wanted to know if you could maybe unpack that. You know, is there anything we should know going forward for maybe recurring CapEx expenditures? Then also G&A, I think the guidance for the year implies a significant ramp into 4Q. So maybe you can just kind of unpack what that is.
Laura Clark (CFO)
Hey, Nate, thanks so much for your questions today. So in terms of recurring CapEx, it's really largely driven by seasonality, especially related to exterior work. As you know, within the third quarter and some into the second quarter, we do take advantage of some of the hotter, drier weather conditions for that exterior work, such as roof and exterior painting.
So that really drove our third quarter capital expenditures higher. As we look forward, we would expect fourth quarter to be more in line with prior quarters. To your question around G&A, I'll note this is the first increase in G&A in 2023. You know, we do continue to realize really significant operating synergies.
Our G&A as a percentage of revenue for the full year is expected to be 9.6%, and that compares to 10.2% in the prior year. In terms of the fourth quarter, the driver is really primarily related to non-cash equity true-up, and that's related to performance-based equity compensation. So that non-cash equity compensation is not realized unless Rexford is continuing to perform at elevated levels. So that's the primary driver in the fourth quarter.
Nate Crossett (Real Estate Equity Research)
Okay, that's helpful. Then, sorry if I missed it, I can't remember if you disclosed it or not, but lease escalation on new contracts, what was it this quarter versus, say, last quarter?
Laura Clark (CFO)
Yeah. This quarter, our embedded rent steps on our executed leases was 4.3%. Then compared to the prior quarters, this is actually the highest rent steps that we've signed through the past three-year to-date. In the second quarter, embedded rent steps were 4.1%, and in the first quarter, they were 4%.
Nate Crossett (Real Estate Equity Research)
Okay, I'll leave it there. Thank you.
Laura Clark (CFO)
Thank you so much.
Moderator (participant)
There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
Michael Frankel (Co-CEO)
On behalf of the entire company, we'd like to thank everybody for joining us today, and we look forward to reconnecting next quarter. Thank you so much.
Moderator (participant)
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.