Rexford Industrial Realty - Q3 2024
October 17, 2024
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator here today. At this time, I would like to welcome everyone to the Rexford Industrial Realty Incorporated Q3 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you, and I would now like to turn the conference over to David Lanzer, General Counsel. You may begin.
David Lanzer (General Counsel)
We thank you for joining Rexford Industrial's third quarter 2024 earnings conference call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and an 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 an explanation of why such non-GAAP financial measures are useful to investors.
Today's conference call is hosted by Rexford Industrial Realty'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 thank you everyone for joining Rexford Industrial's third quarter earnings call. I'll begin with a few remarks, followed by Howard and Laura. To begin with, we'd like to thank our Rexford team for your outstanding work, delivering another strong quarter. Our team generated a 5.4% increase in FFO per share compared to the prior year quarter, which brings our FFO per share growth to 9.3% for the first nine months of the year compared to the prior year period.
With our consolidated stabilized portfolio occupancy of 97.6% at quarter end, our infill Southern California tenant base continues to demonstrate resiliency, driven by the mission-critical nature of our infill locations, fueled by regional consumption that remains stable and has continued to grow each year since 2021, driven by the nation's largest regional population and most diverse economy. With regard to general market conditions, increased levels of global unrest, uncertainty related to the presidential election, and an uncertain economic outlook continue to weigh on markets and business decision-making. Although our infill Southern California industrial market continues to demonstrate superior long-term tenant demand fundamentals, current leasing activity reflects some tenants taking longer to make decisions. Looking forward, as the economic and political environment stabilize, we believe our infill Southern California industrial markets' favorable supply-demand backdrop inherently positions our market for future rent growth.
Most importantly, our Rexford portfolio remains well positioned for favorable FFO per share and net asset value growth, driven by the high quality of our properties and the substantial volume of value-add property repositioning and functional enhancements, driving the accretive internal growth embedded within our in-place portfolio. By way of indication, assuming zero market rent growth, we currently project about 34% cash NOI growth embedded within our portfolio, realizable over the next three years, and with this, I'm very pleased to turn the call over to Howard.
Howard Schwimmer (Co-CEO)
Thank you, Michael, and thank you all for joining us today. Rexford ended the third quarter with solid operating results, a testament to our value creation business model. The Rexford portfolio continues to be favorably positioned relative to the overall infill market. We executed 1.6 million sq ft of leases, driving 394,000 sq ft of positive net absorption, equal to positive 80 basis points, outperforming the overall market's negative 25 basis points of net absorption, according to CBRE. Leasing spreads in the quarter showed continued strength at 39% and 27% on a net effective and cash basis, respectively, in line with our prior quarter projections. Additionally, annual embedded rent steps in our executed leases averaged 3.9%.
Excluding the lease up of the 275,000 sq ft DuPont repositioning project, rent steps averaged 4% in line with prior quarters year to date. With regard to market rents, we have seen asking rents for highly functional product comparable to the Rexford portfolio down approximately 2.5% sequentially and 7.5% year over year, reflecting continued normalization following the extreme market rent growth during the pandemic of over 80% in aggregate within our infill markets. Turning to Rexford's investment activity, during the quarter, we completed $60 million of investments, and subsequent to quarter end, we closed an additional $70 million investment through an off-market transaction. In aggregate, these investments, comprising 550,000 sq ft-...
are generating an initial yield of 5.8% and a projected unlevered stabilized yield of 5.9% on total cost. Looking forward, we currently have approximately $200 million of investments under contract or accepted offer, which are subject to customary closing conditions. Moving to our capital recycling program, during the quarter, we disposed of one property, bringing year-to-date disposition activity to $44 million, generating a 12.8% weighted average unlevered IRR. In addition, we are negotiating on over $90 million of dispositions, which will be subject to customary closing conditions. During the third quarter, we rent commenced and stabilized three repositioning and redevelopment projects, totaling approximately 325,000 sq ft, representing a total investment of $99 million. These projects achieved a weighted average unlevered stabilized yield on total investment of 7.6%.
Year to date, we have stabilized seven projects across 450,000 sq ft, which achieved an 8.4% weighted average unlevered stabilized yield on total investment of $165 million. In the quarter, we also leased our 275,000 sq ft DuPont property in the Inland Empire West, which stabilized subsequent to quarter end at a 5.5% yield. Importantly, I'd like to thank our Rexford team for your entrepreneurial efforts that continue to drive Rexford's success. With that, I'm pleased to turn the call over to Laura.
Laura Clark (CFO)
Thank you, Howard. Third quarter results were in line with expectations. FFO per share was $0.59, representing 5.4% growth over the prior year quarter. Same property NOI growth on a net effective and cash basis was also in line with projections at 2.6% and 5.3% respectively, bringing year-to-date same property NOI growth to 4.7% on a net effective basis and 7.7% on a cash basis.
Third-quarter net-effective same-property NOI growth was driven by a positive 750 basis points contribution from base rent growth, primarily offset by a few items, including 320 basis points related primarily to lower straight-line rent associated with an elevated level of early renewals last year, an 80 basis points impact from the timing of recoveries associated with higher seasonal utility expenses and property taxes, and a 70 basis points impact related to bad debt. While bad debt in the quarter was a healthy 30 basis points of revenue, the third quarter of 2023 included the positive reversal of a prior reserve, impacting the current quarter comp. In regard to the balance sheet, net debt to EBITDA is 4.7 times, near our long-term target leverage range of 4-4.5 times.
During the quarter and subsequent to quarter end, we settled $220 million of outstanding forward equity related to our March equity offering, and currently have $614 million of net forward proceeds remaining for settlement. In total, we have liquidity of approximately $1.7 billion, including $62 million in cash on hand and $995 million available under our revolving credit facility. We have no near-term debt maturities until mid-2026, assuming extension options. Turning to guidance, 2024 FFO per share guidance has been increased by $0.01 at the high and low end of the range to $2.33-$2.35, representing 7% YoY earnings growth per share at the midpoint. Note that our guidance does not include future acquisitions, dispositions, or related funding that has not yet closed.
2024 Same Property NOI growth guidance is now 4.25%-4.75%, and 7%-7.5% on a Net Effective and Cash basis, respectively, both within the range of our previous expectations, reduced 25 basis points at the midpoint. Drivers of our Same Property NOI growth range include the following expectations: First, 2024 average occupancy of 96.5%-96.75%, compared to our prior range of 96.5%-97%. We expect fourth quarter occupancy to be impacted by a few known move-outs included in our prior guidance, combined with the timing of lease commencement on vacant units that are now projected to commence in early 2025.
Second, full year leasing spreads in line with the prior quarter's forecast at 55% on a net effective basis and 40% on a cash basis. Third, concessions for the full year of approximately 1.75 months, up from 1.5 months, largely driven by 3 leases with longer durations signed in the third quarter. Finally, bad debt as a percentage of revenue in the 50 basis point area in line with year to date and historical averages. Our updated same property NOI growth guidance also includes the projected move out of LL Flooring, occupying 504,000 sq ft at our Mission Boulevard property, who sold their business after recently filing for bankruptcy. We anticipate the tenant will vacate the building at the end of November. However, per our original redevelopment plan, we are currently in the entitlement process.
While the vacate of this large space has an outsized impact on portfolio occupancy. The impact to NOI is relatively nominal due to the current estimated rental rate being approximately 250% below market. Other components of our increased FFO per share guidance range include a positive one cent per share contribution from $131 million of acquisition activity, plus an incremental one cent per share contribution related to higher than expected occupancy in our non-same property pool, which represents approximately 27% of our total portfolio. The incremental NOI contribution from repositionings and redevelopments is in line with our prior projections, and full year G&A of $83 million is also unchanged.
Looking forward, over the next three years, we have an estimated $222 million of internal cash NOI growth embedded within the current portfolio, assuming no further acquisitions in today's market rents, and includes $91 million of incremental NOI from repositionings and redevelopments, $72 million from the portfolio cash mark-to-market of 19% as we roll in-place rents to current market rates. $51 million from portfolio annual embedded rent steps averaging 3.7%, and $8 million from acquisitions closed in the quarter and subsequent to quarter end. Together, this represents 34% growth in cash NOI over the next three years. Note that in the third quarter, we captured approximately 350 basis points of mark-to-market, realizing $13 million of incremental annualized NOI.
Finally, I would like to quickly touch on the three-year FFO per share outlook we spoke about at the beginning of the year. Based on the dynamic market environment and current conditions, as well as the inherent challenges with forecasting the timing of market inflections, we will be focusing on our annual guidance going forward, which we will provide when we report fourth quarter earnings in early February. Before I turn the call over for your questions, I want to recognize and thank our Rexford team. We are inspired daily by your passion and pursuit of excellence. Thank you for all you do to drive the success of Rexford. Operator?
Operator (participant)
Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of John Kim with BMO Capital Markets. Your line is open.
John Kim (Analyst)
Thank you, and good morning. I wanted to ask about the slow decision making that, a lot of your tenants you're talking to are having today. It seems like it's a common theme. What would you attribute this to in terms of, are tenants pushing back on the higher rent levels versus uncertainty in the economy and the upcoming election? Or is it something else, like the cost of holding inventory, or automation, or another reason?
Michael Frankel (Co-CEO)
Hi, John, it's Michael. Thank you so much for joining us today. No, I think it's predominantly driven by factors that are not necessarily specific to us, to the company, the tenant, or their industry or sector, really more driven by some of the macro concerns and general decision making around the economy, and I think we're seeing really short-term impacts by elevated levels of economic uncertainty, really driven in part by geopolitical and unrest globally, uncertainty around the election. Interest rates still remain sort of an uncertainty as well. I think a lot of folks had hoped there'd be more certainty around interest rates at this point in time, and we're really seeing tenants make decisions or slow their decision making, and maybe it's kind of staying put.
But we're also seeing, I think it's important to note this, underlying strength in the businesses of our typical tenants. You know, regional consumption remains stable, strong, and growing in Southern California. And frankly, our third Q leasing activity, I'm sure the team will get into this later, reflects a performance that is essentially in line with our guidance set at the beginning of the year. So again, we're not really seeing any big surprises in the tenant base in terms of decision making in that respect. So I think really predominantly driven, you know, by macro factors. And in that sense, as those macro factors stabilize, we continue to see, you know, a favorable backdrop with regard to demand.
John Kim (Analyst)
Okay. And then on your rents that you signed this quarter, it was at $17.88, on a GAAP basis. I think it's kind of bounced around, up and down, this year. How indicative of the current rents or the rents you signed in third quarter, how indicative of that is, is it, versus rents that you will be signing for the remainder of the year and into 2025? It would suggest, you know, market rents declining more than the 7.5% that you presented. And also, we're trying to figure out what the true mark to market is on 2025 expirations.
Michael Frankel (Co-CEO)
Also, I'll just say the differential in rents is really more about the mix of leases, and I'll pass it to Laura with a little more detail on that and the rest of your question.
Laura Clark (CFO)
Hey, John, thanks for your question. In terms of what Michael said, it's true. It is about the mix of leasing. When we look at, you know, our full year guidance for net effective spreads as an example of 55% on an-
... on a net effective basis and 40% on a cash basis, is unchanged from our expectations, last quarter. That does imply, 40% net effective spreads and 25% cash spreads, into the third and fourth quarter. You can see that our third quarter spreads came in right in line with our expectations at 39% and 27%. So as we look into the fourth quarter, you know, we are expecting to generate similar spreads that we did this quarter. And really, what's driving that is the smaller spaces, you know, are mark-to-market. They're mark-to-market more near term. So I think on average, the average size is 9,000 sq ft, and average term was 3.5 years.
John Kim (Analyst)
Laura, do you have the expiring rents on 2025 expirations? It's presumably lower than the $15.10 in your supplement?
Laura Clark (CFO)
Yeah, we can, we can follow up with you after the call.
John Kim (Analyst)
Okay, great. Thank you.
Operator (participant)
Your next question comes from the line of Jeff Spector with Bank of America. Your line is open.
Jeffrey Spector (Analyst)
Great, thank you. One follow-up from John's first question on the reason why, you know, tenants are making slower decisions. You know, there is a key difference, Michael, from what you said, what we heard at our conference from some of your peers in our broker call. And maybe there is a key difference, whether it's your tenant size, your markets. I mean, we were hearing the main reason is a result of excess, you know, space. Tenants took too much space. I don't think you mentioned that, so are you making a clear difference here, or is that just another reason, and you know, you accidentally left that off?
Michael Frankel (Co-CEO)
Hi, Jeff. Thanks so, so much for joining us. You know, I think that, we do see that as a driver. It's probably less of a driver than for the big box product, and so it's probably why you don't hear us emphasizing it as much. You know, we continue to see very high utility at our properties, by our tenants, and we continue to hear of interest for more space. We're just seeing a delay in decision making. So I do think the dynamics are a bit different for our smaller tenant base within our infill markets as compared to the big box market, and that's probably why you hear us, you know, not emphasizing it in the way, that you do for the big box market.
Jeffrey Spector (Analyst)
Thank you. And then, Michael, you also said the mark-to-market is 34%. That would assume market rent stays flat from here. I think you're, you know, you're not providing market rent forecast now, but I guess, can you provide a little bit more color on that comment, the 34%? Are you saying you do feel that at least market rents are stabilizing?
I think the 44% is a reference to our embedded NOI growth. I'm not sure. Can you clarify the question a little bit?
Michael Frankel (Co-CEO)
Sorry, I thought at the beginning you said the mark-to-market is 34%. It's on one of your slides, and that's - I assume that's based on today's market rent. And so I didn't know if you were implying, like, you think market rents are finally stabilizing for your product.
Laura Clark (CFO)
Hey, Jeff, this is Laura. The 34% that you're referencing is the embedded NOI growth within our portfolio over the next three years. We have about $222 million of embedded NOI growth from repositions and redevelopments, mark-to-market, our embedded rent steps, as well as the acquisitions we closed in the quarter.
Jeffrey Spector (Analyst)
Okay. Thank you.
Laura Clark (CFO)
You're welcome.
Jeffrey Spector (Analyst)
Appreciate that. And then, my last, I just wanted to confirm on the current redevs and lease-up redevs. I see some of that is, you know, coming online in the coming quarters. Any expectations on, you know, the lease, you know, on leases signed? Any comments you could make?
Howard Schwimmer (Co-CEO)
Hi, Jeff, it's Howard. Well, obviously, we've already commented on the timeline for decision making being a little slower than we've seen in the past. You know, that said, we are seeing reasonable amounts of activity on space. And we've made adjustments in terms of some of the lease-up time frames in the redevelopment and repositionings. Just, you know, some things were pushed out. You know, and on average, we pushed those out about two months, and half of it is related to construction delays and half of it really being related to leasing. But, you know, overall, you know, there is activity out there. And really, I'd echo a lot of the comments Michael made in terms of some of the reasons why the decisions are slower.
But, you know, we're fairly optimistic in terms of turning some of that activity into some signed transactions into the latter part of the year and into early 2025.
Jeffrey Spector (Analyst)
Great. Thank you.
Operator (participant)
And your next question comes from the line of Craig Mailman with Citi. Your line is open.
Craig Mailman (Analyst)
Hey, good morning. Just wanna circle back to the redevelopment pipeline here. I know you guys are saying that you've been kind of stabilizing projects in the kind of high 7% range, but then DuPont was sort of a 5.5 stabilized. How should we think about where yields or returns are coming on the redevelopments that you guys have underway or are gonna start soon relative to that 7%-8%? I mean, or was the 5.5 a one-off, or is that more of where returns are gonna trend, given kind of higher construction costs and moderating rents and maybe elongated lease-up time frames?
Howard Schwimmer (Co-CEO)
... Hi, Craig. It's Howard. You know, you can certainly refer to the supplemental that has all the data, property by property, in terms of projected yields. But in terms of that specific property, you know, as you recall from some of our prior comments, you know, 275,000 sq ft in the Inland Empire West had been one of the softest segments of that market because of an oversupply of the product. And so rents, you know, even when you just look around all the markets, rents decline probably. I'm gonna say, you know, the most for that kind of product because of the amount of vacancy that there is in it. So that's really more of a one-off in terms of the stabilized yield you see there on that particular asset.
Craig Mailman (Analyst)
Right. Yeah, no, I see the 6% unlevered yield in the deck. I just... I was asking this question because I know, you know, the three-year roll forward that you guys pulled this quarter was really predicated primarily on the redevelopment. I think it was 11%-13% that you had talked about, and I was just trying to get at the, you know, the reason for pulling that if, you know, you guys are continuing to start redevs, then it feels like you feel pretty good about your return expectations. Could you just talk a little bit more about the decision to pull that guidance here so quickly after you gave it?
Laura Clark (CFO)
Yeah, Craig. I think it's purely a function of timing because we are really excited about the embedded growth within the portfolio, and we're very, very well positioned to generate substantial growth over the near and long term. When we're looking at the forecast, and when you look back to the initial outlook that we set at the beginning of the year, it was based on the market dynamics at that time. Since then, there has been continued economic uncertainty. So we believe it's prudent to push aside the forecast at this time. We're really focused on our 2025 growth, when we have the better visibility, and we'll provide those expectations when we report 4Q earnings. And the focus for us is executing on that significant embedded growth within the portfolio.
Craig Mailman (Analyst)
Okay, that's fair. Just clarification on LL Flooring. I know that, you know, it didn't last as long as you had hoped to get you through the planning stage or entitlement stage on that redevelopment. Do you anticipate doing a short-term lease there, or should we just assume that that's gonna be down until you guys start the redev at 1601?
Laura Clark (CFO)
Yeah, Craig. I mean, we will certainly put it on the market and see if we're able to get some short-term income in that space. It's not anticipated at this point in our guidance.
Craig Mailman (Analyst)
Okay. And then just maybe one last one. You know, you guys are still sitting on a good amount of cash to deploy, and what we're hearing is, you know, stabilized yields are coming down on acquisitions, particularly in good gateway markets. How do you guys, kind of, with what's in the acquisition pipeline, I know you guys don't always buy stabilized. You're buying some value add. Kind of, how do you feel the return opportunities are relative to maybe the cost of capital you raised the equity at earlier this year?
Michael Frankel (Co-CEO)
Hey, Craig. Thanks again. It's Michael here. Thank you so much for joining us today, and no, we're excited about any opportunities that we might have in our pipeline. The only reason that they are in our pipeline is because we believe they're gonna deliver substantial accretion, you know, relative to our steady-state cost of capital, and which would mean accretive to, on average, you know, to the near term impacts to the company as well as long term. It doesn't mean from time to time we might not buy a vacant asset, but we're gonna expect that we're gonna get paid for that with a much substantially higher stabilized yield.
But in general, you're gonna see us continue buying, on average, cash flowing assets with, in general, opportunities to create value that we believe are gonna be accretive to the portfolio and the shareholders, both in the near and long term, on average.
Craig Mailman (Analyst)
Great. Thank you.
Operator (participant)
Your next question comes from the line of Nicholas Yulico with Scotiabank. Your line is open.
Nicholas Yulico (Analyst)
Thanks. Hi, everyone. I just wanted to go back to the same store occupancy change in guidance, so in terms of the tenant move out that you talked about, can you just quantify how big of an impact that was on the same store occupancy guidance?
Laura Clark (CFO)
Yeah. In terms of our same store occupancy guidance, we did reduce the midpoint by about 25 basis points. So, and we reduced the high end by about 25 basis points. In terms of the drivers, the two drivers, rent commencement, timing on vacant units, we pushed out projected commencement into early 2025. That's about half of the drivers. Just given the overall leasing dynamics, where tenants are delaying leasing decisions and overall leasing negotiations are taking a little bit more time, we pushed out that projected timing. I'll note that, on really the 10 largest units that account for the majority of the change, we do have activity on about 6 of those units. So it's more of a function of expecting that commencement to be in Q1 and not Q4.
And then, LL Flooring is about ten basis points.
Nicholas Yulico (Analyst)
Okay. Yeah. Thanks, Laura. So, yeah, just following up on that. So it sounds like the piece that's being delayed to 2025, there's not anything specifically leased for that space, and there's a lease in place. You know, it's just not gonna commence till next year. It's all sort of speculative leasing that is being delayed into occupancy for next year.
Laura Clark (CFO)
Yeah, it's just based on our expectations in terms of commencements and the activity we have in place in the paper that we're trading today.
Nicholas Yulico (Analyst)
... Okay, thanks.
Operator (participant)
Your next question comes from the line of Nick Thillman with Baird. Your line is open.
Nicholas Thillman (Analyst)
Hey, good morning out there. Laura, I wanted to kind of touch on some of the leasing mix dynamics you kind of laid out on the smaller tenants having shorter lease terms. So you've kind of already converted that mark to market on that term. But maybe just looking at your schedule, like, do we kind of view that as since 2026 as kind of more larger leases, that would be greater spreads? Or, like, how should we think about that dynamic?
Laura Clark (CFO)
Yeah, I'm certainly not gonna speak to spreads for next year or 2026 at this point in time. I look forward to providing more, you know, more guidance around our spread expectations when we report fourth quarter earnings and put out 2025 guidance. You know, I think it's important to look at, you know, we have provided the portfolio net effective mark-to-market at 31%, and our cash mark-to-market today is a strong 19% as well.
Nicholas Thillman (Analyst)
Pivoting back to kind of the repositioning, redevelopment sort of bucket, like, how much of that NOI flow through are we kind of expecting? Like, is this a... We could capture half of it loaded into 2025, or is this more of a back half sort of weighted forecast?
Howard Schwimmer (Co-CEO)
Are you asking specifically about the product that we've delivered or the entirety of the pipeline, Nick?
Nicholas Thillman (Analyst)
I'm-
Howard Schwimmer (Co-CEO)
Sorry, go ahead.
Nicholas Thillman (Analyst)
I'm kind of asking particularly, like, what's laid out for the 2027 roll forward. Like, what percentage of that...? I know you guys kind of give stabilization dates, but those kind of flow through. I guess, just on, like, your internal modeling, like, is it logical to see some of that upside in 2025, or are we thinking this is still gonna continue to be pushed to more 2026, 2027?
Laura Clark (CFO)
Yeah, I mean, like, we provide our stabilization timing for every property within the pipeline. So we're gonna see some impacts into 2025, 2026, and 2027.
Nicholas Thillman (Analyst)
So just you're pretty confident on those stabilization dates, or anything in market dynamics have shifted in the last 90 days to make you sway one way or the other?
Laura Clark (CFO)
Yeah, I mean, look, that's why we made the update that we did to some of the timing. And so that's in, you know, our view and what we're seeing in the market today, that's incorporated in our current projections around stabilization dates.
Nicholas Thillman (Analyst)
That's it for me. Thanks.
Operator (participant)
And your next question comes from the line of Mike Mueller with J.P. Morgan. Your line is open.
Mike Mueller (Analyst)
Yeah, hi. I guess what are the attributes of the $90 million of dispositions that you're finalizing? And to the extent that you find acquisitions, how are you thinking today about, I guess, incremental dispositions versus pulling down the forward that you have in place?
Howard Schwimmer (Co-CEO)
Well, hi, Mike, it's Howard. I'll speak to the dispositions. We're not, because usually we are really more comfortable reporting as these happen. But we do. You know, this is, I think, more of a larger amount of product that we are looking at and circling at the moment. So we're excited to be, you know, $44 million year to date and having the other $90 million+ that we're working on. But I think we'd be more comfortable giving you more information about that as we close the various transactions.
Laura Clark (CFO)
Yeah, and-
Mike Mueller (Analyst)
Okay. And... Oh, go ahead. Sorry, Laura.
Laura Clark (CFO)
Yeah, Mike, yeah, I'll answer the second part of your question around how we're thinking about funding. I mean, we have a variety, you know, we've got a pipeline of uses in which to fund. We have a pipeline of acquisitions of about $200 million. We also have about $75 million of additional repositioning, redevelopment to spend through the remainder of this year, and about $200 million next year as well.
Mike Mueller (Analyst)
Got it. Okay. And, maybe last quick one. I think during the quarter, you had sequential occupancy declines of about 200 basis points, San Diego and Ventura. And any color there in terms of, some of the moving parts?
Laura Clark (CFO)
Yeah, it's really a number of properties in San Diego, in particular, average about 15,000 sq ft. There were two larger property move-outs, roughly about 30,000-40,000 sq ft. One of those, actually in San Diego, is already released at a 50% cash spread, and the other one we expect to release at about a 50% cash spread. In Ventura, we had it was made up of about seven properties, averaging 26,000 sq ft, driven by about two large move-outs, still around 40,000 sq ft. Expect to release those at about a 30% cash spread.
Mike Mueller (Analyst)
Got it. Okay, thank you.
Laura Clark (CFO)
Yep.
Operator (participant)
Your next question comes from the line of Blaine Heck with Wells Fargo. Your line is open.
Blaine Heck (Analyst)
Great, thanks. Good morning. Can you talk about AB 98 and the impact on your portfolio? I guess, are there any planned redevelopments or repositioning projects that may not be possible to build out given the increased restrictions? And then on the other side, you know, you expect this to result in better long-term rent growth. Could it actually push tenants into other markets? Just how are you thinking about the net effect of all of the aspects of that bill?
Howard Schwimmer (Co-CEO)
Hi, hi, Blaine. It's Howard. Maybe just high level to start for the benefit of others listening. You know, AB 98 is really viewed more as state-level zoning changes and primarily dealing with setback requirements, near sensitive uses, such as homes, schools, parks, et cetera. And it's really addressing this by buffer zones. Really most impactful to buildings that are logistics projects that are 250,000 ft and larger. Nominal impact to product below that, but certainly some. As far as, you know, impacts for Rexford, you know, really no material risk to us for any of the projects right now we have in our pipeline.
There's no impact at all for repositioning and renovating buildings unless you're gonna add more than 20% to the size of the building. And that's a rare occurrence, you know, in terms of our repositioning. And you know, really, to the latter part of your question or the initial part of your question, I should say, you know, this possibly does create more value in our 50 million sq ft portfolio because of the challenges it does present. But mostly these impacts, you know, are gonna be seen throughout the larger big box markets, you know, out east.
Blaine Heck (Analyst)
Great. Thanks, Howard. Just following up on same store and the decrease that seems to have been driven mainly by occupancy headwinds. I guess when you look at the timing of occupancy commencements on vacant space, which I think you mentioned earlier on in the call, as being a little bit more delayed than expected, and then also movement of properties into and out of the same store pool. I guess, how do you see same store occupancy comps as we move into 2025, and how that could influence same store NOI as we look forward?
Laura Clark (CFO)
Blaine, that's a great question, and we look forward to providing Same Property NOI growth and guidance when we report fourth quarter earnings.
Blaine Heck (Analyst)
Fair enough. I guess, you know, is the LL Flooring asset going to remain in the same store pool?
Laura Clark (CFO)
Okay, that's a good-
Blaine Heck (Analyst)
Or big one.
Laura Clark (CFO)
Yeah, that's a good question. As you know, in terms of LL, LL Flooring, you know, we've this is a property, and I'll just give a little bit more color here. I mean, we this was a. We had to execute a short-term lease with LL Flooring at a rent that was 250% below market. We've been in the process of the this redevelopment. We're actually currently in entitlements. We're very excited to deliver buildings to the market that really can't be replicated, given the regulation that's in place in this particular municipality. So it's a great opportunity to create long-term value.
And importantly, because of the low rent, the 250% below market rent, it's going to have an outsized impact on the occupancy, but not necessarily on NOI. Because obviously of the below market rent. So all that being said, it is a redevelopment, and so we will most likely be moving it into the same property pool next year. I'm sorry, out.
Blaine Heck (Analyst)
Okay, great. That's-
Laura Clark (CFO)
Yeah, that's not in.
Blaine Heck (Analyst)
Yep.
Laura Clark (CFO)
It's already in.
Blaine Heck (Analyst)
Yep, that's helpful. And then just to follow up on some of the questions on your acquisition appetite, you guys talk about the steady state cost of capital. Can you give us any color on where that steady state cost of capital is? I guess just, you know, what's that input when you're evaluating value creation or accretion from deals?
Michael Frankel (Co-CEO)
Hey, Blaine, great to hear from you today. Thanks again for joining us. Michael here. I'll, we don't disclose how we perceive our cost of capital. I'll tell you that our expectations are that our acquisition activity on average is accretive to today's cost of capital.
Blaine Heck (Analyst)
Great. Thanks, Michael.
Operator (participant)
And your next question comes from the line of Vikram Malhotra with Mizuho. Your line is open.
Vikram Malhotra (Analyst)
Thanks for taking the question. I guess maybe a last narrative same time, you'd sort of mentioned that this is sort of maybe the best time to acquire, and it's gonna you know, you'll see why. And I'm just wondering, could you sort of maybe size the opportunity for us today? Like, what's the theoretical, whether it's pipeline or the full opportunity set for you to acquire at, you know, a stabilized yield of X, redevelop it, and then get whatever, hundred, two hundred basis points higher. I'm just wondering, like, has that opportunity set just reduced given market conditions?
Michael Frankel (Co-CEO)
Hey, Vikram, thank you so much for joining us today. Appreciate it. We don't really see the opportunity set having shifted. You know, Rexford's business model is predicated on a pretty unique market opportunity. Almost 2 billion sq ft of product within infill Southern California, over a billion sq ft of it built prior to nineteen eighty, replete with opportunities to create value by buying a lot of these legacy assets, mostly with in-place cash flow, and ability to take them with nominal investment to a substantially higher level of cash flow per share. That market opportunity continues. In fact, I think our access to that, our direct addressable market opportunity with respect to that, is improving over time.
That having been said, we're gonna be exceedingly judicious, careful, and conservative in terms of how we acquire and when we acquire. And I think, you know, this is certainly a market environment where we're gonna have heightened caution and scrutinize our investment opportunities that much more, as we always do, frankly. So I think the key driver is Rexford in that respect, in terms of governing the pace at which we acquire. And I think it's the same posture we take at all phases of the cycle. But we're only gonna focus on the very best opportunities for shareholders.
Vikram Malhotra (Analyst)
That's fair. I was hoping you could give a bit more color on the decision to kind of take away the three-year guide. You know, I know you mentioned market dynamic, but I guess, you know, SoCal or the West Coast has been challenged for a while. So what... Like, could you give some more color? Like, what specifically changed in the last three months for you to pull the guide?
Michael Frankel (Co-CEO)
... You know, I'll just add to Laura's comments briefly earlier, and it's just that, you know, we're really good at industrial real estate in Southern California. You know, creating value in our asset class. We're less good about prognosticating about, you know, two, three years out, where the economy goes, where overall, you know, external factors may go that impact, at the end of the day, decision-making for our tenants. And so I think for us, we've found it's just more prudent to focus on the business at hand, to provide the annual guidance that we have a history of providing, where we have more visibility and transparency into the tenant base. And it does not really reflect any long-term concerns about our infill Southern California market. In fact, I think the backdrop is very favorable for our business and our markets.
Frankly, the health of our portfolio continues to be very healthy by all the metrics that you see, you know, predominantly high occupancy levels, exceedingly low bad debt, et cetera. So it doesn't really reflect concerns about our market or the tenant base. It's really more about, you know, focusing on what we do best, which is creating value in the real estate.
Vikram Malhotra (Analyst)
Okay, and then just last one, two numbers, question. Just, given sort of the high sublet volumes, across the West Coast or parts of SoCal, I should say, do you mind giving us, like, what % of your portfolio is sublet? Number one, and number two, just given all the leasing that you may have already done for the fourth quarter, or probably even the first quarter, just can you give us a sense of where you think the near-term rent spreads are trending? Thank you.
Howard Schwimmer (Co-CEO)
Yeah, sure. Hi, Vikram, it's Howard. In terms of subleasing, this past quarter, actually, the amount of subleasing occurring in our portfolio came down. It was equivalent to about 30 basis points of our occupied square feet, which was comparable to 60 basis points last quarter. And which is really, you know, more, I'd say, overall in line with where our projection in terms of one quarter of 2024. But, you know, to put some numbers around that, you know, the amount of product in our portfolio that was actively on the market for sublease at the end of the second quarter was 1.5 million sq ft, and that's also declined. That's now down to 1.3 million sq ft.
So, subleasing is always a good indication of what's happening in changes in the market, and so, you know, I think that's, you know, at the moment, a bright spot in the market, when you see those numbers start coming in.
Laura Clark (CFO)
And then in regards to leasing spreads that we're seeing quarter-to-date, really coming in at this point in line with our expectations. Our guidance implies spreads in the 40% net effective range and 25% cash range for 4Q.
Operator (participant)
And your next question comes from the line of Samir Khanal with Evercore ISI. Your line is open.
Samir Khanal (Analyst)
Good morning, everyone. Hey, Howard. I guess my question around it is around the Inland Empire. The West was still down about 3%, but certainly you saw a bit of an improvement from the prior quarter when you look at it sequentially. Are you seeing some improvements there? You know, getting sort of less bad as we think about the market bottoming or even stabilizing here?
Howard Schwimmer (Co-CEO)
Well, you know, our average product size in the market, the space size, is 30,000 sq ft, so it's performing much differently than the broader market. You know, rent decline in terms of that product size in the Inland Empire, 50,000 sq ft and under, which is, you know, a lot of the space we have there and throughout the portfolio, is actually, I'd say, slowed down in terms of where you're seeing any of the rent decline. Today it looks like it's happening, you know, more in some of the larger spaces, above 50, you know, well above 100,000 sq ft.
So, you know, it's boding well, I'd say, in terms of how we see the market and really where the average size of 25,000-ish sq ft in our portfolio lies.
Samir Khanal (Analyst)
And if you sort of step away from that Inland Empire, but just kind of look at the broader market in Southern California, are you seeing any sort of green shoots at this point, where you start to say, you know, maybe the market rent growth or market rents start to bottom? I mean, sequentially, you've seen them come down. As we think about 2025, is there any sort of green shoots you were seeing on the horizon that make us kind of feel like that market's starting to stabilize or at least, starting to get less bad?
Laura Clark (CFO)
Thanks, Samir. Yeah, I can maybe provide a little bit more detail around what we saw in the quarter, from a sub-market and size performance, because it really is dependent on sub-market and size. In terms of the third quarter, we saw the smallest declines in rent in the San Fernando Valley, Orange County, and San Diego markets. We saw accelerated declines in Mid-Counties and the San Gabriel Valley. When you look at the market in terms of the size segments, our smaller spaces exhibited relative strength. Spaces under 50,000 sq ft saw less declines in market rents compared to those over 50,000 sq ft.
Samir Khanal (Analyst)
Okay. Thank you.
Michael Frankel (Co-CEO)
Samir, I would just add one thing in terms of green shoots. You know, tenant behaviors, we look at overall tenant behaviors, and we don't see tenants, you know, really shedding space in our portfolio in any material way. And in fact, you know, they continue to lock in very high annualized contractual rent bumps in the leasing activity that we're executing. And I think that the lease bumps that we're signing today, and through the last quarter, are very good leading indicators in terms of tenant expectations and tenant health. And when we see them continuing to lock in, you know, 3.9%-4% on average, you know, annual rent escalators in the leasing activity that they're locking in for the next two, three, four, five years...
You know, I think the tenants are telling us that they expect to stay in the space, they expect to pay more rent, they value the space, they need the space. It's essential for their business. And, so I think, you know, there are green shoots, but you probably have to look at some of the holistically, look at the tenant behaviors.
Samir Khanal (Analyst)
Thank you.
Operator (participant)
Our next question comes from the line of Richard Anderson with Wedbush. Your line is open.
Richard Anderson (Analyst)
Thanks, team. Good morning. So just to comment on perhaps the linearity or, or lack thereof of market rent changes. You mentioned 7.5% down year over year this quarter. The number was down 2% in the first quarter. Which would—what happens if next, next quarter, it's like 7.5% again? Like, I mean, I just wonder, in your mind, is this a linear exercise, where when we see something stop declining, then that's a pretty good sign that, you know, we're getting someplace? Or could this sort of be all over the map, you know, based again on tenant behaviors and, and, you know, the psychological exercise of trying to figure out where they're gonna—where they're headed?
Michael Frankel (Co-CEO)
Hi, Richard. It's Michael. Thank you so much for joining us today. I think as much as we have tried to describe it, frankly, for the last, you know, year and a half or so, which was following, you know, the incredible acceleration and increase in rents we saw during the pandemic, that we expect to see some normalization, and that the normalization should, based on tenant behaviors we're observing, that the normalization should be, you know, some moderate rent declines, ±1%-3% sequentially, quarter over quarter. You might even see some gains in certain sub-markets, quarter over quarter. But not to expect anything really dramatic, based on the tenant behaviors we continue to see.
You know, when that ends and we finally see, you know, rent growth kick in more strongly, it's just hard to say. You know, it's very difficult to predict that sort of inflection point. But that having been said, you know, we're really comfortable with the backdrop. You know, tenant health in our portfolio continues to be extremely strong. And we do think it's a very favorable backdrop that portends well for market rent growth. Just hard to predict exactly when you'll start to see that inflection.
Richard Anderson (Analyst)
Okay, fair enough. And so when you think about that dynamic, minus two to minus seven and a half, and, you know, wherever it may go from here, how is it that you underwrite the next redevelopment and repositioning project relative to where you expect market rents to be? Are you, are you haircutting that even more, to make it pencil? Just... I'm just curious how you get comfortable redeveloping projects, with, you know-
Michael Frankel (Co-CEO)
Yeah
Richard Anderson (Analyst)
... the move down in market rents.
Michael Frankel (Co-CEO)
By the way, just to clarify, that -2% ±, and then -7.5%, those aren't apples to apples. The -7.5% would be a year-over-year comparison, whereas the -1% or 2% would be a sequential change. So we didn't-
Richard Anderson (Analyst)
Uh-
Michael Frankel (Co-CEO)
We're not seeing any-
Richard Anderson (Analyst)
No, I think that's, unless I'm reading it wrong, it was minus two down in the first quarter of this year, on an apples-to-apples basis. I might... I believe I see that right, but perhaps I'm wrong. But at any rate, the question still applies on how you underwrite redevelopments in this current environment.
Michael Frankel (Co-CEO)
So we take a granular bottoms-up approach on redevelopments, and we take a close look at where, you know, where we think rents are for the given opportunity and space, and we really do take a bottoms-up approach. And we take into consideration where rents are today and where they're trending.
Richard Anderson (Analyst)
Okay. And apologies if I have that number wrong. I very well might have it wrong. What about space utilization irrespective of occupancy? Do you have a read on that, and how that's competing with need for more space from your tenants?
Michael Frankel (Co-CEO)
I think, as I mentioned earlier, you know, we continue to see very high utilization among our tenants in their spaces within our portfolio. And again, that, we think, contributes favorably to the backdrop that we see. That it's more about decision making and less about, you know, fundamentals. And so, you know, again, we continue to see, you know, very favorable levels of utilization within the portfolio.
Richard Anderson (Analyst)
Okay, last question. Status of the CFO hire?
Michael Frankel (Co-CEO)
That's a great question. We're making great progress, and we're gonna let you all know as soon as we have a definitive answer. But we're super excited at the progress, and super excited for the company and shareholders in that respect.
Richard Anderson (Analyst)
Okay, wonderful. Thanks very much.
Operator (participant)
And your next question comes from the line of Brendan Lynch with Barclays. Your line is open.
Brendan Lynch (Analyst)
Great. Thanks for taking my question. On LL Flooring, where are they on the watch list? And more broadly, how many tenants are currently on the watch list?
Laura Clark (CFO)
Were they on the watch list? It was a bankruptcy, so it did hit our watch list. In terms of the overall watch list, it continues to be very consistent with what we've seen throughout the year. We have less than 10 tenants on the watch list, and really no changes in terms of trends in terms of industry concentration. I mean, I'll note that our bad debt levels continue to be very low, very healthy. Year to date, we're at 50 basis points, and I'm projecting 50 basis points for the full year.
Brendan Lynch (Analyst)
Great, thanks. That's helpful. And then on dispositions, I know you don't want to speak too much about the $90 million that could be coming, but can you discuss the characteristics of the assets you have sold year to date, and how we think, how we should think about what you're prioritizing when disposing of assets?
Howard Schwimmer (Co-CEO)
Hi. Hi, everyone. It's Howard. Yeah, for the most part, they've been some multi-tenant type projects, very management intensive, on our, you know, for our team. And not much growth that we were projecting going forward. The small building that we just transacted on was 25,000, I think 25,000 and change, that we did a light renovation. And the equivalent cap rate to the projected rent on that versus the sale was very attractive. I believe it was in the low fours on a market rental rate. So you know, they're typically assets where really there's no more value creation opportunity or sometimes, you know, it can have to do with, you know, the margin that we're achieving on an asset.
Just, there's some of the more intensive management or capital needs that we might be seeing coming up that we'd like to avoid, because they're not gonna produce any incremental value.
Brendan Lynch (Analyst)
Great. Thank you for the color.
Operator (participant)
That concludes our question and answer session. I will now turn the call back to management for closing remarks.
Michael Frankel (Co-CEO)
We'd like to, on behalf of the company and our board of directors, we'd like to thank everybody for joining us today. We wish you a great rest of the quarter, happy holidays, and we look forward to reconnecting next quarter.
Operator (participant)
Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.