Rexford Industrial Realty Inc

NYSE:REXR

Earnings Call Transcript 2023-Q1

[Operator]

Greetings! And welcome to Rexford Industrial Realty Inc., First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the call over to David Lanzer, General Counsel. Thank you. You may begin.

[David Lanzer, General Counsel]

We thank you for joining Rexford Industrial’s first 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 www.rexfordindustrial.com.

On today’s call, management’s remarks and answers to your questions may contain forward-looking statements as defined by Federal Securities Laws. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information about these risk factors, please review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future.

In addition, certain financial information presented on this call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP reconciliation and an explanation of why such non-GAAP financial measures are useful to investors.

Today’s conference call is hosted by Rexford Industrial’s Co-Chief Executive Officers, Michael Frankel and Howard Schwimmer; together with Chief Financial Officer, Laura Clark. They will make some prepared remarks, and then we will open the call for your questions.

Now, I will turn the call over to Michael.

[Michael Frankel, Co-Chief Executive Officer]

Thank you, David. I'd like to welcome everyone to Rexford Industrial’s first quarter 2023 earnings call. I will begin with a brief introduction. Howard will discuss our operations, followed by Laura, who will discuss our financial results and guidance.

Our strong first quarter results reflect our entrepreneurial approach to creating value and the strength of the infill Southern California Industrial Property Market. For the first quarter, Rexford increased earnings or FFO per share by 8%, enabled by a full 34% increase in core FFO, and we grew consolidated NOI by 33% compared to the prior year quarter, driven by strong and accretive internal and external growth.

We completed a robust 1.8 million square feet of lease activity during the quarter, achieving leasing spreads of 80% on a GAAP basis and 60% on a cash basis. Interestingly, if we exclude one legacy renewal on a lease with the County of Los Angeles, who exercise their 3% fixed option, our leasing spreads were 97% on a GAAP basis and 77% on a cash basis.

The estimated mark-to-market for in-place leases throughout our entire portfolio is 66% on a net effective basis and 52% on a cash basis, which alone is projected to contribute an incremental $1.90 of core FFO per share, equal to a full 89% increase assuming today's market rents, with the remaining weighted average lease term of just under four years. In addition, our team completed $762 million of investments for the quarter.

Tenant demand and market occupancy remain at historically high levels within infill Southern California, the strongest industrial market in the nation with a virtually incurable supply/demand imbalance continuing into the foreseeable future.

From an operational perspective, we believe Rexford is favorably positioned to out-compete within our markets, driven by two key facets of our business. To begin with, our mandate is to own the best locations and the most functional product within our submarkets. Our proactive value-add repositioning work positions our portfolio to outperform through economic cycles due to our superior quality and functionality.

Based upon our experience and the relative performance of our portfolio today, Rexford’s higher quality portfolio is expected to continue to outperform the lower quality product that makes up the vast majority of our infill markets, which includes over 1 billion square feet of product built prior to 1980.

Secondarily, we continue to see substantial new tenant demand from a range of sectors that may not be as prevalent in other national markets, from the electric vehicle sector to food and aerospace to name a few. We're also seeing strength and incremental demand from the 3PL and e-commerce market as Southern California, the nation's largest regional consumption base, continues to be under penetrated in terms of short timeframe and omni-channel delivery capability.

By way of indication, our customer solutions and leasing teams are proactively tracking over 40 million square feet of leasing requirements within infill Southern California. This includes our active engagement on over 3 million square feet of tenant requirements that are proprietary to Rexford through our strategic customer outreach program.

As we look forward, we have substantial embedded internal NOI growth estimated at 35%, equal to an incremental $175 million of NOI contribution over the next 24 months, as we roll deeply below market in-place leases to higher market rents, lease up our repositioning assets, and realize incremental NOI contributions from our recent acquisitions.

With regard to our external growth and investment activity, our team is leveraging our deep, sharp shooter advantage and proprietary access to the infill Southern California market. We are capitalizing upon current market dynamics and diminished levels of buyer competition to achieve superior investment yields that are the strongest we've seen in well over a decade. Our investing activity is positioning Rexford for a very favorable cash flow and net asset value growth into future periods.

Moving to our capital structure, we continue to maintain a fortress-like, best-in-class balance sheet at about 13.6% net leverage to total enterprise value, affording the company the ability to protect against economic uncertainty, while positioning us to capitalize upon highly accretive internal and external growth opportunities.

Above all else, we thank our Rexford team for your tremendous work and dedication that continue to set our great business apart.

And now, it is my pleasure to hand the call over to Howard.

[Howard Schwimmer, Co-Chief Executive Officer]

Thank you, Michael, and thank you everyone for joining us today. I also want to complement our Rexford team for their excellent performance this past quarter. Rexford began the year delivering strong results, a testament to the superior quality and functionality of our portfolio and the strength of our markets.

Vacancy across our infill Southern California markets continues at historically low levels at 1.5% for the quarter, according to CBRE. In regard to market rent growth within Rexford's portfolio, we realized approximately 13.5% year-over-year rent growth.

During the quarter we saw the Rexford portfolio outperform the overall infill Southern California market, which is largely comprised of lower quality and lower functionality product. By way of example, DBRE indicated negative market adsorption in the central Los Angeles market for the quarter, while the Rexford Central LA portfolio in contrast had net positive absorption. Interestingly, the negative adsorption indicated by CBRE was principally driven by lower quality dysfunctional buildings vacated during the quarter.

Additionally, CBRE indicated an increase in overall market sub-lease activity and again, in stark contrast, Rexford's portfolio experienced a reduction in sub-lease activity to a historically low level of 10 basis points of occupied square footage for the quarter, well below our 50 basis point average over the last four years. These key leading indicators reflect Rexford's ability to outperform due to our higher quality portfolio, operating expertise and information advantage.

As Michael mentioned, over the next 24 months we are positioned to deliver 35% projected internal NOI growth. This is comprised of $52 million of incremental NOI contributions as we've rolled below market leases with a weighted average mark-to-market on 2023 and 2024 expirations, estimated at 78% on a net-effective basis and 63% on a cash basis, plus $24 million of incremental NOI generated from contractual annual rent steps embedded with our leases. And $56 million of incremental NOI from lease-up of repositioning and redeveloping projects over the next 24 months.

Lastly, incremental NOI of $43 million from acquisitions closed year-to-date. Our proven investment strategy and data-driven acquisitions methods continued to enable the execution of extraordinary industrial real-estate opportunities, driving substantial cash flow growth, including two transactions closed subsequent to quarter-end. Year-to-date investment activity is now $804 million, electively generating an initial yield of the 5.1% and a projected 6% unlevered stabilize yield on total cost.

Over 85% of these acquisitions were sourced through off-market or lightly marketed transactions. In addition, we exposed one property for $17 million with an unlevered IRR of 16.8%. Furthermore, our pipeline of highly equated transactions under contract or accepted offer is about $120 million, which are subject to customary closing conditions. These forthcoming investments are projected to generate an aggregate initial yield of 5.4%, growing to a 6% stabilized unlevered yield on total cost.

Finally, we have 3.6 million square feet of value-add repositioning and redevelopments in process or projected to start within the next 24 months at a total projected investment of nearly $1.3 billion, with a remaining incremental spend of approximately $415 million. These investments are projected to deliver an aggregate unlevered yield on total investment of 6.4%, representing an estimated $525 million of value creation, assuming today's market rents and no further rent growth.

Now, I'm pleased to turn the call over to Laura to discuss our financial results.

[Laura Clark, Chief Financial Officer]

Thank you, Howard. Our first quarter results were strong and ahead of expectations. Same property NOI growth for the quarter was 10.7% on a cash basis and 7.3% on a GAAP basis, driven by higher rent spreads and lower concessions. Average same property occupancy and ending occupancy were both 98% for the quarter and in-line with expectations.

Strong tenant demand and landlord pricing power continues to be reflected in the annual contractual rent steps in our executed leases. In the quarter, annual contractual rent steps embedded in our executed leases were 4%. Excluding the legacy fixed renewal option Michael mentioned, annual contractual rent steps were 4.2% and largely in-line with 2022. Notably the average annual rent steps for our total portfolio continued to increase and are now at 3.4%.

The continued strong credit of our diverse tenant base is demonstrated by low levels or bad debt as a percentage of revenue. In the quarter, bad debt as a percentage of revenue was 20 basis points, outperforming our guidance expectations and well below the historical average of 50 basis points. This strong operating performance, combined with our accretive investment drove first quarter core FFO per share growth of 8% over the prior year quarter.

We continue to maintain our low leverage fortress balance sheet that uniquely positions Rexford to capitalize on accretive growth opportunity both internally and externally, enabling us to execute on our proven business model through economic cycles.

At quarter end, net debt to EBITDA was 3.6x, below our target range of 4x to 4.5x. In the quarter we demonstrated access to accretive debt and equity capital sources. We settled 11.5 million shares of common stock associated with forward and regular way equity sales for a total of $657 million in gross proceeds, and we completed a public bond offering issuing $300 million of 5% senior unsecured notes due in 2028.

In the quarter we also fixed our remaining floating rate debt through a series of swap transactions. As a result, 100% of our debt is now fixed. At quarter end we had total liquidity of $1.25 billion, encompassing $253 million of cash-on-hand and full availability under our $1 billion revolver. We also have approximately $1.1 billion of remaining capacity under our ATM program.

Turning to guidance, we are increasing our 2023 core FFO guidance range to $2.11 to $2.15 per share, from our previous range of $2.8 to $2.12. Our revised guidance range represents 9% year-over-year earnings growth at the midpoint. As a reminder, guidance does not include acquisitions, dispositions or related balance sheet activities that have not closed, and a role forward detailing the drivers of our revised range can be found in our supplementals.

Key highlights include our same property NOI growth has been increased to 9.5% to 10.25% on a cash basis and 7.75% to 8.5% on a GAAP basis, a 12.5 basis point increase of the midpoint, driven by strong performance in the quarter. We continue to project cash leasing spreads of 55% to 60% and GAAP leasing spreads of 70% to 75%; average same property occupancy of 97.5% to 98%, bad debt as a percentage of revenue of 35 basis points and year-end occupancy of about 98%. Acquisitions closed since our previous guidance are projected to contribute approximately $18 million of incremental NOI.

Lastly, our components of guidance also include the impact of our equity issuance in the quarter, and timing associated with repositioning and lease-up outside of our Same Property pool.

Finally, I want to thank our dedicated Rexford team for your passion and commitment that positions Rexford for future success.

Thank you all for joining us today and we now welcome your questions. Operator.

[Operator]

Thank you. [Operator Instructions]. Our first questions come from the line of Camille Bonnel with Bank of America. Please proceed with your questions.

[Camille Bonnel, Bank of America]

Hello! Understand your mark-to-market could be changing depending on the leasing or investment activity done in a particular quarter. Could you comment on what the portfolio mark-to-market would have been excluding the first quarter acquisition?

[Laura Clark, Chief Financial Officer]

Hey Camille, its Laura. Thanks so much for joining us today. I think the better barometer of our continued expansion in market rent growth within our market is actually reflected in our same property mark-to-market, and that is because the same property mark-to-market would remove nodes from changes in the pool sequentially that you discussed, such as acquisitions or moving the property to reposition or redevelopment.

So in terms of our same property mark-to-market, over the past four quarters our same property mark-to-market has actually increased by 200 basis points, and that is an increase to 75% from 73% four quarters ago in the second quarter of 2022. So importantly, this same property mark-to-market reflects continued market growth that we're experiencing, even as we've rolled leases in the same property pool to market at 86% spreads on a net effective basis over the past four quarters.

In respect to the overall mark-to-market and your question around that change, which was about 600 basis points, a number of factors certainly impact that change, including the mix of properties that we discussed, that you mentioned. And in the quarter that impact was outsized driven by a higher percentage of sale lease back within our acquisition pool. These properties certainly provide us with immediate cash flow growth and the ability to unlock substantial value creation through redevelopment in the near-to-intermediate term.

But I think importantly, our market rent growth forecast is unchanged at about 15% for the full year and infill Southern California, and the change in our overall portfolio mark-to-market is not a reflection of market conditions changing. It's certainly just a reflection of rolling those properties to market, rolling properties to market at higher spreads, as well as the change in the pool.

[Camille Bonnel, Bank of America]

I appreciate all the color there. My second question was, acquisitions this quarter were notably high. Given expectations we might get better clarity around pricing this year and the pipeline you're tracking, how should we be thinking about the magnitude and cadence throughout the rest of this year?

[Howard Schwimmer, Co-Chief Executive Officer]

Thanks Camille. Its Howard. We really aren't able to give you the guidance necessarily on how much we plan to buy through the remainder of the year. We're really focused on the opportunity said versus a goal in terms of any dollar amount. What's interesting though is if you think back on our first quarter call, we mentioned that we had, I think it was about $100 million of acquisitions under NOI or contract and on the closing year-to-date now about $804 million.

What we're finding in the market is that there's some opportunities we've been working on for quite a while that just took longer in terms of the gestation timeline. And there's just so much disruption and different needs that are emerging out there that there's a lot of deals that come to us and happen very, very quickly, but we just can't predict in what volume or when those type of deals will close.

[Camille Bonnel, Bank of America]

Understand. And finally, just regarding the CBRE case study on Central LA. Can you speak more broadly to whether net absorption is still trending positive for more competitive inventory? We've been hearing due to the combination of lower imports into the west coast ports, rising occupancy, cost for tenants and older stock that demand has been shifting to more affordable locations likes Inland Empire in Phoenix. Any thoughts on this would be appreciated.

[Michael Frankel, Co-Chief Executive Officer]

Hey Camille, its Michael. Thanks so much for joining us today. I think generally we're not really seeing an impact related to the factors that you described, whether it's imports or otherwise. And so comparable and competitive product to Rexford, we continue to see the type of demand dynamics that you see in our results frankly, and net positive absorption through the Rexford portfolio I think is representative of that competitive set. And so you know – and remember, our tenant base throughout the market is disproportionally serving regional consumption, and so inherently less impacted by externalities like changes associated with trade flows, even impacts from the ports in prior years where we've seen slow-downs and shut-downs.

We didn't really see any discernible change in tenant demand in infill Southern California and certainly not within our portfolio. So I think it's just really important to remember the nature of the tenant in relation to some of these external factors.

[Camille Bonnel, Bank of America]

Thank you for taking my question.

[Operator]

Thank you. Our next questions come from the line of Nate Crossett with BNP Paribas. Please proceed with your questions.

[Nate Crossett, BNP Paribas]

Hey! Thanks for taking the question. Maybe one on pricing and I'm not sure if I heard it correctly, but I think you said embedded rent steps this quarter was 4.2% on new deals, and I think last quarter it was 4.4%. So my question is, have you kind of reached the ceiling on that? And what are the conversations with customers like? Are you getting more pushback on those lease escalations?

[Laura Clark, Chief Financial Officer]

I’d say – so hey Nate! Thanks so much for joining us today. In terms of our rent step buying in the quarter, rent steps on new deals was 4.3%. Overall in the portfolio it’s 4% and as I mentioned in the prepared remarks, that was impacted by a fixed renewal option that we have that is up 3%. If that's excluded and you just look at the new deal, its 4.3%.

And you know, looking back at our rent steps that we signed in 2022, those averaged 4.3%, so really in line from a new perspective. And I say that that's where we’re – it feels like we're settling out in that 4% to 4.5% range from an embedded rent step perspective, which I think is certainly a reflection of the strengths of the market and the continued landlord pricing power that we have in place, as well as the high-leasing spreads that you're seeing as well.

[Nate Crossett, BNP Paribas]

Okay, that's helpful. And then maybe just one, how should we think about leverage levels for the balance of this year? You know you guys are below your kind of 4% to 4.5% range that you've given in the past. What's the tolerance to take on more leverage here? And then also, how are you thinking about addressing the 2024 debt maturity?

[Laura Clark, Chief Financial Officer]

Yeah Nate, in terms of leverage, number one focus for us is continuing to maintain a low leverage balance sheet. When we think about the 4x to 4.5x area range from a net debt to EBITDA perspective, we're perfectly fine operating below that level, because at the end of the day we want to maintain this low leverage balance sheet, because it protects us through all business cycles, and it enables us to continue to be opportunistic for future growth opportunities.

So when we think about how we're going to fund going forward, we're going to look at you know – we're going to look at attractive and accretive sources of capital that allow us to execute on those opportunities, with a focus on maintaining that low leverage.

In terms of the 2024 debt maturity, that's primarily made up of a $400 million term loan that has two one year options, so we do have the ability to extend that to effectively 2026.

[Nate Crossett, BNP Paribas]

Okay, thank you.

[Laura Clark, Chief Financial Officer]

You’re welcome.

[Operator]

Thank you. Our next question is come from the line of Craig Mailman with Citi. Please proceed with your questions.

[Craig Mailman, Citi]

Hey everyone! Laura, maybe just to circle up with the earlier question about the 600 basis point decline in the mark-to-market, could you give just a little bit more detail on the component to that 600 basis point decline?

[Laura Clark, Chief Financial Officer]

Yeah, absolutely correct. Thanks for joining us today. So of the 600 basis point decline, about 400 basis points of it is the impact from – a negative impact from leasing activity in the quarter as we roll pieces to market at significant spreads, 80% on a GAAP basis, 60% on a cash basis, and then another 100 basis point drag from the embedded growth within the portfolio. I mentioned in the prepare remarks that our contractual rent steps now average 3.4%. So where the base rent and the apartment [ph] growth, the base rent continues to grow within the portfolio, which is great.

So that, so we get that 400 basis point impact from rolling leases and that portfolio growth, and then layer into that a 300 basis point impact from the change in the mix of properties that I mentioned earlier. And that's mostly driven by that outpaced impact from acquisitions we closed in the quarter that had a few more sale lease backs in place that don't have a mark-to-market.

And then lastly, the positive offset to that is the sequential market rent growth that we saw in the quarter of about 3%.

[Craig Mailman, Citi]

So, if we think about how much of your portfolio is maybe these positive carry sale leasebacks that are ultimately developments down the road, what do you think the percentage of your book value or however you want to look at it? Kind of how – what's the magnitude when you think of that piece of the portfolio overall if you were to strip that out; maybe where that would kind of bring the mark-to-market estimate. Let’s say the base rent's just in the quarter, but is there another couple of hundred basis points throughout past acquisitions that are still in the other deals you haven't gotten to start with developments on yet?

[Laura Clark, Chief Financial Officer]

Yeah Craig, I think it's a good question. I think the latest thing about, connected to the embedded, there's two ways to think about it. I think we can go back to the same property mark-to-market that I talked about in terms of we're seeing if you strip all of that out, which is that noise from the mix of properties and those acquisitions, the same property mark-to-market has increased over the past four quarters and has upped to 75% from 73% four quarters ago. So I think that's a really good indication of the market rent growth and the strength of the market today.

I think the other important component to focus on is the embedded growth within the portfolio and the components of that. So mark-to-market is only one component of the internal growth, internal embedded growth within the portfolio. So over the next 24 months we're projecting $175 million of NOI growth, and that includes repositioning and redevelopments that are currently in process or in the pipeline, and will deliver about $56 million of NOI, and then that's fully by the mark-to-market contribution of about $52 million and then another $24 million from rent steps. So I think it's important that we’ve got a – it's important to really focus on all the components of our embedded growth, not just the mark-to-market.

[Craig Mailman, Citi]

No, and that's fair. I guess just one more point on the mark-to-market just from a bigger picture. So if we just exclude that 300 basis points from acquisition right, it would have been a net 200 basis point fall off, just given you know that basically realizing that mark-to-market through leasing. I mean, should we be thinking about this level, kind of what you guys have this quarter as the kind of the peak, unless market rent growths reaccelerate way beyond the 15% you guys said in here, that every quarter we should be losing about 100, 200 basis points of that mark-to-market, just because of the realization your losing?

[Laura Clark, Chief Financial Officer]

Yes Craig, it's a good question. We have not provided guidance around where we expect for the mark-to-market to go over time, but obviously we've got significant embedded growth within our rent steps for projecting leasing spreads on a net effective basis of 70% to 75% this year and 55% to 60%. So we are going to – we do expect to continue to roll leases to market and that will have an impact on the overall portfolio mark-to-market.

[Craig Mailman, Citi]

And then just separately, the case study was helpful, how – that you went through. I'm just kind of curious, because they clearly are – its growing concern with the allied Inland Empire given some of the broker reports out there. I mean, you guys did a million of leasing in the first quarter. Is there any way you could give us some updated of maybe what you've done April-to-data and what you think you'll close in April to give a sort of a run rate. Are we consistent with that 1.8 or has there been a fall off of that? Just kind of curious on the trend post-quarter end?

[Michael Frankel, Co-Chief Executive Officer]

Well, maybe I'll jump in here Craig. We actually did see a little bit of a slowdown in the market in March from some of the banking disruption, but things really picked up again as we headed into April. So we have a lot of activity on really most all of our spaces that are vacant. Rents that we’re negotiating in many cases are above the rents we've underwritten. So we feel really great about where the market's at and the activity we're seeing right now.

[Craig Mailman, Citi]

Great! Thank you.

[Operator]

Thank you. Our next questions come from the line of Blaine Heck with Wells Fargo. Please proceed with your questions.

[Blaine Heck, Wells Fargo]

Great, thanks. Good morning. Michael, in your prepared remarks, you talked about tracking 40 million square feet of requirement in the market. You just put that into historical context, what's the average amount of requirements you're typically tracking in the market and maybe what was it at the peak of demand during the pandemic?

[Michael Frankel, Co-Chief Executive Officer]

Hey Blaine! Thank you so much for joining us today. I appreciate the question.

Yes, in regards to sort of historical context, this is probably not far off. It was probably a little more intense during the frenzied time, during the mid and later stages of the pandemic, but this is representative of very healthy levels. Certainly we’re in a very strong market, an exceptional market going into the pandemic, and arguably this is probably similar levels that we're seeing at that time.

But I think importantly, this is a window into the market that is not available to all players in the market. And when I talk about the amount that we're tracking, particularly the over 3 million square feet that is proprietary to Rexford, you know that is a lot of Rexford driven, proactive activity and engagement in the market. That is the result of our focused approach to infill Southern California.

You know we have a dedicated team. We call them the customer solutions team. At Rexford it’s a separate department in addition to our leasing team, you know who are solely mandated with making sure that we are in front of and having conversations and engaged and having the best relationships in the market with all levels of emerging tenant demand, whether they are currently our tenants or whether they are perspective or potential tenants.

And so when we talk about tracking, that's not necessarily just sort of what's available to all market participants, and I think that's a very important aspect of the work. Nobody has better information in infill Southern California than we do. We’re on average consummating a lease, a new lease or renewal, more than two lease transactions every business day and you know combined with that productive outreach into the market, we really do have sort of a unique window into activity and I think you're seeing that flow through the results frankly. As Howard highlighted in our prepared remarks, you know kind of differentiated from the marketplace.

[Blaine Heck, Wells Fargo]

Great! Thanks for that, Michael. Also, in the presentation we noticed first year – first quarter year-over-year rent growth was around 13.5%, which obviously I think indicates that you're expecting some year-over-year acceleration in the rest of the year to hit your 15% target. Can you just talk about what gives you confidence in that number and whether there was anything nuanced in the first quarter, whether it be tougher comps from last year or anything like that?

[Michael Frankel, Co-Chief Executive Officer]

Well, I'll just comment briefly and then maybe Howard… [Cross Talk] Go ahead Howard. [Cross Talk] I was just going to comment briefly, and then Howard can continue with some more detail. But I think as Howard just noted a few minutes ago, you know we actually had a – call it – I wouldn't call it a pause. Well maybe a slight calming effect in the latter part of Q1. But we're seeing things pick up again, and it's similar to what we saw during Q4, and based on the current activity we're seeing in the market, I think that's what gives us the comfort, and with that I'll turn over to Howard for any more detail.

[Howard Schwimmer, Co-Chief Executive Officer]

You covered it. Thank you.

[Blaine Heck, Wells Fargo]

All right, great. The last one for me, can you talk about the potential for strike at the ports and maybe how that could affect your portfolio from a leasing perspective?

[Michael Frankel, Co-Chief Executive Officer]

Just briefly on the port activity and what's happening there, you know we've seen this before. The port negotiations with the dock workers have been contentious in prior periods. You know in 2002, 2014 we even saw slowdowns and shut downs at the port, and in our prior experience we've never seen any discernible impact to our tenant demand. So we do expect that the negotiation with the dock workers will be resolved hopefully in the near term, but we're not seeing any impact with regard to our tenant base. Remember, our tenants are disproportionately serving you know as local regional consumption directly to businesses or indirectly through businesses or directly to consumers.

These sorts of disruptions at the port or changes in trade flows are going to impact the big box markets that are focused more on super regional trade and distribution. But we really had never demonstrated impact to our inflow markets.

[Blaine Heck, Wells Fargo]

Great. Thank you all.

[Operator]

Thank you. Our next questions come from the line of Nick Thillman with Baird. Please proceed with your questions.

[Nick Thillman, Baird]

Hey! Good morning out there. Maybe touching on leasing a little bit, retention seems pretty high generally, but maybe on the 20% that doesn't renew, what's the usual reason for leaving?

Is it expansion space or rents? Are they getting priced out of the market? Just trying to get a picture of kind of the credit quality?

[Howard Schwimmer, Co-Chief Executive Officer]

Hi Nick, it's Howard. There's not one real driving reason on some of those vacates. A lot of them are growing; a lot of them are relocating and there are you know, I was looking at some data in Vernon. We were talking about some of the larger amount of vacates there. There was one 300,000-foot building that was low-clear, inferior in quality and that kind of moved to Orange County where they had other space. So a lot of it is moving around the markets and really very little movement out of the markets.

You know as Michael mentioned, most of the tenants here are focused on the consumption that's occurring, and frankly anyone that didn't have to be there has left the Southern California market many years ago, where their businesses didn't require them to be in the market there.

[Laura Clark, Chief Financial Officer]

Hey Nick, and also something in terms of the credit quality per your questions, you know we continue to see very low levels of that below our expectations and certainly below what we've seen pre-COVID. This quarter coming in at 20 basis points and that's certainly lower than historical averages of about 50 basis points pre-COVID.

Our tenant base continues to be very strong and exhibits stability. Just to put the numbers around that, our watch list currently represents the lowest percentage of ADR over the past several years. We only have six tenants that we’re currently monitoring on that watch list of over 1,600 tenants. So we're continuing to see very strong performance out of our tenant base.

[Nick Thillman, Baird]

That's very helpful. And then maybe turning to the acquisition pipeline, have you seen any sort of shift, the types of assets in there or maybe more value-adds versus core and that you’ve mentioned a little bit more sale lease back in this quarter. So just has that mix shifted at all or anything more interesting than other segments today.

[Michael Frankel, Co-Chief Executive Officer]

I think a lot of the acquisitions we did, probably almost 60% in the first quarter had some value-add component. Although what’s interesting is very, very little of what we thought year-to-date didn't have income in place. The inbound yields on the year-to-date acquisitions are about 5.1% with projected stabilization of 6%. And so today we have more opportunities to buy assets than have strong cash flow in place and so we've sort of been focusing and looking for those type of opportunities in the market at the moment.

[Nick Thillman, Baird]

That's it for me, thanks.

[Operator]

Thank you. Our next question is coming from the line of John Kim with BMO Capital Markets. Please proceed with your questions.

[John Kim, BMO Capital Markets]

Thank you. Good morning. For various reasons there has been a pick-up in on-shoring or near-shoring, and I was wondering how you think that impacts your markets. And if this trend continues, are there markets outside of South Cal that look potentially attractive to you?

[Michael Frankel, Co-Chief Executive Officer]

Hi John! Thank you so much for joining today. And yeah, there may be a trend to near-shoring or on-shoring, but we're not really seeing an impact. We don't expect to see an impact with regard to our tenant base, because again they are disproportionately serving consumption. So they are less concerned with where the goods come from, so we don't really see that, which generally is probably a good thing for our tenants’ net-net.

And no, we're not really looking at other markets. We think that we're focused on the strongest market in the country. We currently have a near 2% market share in infill Southern California. This is where we believe we can create the most value. I think I mentioned in my prepared remarks, for instance we have over 1 billion square feet built before 1980 right here in our own backyard. So we have a nearly limitless pallet of value creation in front of us, probably for many management teams to come at Rexford. So no, we're not looking and we don't really have the view on other markets.

[John Kim, BMO Capital Markets]

Okay. Your tenant improvement costs were low this quarter compared to prior quarters. I'm wondering if this is just the sign of the market or is this quarter just unusually low and we should see it go back to trend later this year?

[Laura Clark, Chief Financial Officer]

Hey John, I think this quarter's just unreasonably low. We had a – we did a fair volume of renewal versus new leasing activity this quarter and have not seen a material change in terms of TI's. They've actually been really low for the past several quarters and expect for that trend to continue.

[John Kim, BMO Capital Markets]

Got it. Thank you.

[Operator]

Questions come from the line of Vince Tibone with Green Street. Please proceed with your questions.

[Vince Tibone, Green Street]

Hi! Good morning. Could you discuss how you view your cost of capital today? It's just a bit more complicated than normal given you’re doing sale lease back at low five initial yield, while you're implied cap rates in the low fours. So that's on today's NOI and obviously there's a big mark-to-market there.

So just how do you think about the attractiveness as you're talk of equity you were making, you know making some of these acquisitions in the first quarter?

[Laura Clark, Chief Financial Officer]

Hey Vince, thanks for your question. We will continue to be, we have been and will continue to be extremely selective and focused on opportunities that are going to drive accretive cash flow and long-term NAV growth.

As we've discussed in the past, we take a long-term view on our cost of capital and that's how we're making our capital allocation decisions today. Our valuation remains very attractive and when you take into account the higher yields that which we’re talking to today, 6% on a stabilized basis. You know even at today's higher cost of capital for every dollar that we invest, that investment is 40% more accretive to earnings or core FFO compared to our 2022 investment.

So said another way, the higher yields that which we're solving to today are more than overcoming today's higher cost of capital and we're driving substantially more accretions.

[Vince Tibone, Green Street]

That's helpful color. Are you able to share maybe what the unlevered IRR you're expecting on that kind of fixed stabilized deal? I'm just curious kind of what you guys are solving for on an unlevered IRR type basis.

[Howard Schwimmer, Co-Chief Executive Officer]

We look at IRRs as a guide post on some of the acquisitions. But we're mainly focused on the cash flow and as Laura mentioned, the accretiveness of the cash flow that we're generating for these investments.

[Vince Tibone, Green Street]

Okay, got it. And then another one for me is just on kind of the sale lease back activity. I'm curious if you think any of the sale lease back transaction were a direct results of the banking crisis and tighter data availability for some of these users who can make a sale lease back more attractive to them, and if that's the case, if you think sale lease back maybe kind of a growing part of the acquisition pie over the next few quarters or so.

[Howard Schwimmer, Co-Chief Executive Officer]

Well, we've always done sales lease back transactions. We can't predict the timing when they happen, but obviously this quarter had more sales lease backs than others. It could very well be a more attractive source of capital to some of the people we're working with, but it's just really hard to predict going forward what that volume could be if it would be increasing or more in line of what we've seen in the past.

[Vince Tibone, Green Street]

Okay, great. Thank you.

[Operator]

Thank you. Our next question is coming from the line of [inaudible], Please proceed with your questions.

[Unidentified Analyst]

Hi! Good afternoon. Thanks so much for taking the questions. Maybe just first one, the dispersion you referenced, that of your own portfolio versus peers that you're starting to see, I'm assuming that's a bit of a change versus say the last two years when sort of everything was doing very well. Can you maybe just give us some thoughts on or maybe more color and anecdotes on how much just dispersion can widen as we go forward in terms of the vacancy or market rents or maybe even like TI packages?

[Michael Frankel, Co-Chief Executive Officer]

Hey Vikram [ph], its Michael. Thank you so much for joining us today. Maybe I'll talk a little bit how the dispersion is reflecting in our performance and then maybe Laura and Howard can drill down to a little bit of the operational dispersion or differentiation.

I think your question in issue, the first part of your question was related to, how does this dispersion or differentiation between our portfolio and peers compared to day to prior periods? And what's interesting is, if you roll up all of our performance, Rexford his generated about a 15% CAGR on our FFO per share growth over call it the last five years or so. And the peers have been around 10%. So we've generated around 50% greater FFO per share growth as compared to the peer set and I think that is a direct result of the Rexford business model. Because to your point you know, investors have been pretty helpful for the last five years for all the peers. So Rexford's performance has been very differentiated.

And I think it really comes down to our ability and focus on the value creation side and the assets themselves. And Rexford, when we started this business 20 some odd years ago, there was virtually no market rent growth and capital is much more expensive than it is today. And so we knew to have a great business we had to be able to create value at the property level without the tailwinds that we've had in the last five or 10 years. And so it's that physical repositioning, the intrinsic value creation and the assets that truly sets Rexford apart and volume at which we're able to do that and that's really the differentiator.

I think as we move forward, as the tailwinds may be diminished for everybody, that is markets normalized a little bit and we don't see the crazy trends in demand that we saw, and the acceleration in the demand that we saw during the pandemic. We still will all have I think very healthy markets.

I think the big, the differentiation may widen. Rexford's differentiation may increase because we're going to continue with the value add work that we have, so it is not as available to our peers and I think that's the key takeaway. I think it's a great question Vikram. And hopefully I answered that first part of it and open it up to Howard or Laura if you want to dive into more of the components in the operational level.

[Laura Clark, Chief Financial Officer]

Vikram, thanks for joining us. I'll just add a little bit more color in terms of your comment around the relative performance. Even in the frenzy market that we were in into the past couple of years, our portfolio is still as differentiated. From a market rent growth perspective, our portfolio market rent growth increased 13% more than the overall infill Southern California market did.

And then just kind of diving into some different dynamics, into these different markets, Central LA as an example. In the period of 2020 to 2023 market rent growth for the Central LA market was 61% and Rexford’s portfolio market rent growth was 95%. So there has been a bifurcation and differentiation of Rexford's portfolio because of our high quality, higher functionality product and we're starting to see that, as you mentioned, that bifurcation expand and which we would expect.

[Unidentified Analyst]

Okay, that's helpful. And I guess just a follow-up to that is. If you're, as you're anticipating more and more of this bifurcation, even within your sub-market, your granular sub-market, do you expect sort of when you gain shares your vacancy remains stable, others see higher vacancy. Maybe partly as you said because of normalization, partly because of the economy. Could this become a more competitive market, meaning more TIs, more incentives to just garner share, your peer set just being more competitive.

[Michael Frankel, Co-Chief Executive Officer]

You know, if you want to compare for instance the pre-pandemic period, where concessions were exceptionally low and market vacancy was around 2% plus or minus. So if we're considering that to be generally speaking, a normalized market, then we would not expect to see any material, a dramatic change in terms of concessions and whatnot and availability.

And frankly based on the activity that we're seeing today, given the level of uncertainty in the market and the world and the banking issues and all the rest, I think we have comfort that we don't see the near-term or into the foreseeable future we don't see a dramatic expectation in terms of concessions and whatnot.

[Unidentified Analyst]

Okay, great. Thank you.

[Howard Schwimmer, Co-Chief Executive Officer]

I’ll add one other piece to that Vikram. We focus on low-finish industrial. So the TIs, anyway aren't very significant? So this is not R&D or flex type product where the TIs can be rather large. Tenants move in and out of our spaces with relatively low frictional costs and so even when there is a change in the market, that change is relatively small in terms of those costs.

[Unidentified Analyst]

It makes sense. Thank you.

[Laura Clark, Chief Financial Officer]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Michael Mueller with J.P. Morgan. Please proceed with your questions.

[Michael Mueller, J.P. Morgan]

Sorry about that. Yeah hi, just a quick one. On the redevelopment pipeline, I mean most of the projects have stabilized yields in the six to seven range, but as you go through the list of what’s in process and some of the planned ones, there are some that are in the mid-4s and high-4s and I guess what are some of the attributes or what's going on in projects like that where the yield are notably lower than the average?

[Howard Schwimmer, Co-Chief Executive Officer]

Hi Mike! It's Howard. Nice to hear your voice. The real difference is the timing, right. Most of those projects you're seeing now coming out of the COVID redevelopment information, that were purchased probably a year plus ago when market yields were a little bit different. And there's a bit of conservatism built into some of those numbers. You'll see us quarter-to-quarter updating based on changes in construction costs and market rents, and you know incidentally recently we did make some adjustments based on construction costs. Not necessarily the cost coming down, but the increases in construction costs that we built in to our projections were moderating.

Last year there were about 25% to 30% in terms of increasing cost growth, and this year we're driving about 12% and that's starting to look like it might moderate down going forward a little bit too. So that also could have an impact on some of those yields in a positive manner frankly.

[Michael Mueller, J.P. Morgan]

Got it. Okay, that was it. Thank you.

[Operator]

Thank you. Our next question comes from the line of Craig Mailman with Citi. Please proceed with your questions.

[Craig Mailman, Citi]

Hey guys! Thanks for taking the follow-up. Laura, I just want to circle back real quick, just to clarify. I think you guys kept the 15% market growth estimate intact, but you had mentioned when you went through the kind of the puts and takes on the sequential change in the mark-to-market, a 300 basis point impact from changes in the quarter of market rents.

I'm just trying to get at, are these – should we be able to extrapolate the 300 basis points into that market rent growth or – because it would seem like that would extrapolate to a lower value than the 15%, or could you just give us some color on kind of maybe how you get that 15% and how you stay comfortable with keeping it there given maybe some of the broker reports out there. Any color would be great.

[Laura Clark, Chief Financial Officer]

Yeah, absolutely. Thanks Craig for your question. In terms of our market rent growth forecast, we're continuing to assess that year-over-year growth at 13.5%. It's pretty close to that 15% number and that sequential growth that we saw of about 3% consistent with our projections.

And maybe it's important to discuss how we get to that market rent growth forecast, and first of all its – we generate the forecast based on our current activity in the market and within our portfolio. And year-to-date has been strong and we've talked a lot about this on the call.

Occupancy has held steady in our portfolio. We continue to achieve high spreads, above our underwriting, rent steps continue to be favorable, retention was at second highest levels this quarter that we've seen in five quarters, so overall indications are that we continue to see strong demand within the portfolio. So that's certainly, that's the first factor that goes into our overall forecast for the full year.

The second factor that goes into it is our ongoing informational advantage that we talked about on the call. Our tenant outreach, our deep dive into the regional tenant demand within our infill Southern California market, and we're continuing to see a really wide diversity of demand. We talked about the tenant requirements that we're tracking on the market, our customer solution the leasing team is tracking, and then the 3 million square feet that's proprietary to Rexford, so – and that 3 million square feet that is proprietary to us has actually grown.

So I think all of those factors, including the overall and ongoing persistent supply demand and balance within our infill markets is how we get to that forecast and how we get comfortable with that great projection for the full year.

[Craig Mailman, Citi]

But there's a little bit around that you're rounding up a little bit to 15%, it sounds like it.

[Laura Clark, Chief Financial Officer]

Well, we are not providing the forecast on a quarterly basis, but for the full year we're comfortable with that 15%.

[Craig Mailman, Citi]

Okay, great. Thank you for the color.

[Operator]

Thank you. There are no further questions at this time. I'd now like to hand the call back over to management for any closing comments.

[Michael Frankel, Co-Chief Executive Officer]

We'd like to thank everybody for joining Rexford Industrial today. We wish you and your families a happy, healthy period over the next three months and we look forward to reconnecting in about three months. Thank you so much.

[Operator]

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.