Rexford Industrial Realty Inc

NYSE:REXR

Earnings Call Transcript 2022-Q2

[Operator]

Greetings. Welcome to the Rexford Industrial Realty Second Quarter 2022 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] Please note, this conference is being recorded.

I'll now turn the conference over to your host, David Lanzer, General Counsel. You may begin.

[David Lanzer, General Counsel and Corporate Secretary]

We thank you for joining us for Rexford Industrial's second quarter 2022 earnings conference call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and investor presentation in the Investor Relations section on our website at rexfordindustrial.com.

On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future.

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

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

Now, I will turn the call over to Michael.

[Michael Frankel, Co-CEO Officer and Director]

Thank you, David, and thank you, everyone, for joining our Rexford Industrial second quarter 2022 earnings call. We hope you and your families are well. I'll provide some brief remarks followed by Howard, who will discuss our transaction activity, and then Laura will provide an update on our performance and guidance.

As we head into the second half of the year, we continue to see strong levels of tenant demand and positive market rent growth within infill Southern California. Our portfolio continues to perform at essentially full occupancy with our same property pool average occupancy over 99%. Demand continues to exceed supply with overall market vacancy tracking at well below 1%. We expect the supply-demand imbalance within our infill markets to persist into the foreseeable future due to an extreme lack of available space or developable land within infill Southern California.

Rexford's performance continues to differentiate itself. Our team grew FFO per share by 26% compared to the prior year quarter. This brings our prior five-year FFO per share growth to over 15% on a CAGR basis, substantially exceeding the FFO per share growth of any other industrial REIT in the nation.

Rexford's outperformance is a reflection of our entrepreneurial business model, focused on creating value by increasing the quality and functionality of industrial property throughout infill Southern California, the nation's highest demand and lowest vacancy industrial market, with over 1 billion square feet of industrial property built prior to 1980, within a nearly two billion square foot regional infill market, we are favorably positioned with proprietary access to an exceptionally deep wealth of value creation opportunities.

Our team is executing upon a substantial range of internal and external growth strategies to unlock tremendous value. Leasing spreads for the quarter were a full 83% on a GAAP basis and 62% on a cash basis, representing an acceleration over the first quarter. On the external growth front year-to-date, our team acquired over $1.6 billion of irreplaceable assets with strong embedded value creation opportunities and compared to the prior year quarter, we grew net operating income by 43% and grew core FFO by a full 55%.

As we look forward, Rexford remains well positioned to continue to grow our cash flow and value. From an internal growth perspective, that mark-to-market on rental rates for our entire portfolio is estimated at 60% on a cash basis and 70% on a net effective basis. Over the next 24 months, we project approximately $172 million equal to 43% of annualized cash NOI growth embedded within our current portfolio, assuming no further acquisitions and based upon today's market rents.

The components of our internal NOI growth include $73 million of incremental NOI as we roll in place rents to higher market rates and as we ratchet up our annual contractual rent steps, $45 million of incremental NOI as our redevelopment and repositioning projects stabilize and $54 million of incremental NOI contributed from recent acquisitions. Within our embedded NOI growth, we are projecting annual same property cash NOI growth of approximately 8% to 10% over the next two years.

In addition, with regard to external growth, we currently have over $500 million of new acquisitions under contract or accepted offer. To fuel this growth and to ensure we are well positioned to capitalize upon emerging opportunities in today's dynamic market, we continue to maintain an exceptionally strong, low leverage balance sheet closing the quarter at 13.5% net debt to enterprise value.

With that, we'd like to thank our entire Rexford team for your extraordinary talent, dedication and entrepreneurial approach to growing our great company. As demonstrated through prior cycles, we believe our unique team is the primary determinant of our success and our ability to differentiate Rexford's favorable performance through all phases of the economic cycle.

Now I'm very pleased to turn the call over to Howard.

[Howard Schwimmer, Co-CEO Executive Officer and Director]

Thank you, Michael, and thank you everyone for joining us today. Rexford finished the first half of 2022 with yet another quarter of exceptional results, reflecting the high quality of our portfolio and the ongoing strength of the Southern California infill markets. Based on Rexford's internal portfolio metrics, market rents for comparable space continue to accelerate, increasing by 49% over the prior year, which continues to mitigate the impacts of higher construction costs.

According to CBRE, quarter end vacancy remained at near record low levels at 0.8% and was essentially flat compared to prior quarter across our infill markets, which are differentiated with essentially no land availability and therefore virtually no opportunity to increase net supply. As a result, with robust tenant demand, we see vacancy rates in our markets continuing at historical lows, positioning us well to capture strong rent spreads for this foreseeable future.

The consolidated portfolio weighted average mark-to-market for our remaining 2.6 million square feet of 2022 lease expirations is now estimated at 73% on a net effective basis and 60% on a cash basis. Regarding external growth, in the second quarter, we completed 18 acquisitions of prime infill properties, totaling nearly $600 million representing 1.4 million square feet of buildings on 85 acres of land, including 15 acres for near-term redevelopment.

Approximately 72% of our acquisitions were value add investments. Over half of all our investments were either initially vacant or at least at substantially below market rents. In aggregate, our second quarter acquisitions generate an initial unlevered yield of 2.5% growing to an estimated 5.1% unlevered stabilized yield on total costs.

Subsequent to quarter end, we added an additional five properties, totaling $587 million of investment. Year-to-date, we have acquired 40 properties containing 4.3 million square feet totaling over $1.6 billion with an initial yield of 2.9% and a projected stabilized yield of 4.6%. Over 80% of our acquisitions were acquired through off market or lightly marketed transactions sourced through our proprietary research-driven processes and deep market relationships. These acquisitions are projected to contribute $38 million of NOI in 2022, increasing to approximately $60 million in 2023 and expected to grow further over time.

Looking towards the future, we currently have over $500 million of new investments under LOI or contract, which are subject to customary closing conditions. In addition, we have an extensive originations pipeline beyond these transactions.

Further, the team is executing on a broad range of accretive internal growth initiatives. For our value add and redevelopment projects underway or expected to start over the next 18 months, we have approximately $450 million of projected incremental investment bringing total investment to an estimated $1 billion. These projects are projected to deliver an aggregate return on total investment of about 6.7% representing over $950 million in estimated incremental value creation.

And with that, I'm pleased to now turn the call over to Laura.

[Laura Clark, CFO]

Thank you, Howard. Before discussing our second quarter results, I would like to highlight our ESG report that was published during the quarter, which details our progress and commitment to further accelerating our value add ESG impacts. At Rexford creating economic, community and environmental value is foundational to our business model as we reinvent legacy properties and reinvigorate communities.

Now turning to our performance, same property NOI growth for the quarter was a strong 7% on a GAAP basis and 10.1% on a cash basis. Our results outperformed projections led by continued strength in the overall operating environment. Average same property occupancy was 99.1% in the quarter up 100 basis points over prior year. Year-to-date, we have achieved record leasing spreads of 78% and 60% on a GAAP and cash basis respectively. Additionally, annual embedded rent steps and our executed leases continue to increase with second quarter average steps at 4.3%.

Our high quality tenant base continues to perform exceptionally well as demonstrated by zero bad debt recorded through the first half of the year. This robust performance combined with our internal and external value creation drove core FFO per share growth of 26% over prior year to $0.49.

Our fortress like balance sheet, strong liquidity position and favorable access to capital continues to position Rexford to opportunistically execute on our strategy and drive substantial long-term value creation for our shareholders. At quarter end net debt to EBITDA was a sector low 3.8 times and below our target range of four to four and a half times.

We completed an active quarter in the capital markets. We sold 12 million shares of common stock through the ATM on a forward basis for $751 million. At the end of the quarter, we settled forward equity associated with ATM sales, which occurred in the first half of the year, issuing six million shares of common spots for net proceeds of $419 million.

Also, we recast our unsecured revolving credit facility, increasing the size to $1 billion while obtaining more favorable terms, including reduced borrowing rates and sustainability linked pricing targets. We also added a $300 million term loan expiring in 2027, with proceeds used to repay our $150 million term loan expiring in 2025 and to reduce borrowings under our revolving credit facility.

Finally, subsequent to quarter end, we closed on a new $400 million term loan facility expiring in 2024 with two, one year extension options. Proceeds were used to fund acquisition activity and reduced borrowings under our revolver. After incorporating our transaction and financing activities closed subsequent to quarter end, we currently have $1.2 billion of liquidity, which includes $22 million of cash, $552 million of forward equity remaining for settlement and $650 million available in our revolving credit facility.

Now turning to our full-year guidance. We are increasing our core FFO guidance range to a $1.87 to a $1.90 per share from our previous range of a $1.84 to a $1.88. Our revised guidance range represents 15% year-over-year earnings growth at the midpoint. As a reminder, our guidance does not include acquisitions, dispositions or related balance sheet activities that have not closed.

We have provided a roll forward detailing the drivers of our revised guidance range and our supplemental package. A few highlights include same property NOI growth on a cash basis has been increased to 8.5% to 9% up 150 basis points at the midpoint. When normalized for COVID-related repayments, cash same property NOI growth is projected to be 9% to 9.5%.

Same property NOI growth on a GAAP basis is now projected to be 5.75% to 6.25% up 150 basis points at the midpoint. Assumption striving same property growth include average occupancy of 98.5% to 98.75% up 12.5 basis points at the midpoint, cash leasing spreads of approximately 55% and GAAP leasing spreads of approximately 65%.

Our projection for bad debt as a percent of revenue is now 10 basis points for the full year as compared to 25 basis points in the prior guidance, driven by the strength of re-tenant base. Same property expense growth is projected to be lower than prior expectations, which represents a 35 basis point contribution to our increased same property NOI guidance. Incremental NOI related to acquisitions closed in the second quarter and subsequent to quarter end is projected to be approximately $20 million in 2022.

Finally net search expense is projected to be in the range of $51 million to $52 million driven by an increase in debt related to acquisition funding. This completes our prepared remarks and we now welcome your questions. Operator?

[Operator]

[Operator instructions] Our first question comes from the line of Jamie Feldman with Bank of America. Please proceed with your question.

[Jamie Feldman, Bank of America]

Great. Thank you. Thanks for taking my call. So I guess kind of big picture here, if you think about prior cycles and downturns with forecast for recession here, where do you think the risks are to your occupancy or to your credit, the credit and the portfolio. And as you are, put you have a nice acquisition pipeline still, what gives you comfort putting money to work at the prices today when we may see future changes in price discovery?

[Michael Frankel, Co-CEO Officer and Director]

Hey, Jamie, it's Michael, thanks so much. Thanks for joining us, Jamie, it's Michael. Laura, maybe I'll just give a brief context on kind of how we see the market and the occupancy. You can dive into the tenant credit and the aggregate and we can then talk about the ability to put money to work in this environment.

And Jamie, obviously, great questions; I think the first part of the question was comparing today's environment with the potential and a lot of concern in the economy as compared to prior cycles. And I think with the most recent downturn obviously would take us back to the great financial crisis. And I think there's a lot of great tremendous takeaways from that experience as they may or may not relate to what we see today or what may bring -- what the market may bring in the near term.

And just briefly, the market today, first of all, in the great financial crisis, which was a true shock to demand in the first quarter of 2009 order flows for many tenants actually stopped. We have never seen that before. And what was interesting in terms of the infill Southern California market was that it performed in a manner that was very counterintuitive. We never saw a supply problem in infill Southern California.

Going into the great financial crisis, vacancy was 2% to 4%. The worst it ever got was 3% to 5.5% throughout infill, Southern California. So we just never, even during the worst of times, we never had a supply problem and you didn't have to go far to see a substantial supply problem. In the big box markets, the situation that was very different, even in the Eastern inland empire, where vacancy double, tripled or worse during the great financial crisis.

And then we ask ourselves, well, how is the market prepared today as compared to then? The market today is very different than the market was. The market today is so much stronger in terms of preparedness or positioning and by so many metrics. Number one, going into the great financial crisis, as I mentioned, market vacancy was around 2% to 4%, call it an average 3%.

Today we're at 0.8% throughout infill Southern California; 0.8% vacancy. If you were to drill down into the vacancy and look at the actual things that are vacant to compete with Rexford, probably less than half of the stated market vacancy even begins to compete with Rexford's portfolio on a location or functional basis.

So we're an environment today where tenants literally have no options. And that is very different than a 3% vacant market, although 3% is an extremely strong market. Tenants could find options in terms of other space. It might take a while, but they could find them.

And then the other big difference today as compared to going into the great financial crisis is the deep and diversity of demand. We have segments of demand that did not even exist going into the great financial crisis. Many of them driven by e-commerce, new business models, electric vehicle industry, space exploration, we're looking at a transformation of the three PL business that is embracing technology, like never before and reinventing their businesses, driving substantial incremental demand. We have, food delivery, same-day delivery.

So many factors driving demand today that did not exist going into the great financial crisis or even five years ago, frankly, to the degree they exist today. So very, very different market backdrop today. And Laura, do you want to talk a little bit about tenant credit?

[Laura Clark, CFO]

Yeah, absolutely. Hey Jamie, thanks for joining us today. The strength of our tenant base has been demonstrated through cycles and really, through some pretty significant economic disruptions and some things we could have never have anticipated such as when our tenants were given the unilateral right to not pay rent at the start of COVID in our markets. But we saw essentially no impact to our collections as our tenants continued to pay rent. These spaces are critical to their ongoing business needs.

So, and couple that with the fact that we've been able to increase the credit quality of our tenant base and I'd say that credit quality of our tenant base is stronger than ever. We've been able to do that in many ways. Clearly given the strength of demand over the prior few years, coupled with the extreme lack of supply, we've had the opportunity to be very selective and the tenants that we're putting in our spaces, for example, when you've got multiple competing offers on the space we get to select the highest and best use for tenants that's got growing a growing business and strong credit.

Also during COVID, we took the opportunity to further pull the portfolio of underperforming tenants. We replace those tenants with higher quality tenants that we're paying higher rents. So, and then I think finally our low levels of bad debt are a great indication of the strength of our tenant base, and the increased quality of our tenant base.

If you look at bad debt as a percentage of revenue over the trailing 12 months, it's zero and we're projecting 10 basis points for the full year 2022 that compares to 40 to 50 basis points pre-COVID. So, in summary, our tenant base has proven resilient through disruption and given the strong market dynamics today, we feel we're really well positioned for what may be ahead.

[Howard Schwimmer, Co-CEO Executive Officer and Director]

I was just going to say, just on your -- on the other part of your question, whether we should buy today or wait, I think you're asking what's happening with cap rates and demand for assets and we've seen moderate adjustments in cap rates, but really it's the mark-to-market that's driving the opportunities out there for us in terms of being able to find opportunities that others in the market don't have access to and being able to stabilize those at very accretive yields.

And we're finding more and more of those opportunities. We've reset some of the inbound yields that we're seeking. And we're finding sellers that are happy to adjust some of their thinking as well in terms of what we're looking at and buying and, Michael provided a reference to the last recession, during that recession, everyone thought there was going to be a lot of product for sale at incredibly discounted prices and people waited and that never really materialized.

There was a few things here and there, but the industrial market, it really didn't turn into a wholesale buying opportunity. So, there's still great opportunities in our market and demand strong and I don't really expect to see much of a shift in terms of the values here, unless we see a dramatic change in demand vacancy and rent growth.

[Michael Frankel, Co-CEO Officer and Director]

And Jamie, maybe I'll just add a little bit of additional color. What's interesting is that that's a common question, cost of capital's gone up a little bit, there's uncertainty in the market, threat of inflation and other things and the question is, are we comfortable to continue investing in this environment? And what's a bit ironic about the question is actually we're seeing, marginally better yielding opportunities today inclusive of a slightly marginally higher cost of capital.

There's always pressure on yields right? Last year or six months ago, the question was my goodness; the markets are so competitive, cost of capital is so low for everybody. Cap rates are so low, how can you buy and create value? And arguably we had more pressure on yields and margins last year because of the intense competition and low cost of capital for just about any player than we do currently in the market, despite this marginally higher cost capital.

And I think really it goes to the Rexford business model. We do a tremendous amount of extra work as you know, in our originations and research and identify a tremendous volume of investment opportunities that allows us to be extremely selected during all phases of the capital markets or economic cycle. And I think you're seeing that really, really pay off well, and we can talk more about that, but I wanted to add that little bit of color.

[Jamie Feldman, Bank of America]

So thanks for all the color, very helpful. How do you compare the change in your cost to capital from pre-pandemic to now versus where yields have moved and just, I guess maybe to take a step back, how do you think about your required IRRs today versus where you were?

[Michael Frankel, Co-CEO Officer and Director]

Well, we can talk, Laura can talk a little bit about cost capital a minute, which we find to still be at attractive levels on a historical relative basis, frankly. And our IRRs today on opportunities that we're looking at are probably actually slightly better than IRRs that we were looking at, call it 12 months ago. So on a relative basis we've seen an improvement there.

We don't disclose our cost to capital, but I can tell you that when we underwrite at every point in the cycle we underwrite not based on spot cost of debt or equity, but we underwrite more on a what we perceive to be our steady state cost of capital. And which would actually be higher than even what we see today on a steady state basis, historical basis.

And we also, the other piece to underwriting that drives IRRs is your market rental rate assumptions and your exit cap rates, exit cap rate being the number one driver of performance, generally speaking or biggest impact. And Rexford is also maybe different than some institutional buyers in that respect and that our exit cap rates are typically anywhere from 75 basis points to 150 basis points higher on the exit cap rate as compared to our inbound or market cap rates and our market rent assumptions, also very conservative driving those ultimate IRRs.

We don't underwrite anything close to what the market has experienced and by the way, I have a really interesting example of a very current example, the whole Boulevard property in the i.e. West that we bought just a couple months ago, we underwrote to a 3.9% yield with, I think we were protecting a $1.35 in rent and it looks like, and this is not the done deal yet, but we have, a lot of interest tenants circling and we expect that we hope that there's a strong potential. We think we'll lock in about a $1.70 triple net rent, which will drive just under a 5% cap rate.

So, and that's a property we underwrote, very recently. So you can kind of see the conservatism that goes into the underwriting of the company.

[Laura Clark, CFO]

Yeah. And I'll just, Jamie, I'll just add a little bit to that. While our cost capital has increased over the prior quarter, our cost of equity and debt continues to be very attractive. In fact, this morning we executed a five-year swap fixing our $300 million term loan at a very attractive all-in rate of 3.7%.

So, we continue to source accretive acquisitions. That's demonstrated by the positive FFO contribution that we saw from acquisitions that are increased guidance range. But we're going to continue to be very selective as we have in the past. We're going to evaluate opportunities that are going to drive cash flow growth through our value creation platform that are going to generate above market yields, which really, ensure that we're going to be able to grow FFO and maybe through all points in the cycle.

[Jamie Feldman, Bank of America]

Okay, great. Thank you. I'm sure, we'll have -- continue to have this conversation for a long time. Appreciate it.

[Michael Frankel, Co-CEO Officer and Director]

We hope so, Jamie, thank you so much.

[Operator]

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

[Craig Mailman, Citi]

Hey, everyone. Maybe picking up a little bit on the cost of capital here. You guys ran through your updated liquidity of about $1.2 billion and I think if I look at what you guys have on your contract, plus the remaining spend on the ongoing re-dev and future re-dev, you have about $340 million gap there. So I'm kind of curious with, being able to swap debt at three-seven, we have your apply cap rates in the mid threes. What's your view on debt or equity as the best source of funds here?

[Laura Clark, CFO]

Yeah. Hey Craig. Thanks for joining on us today and welcome. So when we think about -- when we think about debt versus equity we're going to continue to take a very opportunistic approach to capital raises as we have in the past. Our low leverage balance fee allows us to do that and to be able to take advantage of attractive sources of those in equity.

We were able to close on $700 million of very attractive term loans over the past quarter and subsequent to quarter end. So, but what our really our focus continues to be on maintaining a low leverage investment grade balance sheet. We're targeting net debt to EBITDA in the four to four and a half times area. So that's the number one focus is maintaining that low leverage balance sheet which allows us to continue to be opportunistic.

[Michael Frankel, Co-CEO Officer and Director]

And I'll just add to that and thank you again for joining today. I'll just add to that. Another source of capital would be recycling capital through dispositions, which we continue to look at on an opportunistic basis. That hadn't been said though, when we have a 60% GAAP or 60% cash and 70% GAAP mark-to-market across the entire portfolio, generally speaking, we're able to drive tremendous secretion by not selling an asset and re-tenting it.

And by the way, with these leasing spreads, we are sourcing a tremendous amount of incremental capital, literally every quarter, through the leasing activity that in turn is funding an increasing percentage of a lot of our capital requirements. So, we're seeing that as also another very favorable source of capital internally.

[Craig Mailman, Citi]

No, and I'm glad you brought up the spreads, because that was my next question here. You guys kind of sequentially you're at 500 basis points on the portfolio mark-to-market on a cash basis. As you guys look at what market rents are doing in your so called markets, where could that mark-to-market trend by the end of this year, do you think?

[Michael Frankel, Co-CEO Officer and Director]

Well, we don't really prognosticate in that way to be honest, but I think we've probably seen, Howard, Laura feel free to comment, but we've probably seen upwards of 20% plus or minus market rent growth year to date. I think we disclosed, we saw about 48% or 49% year-over-year market rent growth. So maybe that gives an page more things of trending.

[Howard Schwimmer, Co-CEO Executive Officer and Director]

Yeah. Craig, hi, this is Howard. Market rank growth is still strong out there. We're conservatively projecting that it's not going to obviously grow at the same pace it's been lately. And, the brokerage community feels that there's still plenty of rent growth, but albeit at, maybe a little bit slower pace, but however, when you look at what's happening on the ground, as Michael described a minute ago and an example of one asset, we're still outperforming the reforecast market rents we have in the portfolio every day. So we may surprise ourselves to the upside.

[Craig Mailman, Citi]

It's. Michael Mailman just a quick question and we're also very happy that Craig's on the call. But maybe just stepping back, just thinking about issuing equity, obviously there's the current cost on your current earnings, but given the significant mark-to-market in your portfolio, how do you think about it more of a sort of longer term, like a five year basis of issuing that equity today and diluting investors, buying something that yet has upside in it.

However, your current portfolio has got such robustness and so how do you balance issuing that equity today, knowing that you're giving up some of the future growth by selling that equity, which has that 60% mark to market in it?

[Michael Frankel, Co-CEO Officer and Director]

Well, I think you said the right word, and thanks so much for joining us today. You said the right word, I think in balance and we do try to strike that balance because don't forget it's all the acquisition activity in the recent years that has provided this incredible internal growth opportunity that we see in our capitalizing today. And so, we're frankly not buying assets that don't -- that aren't -- don't position the company to deliver that kind of accretion going forward. And so, we just try to strike that balance and I think it's an important question.

[Craig Mailman, Citi]

You and Michael, if you…

[Howard Schwimmer, Co-CEO Executive Officer and Director]

I was just going to add one comment on top of Michaels. If you look at $1.6 billion of product we bought so far this year, the mark-to-market, in terms of the below market rent in place, there for those assets was about 25%,

[Craig Mailman, Citi]

Right. But that's much less than the 60% on the current, right? So buying assets with 20% mark to market, arguably you're banking on market rent gains in the grow, given the low vacancy in your markets, but arguably you're selling equity in the portfolio, that's up 60. And that trade obviously on, if we look at year five or year 10 in our model, I don't know if it goes out that far, but arguably you're diluting that more than today. That's all. And just know you're, you've been very, very heavy on the equity. And so I just wanna better understand that balance that you're going for so that you continue to produce shareholder returns.

[Michael Frankel, Co-CEO Officer and Director]

I think those are important questions and I think that statement is probably partially indicative of our business. And if we were only relying on mark-to-markets to run our business, maybe that analysis could hold some water, but we have so many other things that drive accretion.

We have the value add repositioning that drive yields that are substantially in excess of what just rolling to market might yield. So it's really a combination of these things and again, we try to balance it in terms of near term impacts and longer term impacts. And by the way on a, not that this is a driving metric but on a GAAP basis, the activity is accretive earlier than you might expect, frankly. So, and again, not that that's a driving indicator.

[Craig Mailman, Citi]

Right. Thanks for taking all the questions.

[Operator]

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

[Blaine Heck, Wells Fargo]

Great, thanks. Good morning up there. Laura, starting with you, you guys are out to a great start on same store NOI this year, cash at 10.9% year to date, but to hit your midpoint on guidance for the year, that continues to be a meaningful slowdown and bought in the remainder of the year as I think occupancy comps get a little bit tougher; can you just talk about how we should think about the cadence of occupancy from here and whether there are any large, chunky known move outs that you guys have visibility on in the second half?

[Laura Clark, CFO]

Yeah. Hey, Blaine thanks so much. And thanks for joining us today. Yeah, as you mentioned, our occupancy is projected to decelerate in the second half. I think important to know though that today, we are sitting at very full occupancy levels. At the end of the second quarter, we were at 98.9% occupancy and market fundamentals continue to be very strong. And in fact, we increased our occupancy guidance this quarter. It's up 12.5 basis points on average for the full year.

But when you think about the second half of the year, there's a few factors that are driving that. One is, we do have visibility into about half of the decline. It's driven by four units that we had previously projected to vacate. So this isn't, this is not outside of our expectations that we had at the beginning of the year.

Importantly though, those projected leasing spreads on those four units is about 80%. So obviously presents a significant opportunity for us to drive value creation, but it comes with some downtime and some near-term occupancy impact. I'd say the second, the second impact driving occupancy for the second half of the year is that 40% of our expirations are in December alone. So as we have more certainty as to the renewals on those units, we'll update our forecast accordingly.

And then I think lastly, embedded into our guidance is the fact that yeah, there does continue to be uncertainty in the overall economic environment. So, we feel we've embedded a prudent assumption for occupancy in the second half of the year.

[Blaine Heck, Wells Fargo]

Great. That's very helpful color. Switching over to Michael or Howard, you guys have consistently highlighted how fragmented the ownership of warehouses is in your market and the low level of institutional ownership. Do you think anything has changed during the pandemic or coming out of it with the volatility in the market that we're seeing this year that would make the private owners more or less willing to sell their industrial buildings or even other properties that could be converted into industrial?

[Michael Frankel, Co-CEO Officer and Director]

Well, we've certainly had great success in convincing private owners to sell their real estate in the past couple years. That I'd say the largest catalyst in some of our transactions has been just that aging ownership and the generational shift that the next generation at the kind of prices we've seen and growth has been very interested in selling.

As far as, any changes, I think that a lot of people we're talking to today are even more interested in selling. It seems, it seems that most people enjoyed the ride up in industrial values and thought those value increases would never slow down. And now that they are seeing a bit of a change put in terms of the future growth in those values moderating a bit, we're getting more and more calls from exactly those type of sellers that continue to have interest.

We have a lot of discussions still about upright type transactions. So, the market seems to still be feeding into our business model in terms of the hard work we do in establishing those relationships and cultivating, the data that we track in the markets.

[Howard Schwimmer, Co-CEO Executive Officer and Director]

And Blaine just add to Michael, thank you so much for joining today. It is a very interesting time for us with respect to that fragmented ownership base that you described, because they're not getting younger and they're increasingly aging out at this point in time and that group is sort of marching increasingly into the Rexford fold and I can recall a conversation with the seller on a very recent purchase, and we've been pursuing the property, I think, for over a decade.

And I said, I asked him, I said, we've known these people for a long time. Why now, why did you finally decide to sell? And the answer was, well, we have a lot of different needs among our family who are now all partners in this thing.

I think they had like, 15 different owners now and just through family and deaths in the family and errors stepping up. And he said, at this valuation, we could actually replace the investment into income generating investments and securities that generate adequate level of cash flow to support the family, several generations of the family.

And so to Howard's point, the valuation has played a great role in catalyzing some more of these opportunities in combination with this aging, increasingly aging out owner population. And there's a palpable fear in the market now that they're going to miss out. And so we're and brokers are capitalizing on that as well. So it's a very interesting time for us with respect to that ownership base.

As I mentioned in my prepared remarks, that ownership base is among that one billion square feet in until Southern California was built before 1980, that is just replete with value creation opportunities. So that's really the sweet spot in terms of value creation opportunity in the market for us.

[Blaine Heck, Wells Fargo]

Thanks. That’s great color. Last one for me. Can you guys talk a little bit about the project construction delays that you refer to in the guidance roll forwards? Are those delays mostly attributable to supply chain disruption and delays in procuring the raw materials? Or are there other problem next related to zoning, entitlement, labor, other reasons?

[Howard Schwimmer, Co-CEO Executive Officer and Director]

I think it's a little of all you know, and you look at what's happening out there, cities are taking substantially longer to process entitlement and permits. That extra time as the construction cost escalation because contractors are escalating their costs, now seems like holding prices for five days and then they keep moving them up. So it really just adds up.

You've got unions that are showing up to a lot of the planning commission meetings, all of a sudden. You've got a lot of moratoriums that you're working through occasionally in some of these markets. So it's really coming from a lot of different directions. But we're doing a really good job of mitigating some of those risks. We've built in a lot of that escalation into our go forward projections.

I think we've taken a very conservative approach in terms of those escalations will continue. We've adjusted some of our timing as well in terms of what we see as some of the obstacles going forward and I think we're doing our team is doing a great job in terms of buying out some of those long lead time materials and building components on the new construction.

Interestingly though, our repositioning projects, we're not experiencing any degree of those type of cost increases or delays. A lot of those projects are more simple. It doesn't take planning commission approvals, and frankly that's the bigger opportunity in the marketplace here, as we've described there being really literally no land available. So there's, there's limited opportunity to develop, but as Michael just pointed out, there's a huge opportunity in that base of product that has repositioning and mark-to-market type opportunities in the existing supply.

[Laura Clark, CFO]

Yeah. Blaine, one thing I'll add to that. Hey Blaine, one thing I'll add to that. In terms of, well, first of all, a shout out to our development and construction team, I think they're just doing an amazing job, really working diligently to reduce risk of delays wherever possible. So not -- so we've got a phenomenal team in place there, but in terms of the, -- in terms of the one set of erosion that we saw in our guidance, I think it's important to point out that that's related to delays and timing not related to -- not related at all to lease rates.

We continue to see market rank represents in our portfolio and growth within, in our rental rates that's at this point helping us overcome some of these construction costs increases and we're seeing yields continue to be at around 6.7% consistent with prior quarters on our repositioning and lead developments.

[Blaine Heck, Wells Fargo]

Great. Thanks everyone.

[Operator]

Our next question comes from the line of Connor Siversky with Berenberg. Please proceed with your question.

[Connor Siversky, Berenberg]

Hi there. Thanks for having me on the call. Two quick ones from me and apologies if this was missed in your answers previously, but on the retention rate down sequentially from last quarter, and then seeing the footnote on Page 22 of the supplemental, I'm wondering how much of that delta is attributable to adding the other repositioning segment to the calculation, and then how much of it was just background, maybe an unforeseen move out or something of that nature.

[Laura Clark, CFO]

Hey Connor and thanks so much for joining us today. Actually our retention calculation excludes an all repositioning, so that wasn't a driver. Really the driver of lower retention then over the prior quarter was due to expected move outs. So not no unexpected move outs in there as we continue to drive leasing spreads.

I think one really good example we had, we had a 76,000 square foot kind of vacate. We executed a new lease with a new tenant out of 143% GAAP leasing spread and an 88% cash leasing spread. That impacted our retention rate, but we only had two weeks of downtime. So really no impact on occupancy, but impacted that retention rate as reported. So just if you excluded that one deal from our 66% retention, that would get you to about 73% retention for the quarter, which is in line with what we've been seeing over the prior several quarters.

[Connor Siversky, Berenberg]

Got it. Okay. And then just kind of one more follow up from an earlier question, understanding that the supply dynamics are exceedingly favorable in your market, but we haven't seen much of abatement in terms of fuel or labor costs as it pertains to a logistics provider, for example. So is there any sense that at some point these budgets get squeezed such that they wouldn't be able to afford a 70% releasing spread or is that still trending very much in the right direction from your point of view?

[Michael Frankel, Co-CEO Officer and Director]

Well, Connor, don't forget that, things like drainage cost and fuel cost, transportation cost, two things, one, those are a much bigger percentage of the typical economics for a distribution oriented tenant than their rent is. And so by securing these locations that are closer to both the end points of distribution and the ports, they're actually able to find efficiencies on the much larger expense base, which is the transportation oriented expenses.

So the answer can they continue to absorb strong rental rate growth. We're not seeing any indications that they cannot. We continue to see very favorable price elasticity in terms of our ability to raise rent. And I think also if you want to delve into the sort of the three PL market, that market is as I mentioned earlier, is experiencing, pretty interesting transformation where you had a lot of old line three PLs that historically maybe were in a very low margin business because they're basically arbitraging the cost of their rack space with what they could charge for that rack space and it was sort of a commodity.

Today that businesses look very different. They're embracing technology, moving up the value chain, providing end to end solutions. In some cases ranging from raw materials to production, to shipping, to delivery, whether it's one item to a consumer or a million items to a business and providing unbelievable transparency throughout that supply chain. And because they're delivering such level of value add services, they're becoming much more profitable businesses and that's increasing their ability to pay more rent, frankly.

So that transformation is very, very helpful to us, which some is somewhat technology driven. So we're not really seeing any indication where we see a potential reduction in their ability to pay rent due to these increasing rent.

[Laura Clark, CFO]

Yeah. And one thing I'll add to that is I think that rent steps and these annual embedded rent steps that peninsula are signing are a good indication of how they're thinking about their future business growth and projections. And we continue to see the ability to push those rent steps higher.

We've, average annual rent steps sign for leases in the quarter were 4.3%. That's up from 4.2% in the prior quarter. And I believe that number has continued to take up every quarter for the last -- for the last several quarters. So we're continuing to be able to push those escalations and increases and I think it's a good indication of how tenants are viewing their longer term business.

[Michael Frankel, Co-CEO Officer and Director]

Laura, correct me if I'm wrong, but I think that the June average rent steps, which be at the end of the quarter were a full 4.5% on average. So again, a pretty nice acceleration or even over the quarterly average.

[Connor Siversky, Berenberg]

Got it. Okay. That's helpful color. I'll leave it there. Thank you.

[Operator]

Our next question comes from the line of Vince Tibone Green Street. Please foresee what your question.

[Vince Tibone, Green Street]

Hi, good morning. Could you provide some additional color on the merge west transaction, specifically around when the pricing was lost on that acquisition? And just curious to see, do you think that pricing is reflective of the -- in current market today for new construction in IU [ph] West?

[Michael Frankel, Co-CEO Officer and Director]

Sure. Hi Vince. Nice to have you join us. Yeah, that was an incredibly interesting transaction. We actually looked at that going back several months and initially when it was actively placed on the market, they were targeting about a 3% stabilized return and we didn't even hang around the hoop. We literally just said, no, thank you. This does not work for us and so we forgot about the deal.

And later on, they had some buyers. They had a buyer tied up and it fell apart and as thing progressed, they had another seller at a bit of a higher yield and the sellers apparently were having a little concern over other people's ability to get a transaction done at those returns.

And so the brokers, literally I would call this in an off market phone call came to Rexford and said, we've done a lot of transactions with you. We know you can perform we're really looking for performance as opposed to the highest price at this point and so, we were able to step into a transaction that really the price was agreed on less than 45 days ago.

And, there were some moving pieces on it though, which was, I think why we were able to achieve the 4% projected stabilized returns. There was obviously a little bit of vacancy in the project, whether it being 71% occupied, there was a few things the sellers still had to finish up in terms of some construction work and some offsite work and so we established some holdbacks and with a few other things.

So we were actually able to work with their needs and provide the solution that was needed and we believe we actually achieved the transaction that's going to stabilize. At a 4% return is probably a bit higher than that project would transact that still today in the marketplace, if the last bit of that leasing was completed and some of -- and that little bit of remaining construction work was done as well.

And so -- but it's interesting, literally we closed that transaction and just days before there was another transaction in the West on a 111,000 square foot building, not the same quality, this was a 30 foot clear building. We bought it $445 a foot. This other deal I'm referring to closed at $525 a foot, which was I think about a 2.85% cap rate, and it had a five-year lease in place. So, when you look at that, that data point compared to what we bought at, our transaction is, is still very, very attractive.

[Vince Tibone, Green Street]

Yeah. That's all really helpful color. Thank you for that. One more, just for me, switching gears a little bit, and you mentioned, year to date, you think rent growth in your market has been or portfolio rather has been plus or minus 20%. Has that been pretty consistent across your submarket, or are there any that jump out as being a little better or worse than that portfolio average?

[Michael Frankel, Co-CEO Officer and Director]

Yeah. Well, the Inland Empire West is really been performing incredibly well. In i.e. West rates were up 16.5% quarter-over-quarter and year-over-year, that's about almost 110%. But all the markets are performing pretty well. Orange County has been up, I think they're about 5% quarter-over-quarter and really, I think the lowest increases we've seen probably been more around some of the LA markets, but still strong rent growth and when you really dive into the stats, just in our portfolio, all these markets are performing very well in terms of the rent growth. But the standout obviously was in Inland Empire West.

[Operator]

Our next question comes from the line of Dave Rodgers with Robert W. Baird. Please proceed what your question is.

[Dave Rodgers, Robert W. Baird]

Yeah, good morning out there, everybody. Thanks for all the details so far, just one follow up for me and it's around that tenant credit issue that you guys started with early on, I think with Jamie great details from the global financial crisis, Michael, so thanks for all that, but you guys have this really obviously sophisticated system that tracks all the acquisitions that you can do and all the people you want to target.

Do you have something similar on the credit side, you guys feel as kind of strong about your credit profiling and as a kind of investors, can you give us a sense of kind of how we should be thinking about the tenant credit profile notwithstanding the historical information and obviously the government stimulus that kind of went out and supported the last 12 months, but as you look forward, is there a detailed system that you guys are comfortable with that where you've been able to elevate credit or give us some kind of details around that fairly vague, but any help would be greatly appreciate that.

[Michael Frankel, Co-CEO Officer and Director]

It's a little bit vague, but go ahead. Go ahead, Howard. I'll finish up.

[Howard Schwimmer, Co-CEO Executive Officer and Director]

Yeah, no, I'm just going to add a couple comments and let you or Laura jump in. In this type of market environment where you have sub 1% vacancy credit is an extreme focus, right? There's plenty of tenants that are willing to pay you whatever you want for a building. So, for the past years, we've had an extreme focus on tenant credit quality. And so that's an overriding factor and has always been when compared to outperformance on rental rates.

And our team runs a very rigorous process in terms of credit and in fact many, I can think of many examples where literally we've had multiple offers on a space or a building, and they've gone back to interested parties and gotten the credit side of it out of the way before we would even tell somebody we're going to consider them amongst one of the finalists competing on an individual space. And so that's really the level we take it to in terms of our seriousness about credit and continuing to improve the quality, always of the credit in our portfolio.

[Michael Frankel, Co-CEO Officer and Director]

And Dave, I'll just add a little bit, and it's great to hear your voice today. Thanks for joining us. Your question was, , how should investors think about our tenant credit, and if I try to separate myself from Rexford put myself in the investor's shoes and be objective, and just look at the data over the last 20 years I think that the Rexford tenant credit in the aggregate is the best credit you can find in the market period of any asset class, not just industrial and far better than any other industrial read, just very different.

If you look at the diversity of our cash flows by industry sector, by function, by type of tenant, more diverse than just about any other industrial rates. If you look at the data that in terms of how they performed through cycles, you mentioned the pandemic and the fact that there was stimulus to consumers and that that's no longer in place.

Well, don't forget that during the pandemic, the authorities told our tenants, they didn't have to pay rent and what did they do? They all paid rent. For all practical -- for all practical purposes, they essentially all paid rent. And why, because they -- because they have to hold onto the space. We saw that during the great financial crisis, we saw that during the uncertain times of pandemic and that these locations, it's not just the most diverse source of cash flow by industry or function of these businesses, but these are, and I don't like this phrase, because it's overused in my view, but these are truly mission-critical locations for our tenants.

They would have a hard time or literally could not operate their businesses if they didn't have these locations. And so for a whole range of factors and again, the market is substantially better positioned today than it was going into the great financial crisis. We believe that this is the best credit that you can have, period.

[Dave Rodgers, Robert W. Baird]

Yeah. I appreciate the color on that. That's helpful. I think that's the one thing that people will continue to focus on Rexford right. No, new supply, great growth, great embedded mark-to-market. So, if you're going to focus on something I think that's the big focus and so appreciate you guys given some extra time and thought to it.

[Michael Frankel, Co-CEO Officer and Director]

No, it's an important question. And I remember during when the pandemic first started, there was some research papers out there that said, oh, small tenants are going to get hit more than large tenants. And there was really no data to back that up. In fact, if you looked at the data through prior downturns, it's quite the contrary, these info tenants perform substantially better than your big box tenants in the aggregate.

And then we saw that during the pandemic, in Infill Southern California performed just incredibly well. And we have the strongest market in the country by far and nobody can touch our leasing spreads, FFO growth, etcetera. So clearly the data has spoken and indicates that there is just nothing like this infill tenant base in the country.

[Operator]

[Operator instructions] Our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.

[Mike Mueller, JPMorgan]

Yeah. Hi. You answered most other things, but just out of curiosity on the next $500 million or so of acquisitions that are in the works, how are the stabilized yield expectations on those compared to what closed this past quarter?

[Howard Schwimmer, Co-CEO Executive Officer and Director]

Hi Mike. Well we really typically don't disclose anything until we've closed transactions, but, to some of, I think Michael's earlier comments, he mentioned that we are finding some better opportunities right now with I'd say increasing stabilized yields, increasing in place yields. So, the market is certainly playing toward us and our ability to capture some of these opportunities.

But we are very, very selective though, I'll say at this point what we -- and what we buy. And we've probably, I think we've written more LOIs, well, I know we've written more LOIs at this point than we did same time last year. And I think that really testament to our team, it's more about buying the right transactions and finding those opportunities going forward now that have those attractive yields in them and we're succeeding and doing so

[Laura Clark, CFO]

Hey Mike, it's Laura, thanks for joining us today. I'll just add to that. I think what we talked about earlier is the balance of -- is we're really focused on the balance of what we buy. And if you look at what we've got year to date over half of it is either vacant or really low yielding. And so when we look forward into bringing a balance of accretive cash flow acquisitions and investment opportunities into the portfolio that's a focus -- that's a focus for our team.

[Operator]

And we have reached the end of the question-and-answer session, and I'll now turn the call back over to management for closing remarks.

[Michael Frankel, Co-CEO Officer and Director]

Thank you. And on behalf of the entire Rexford team, we want to thank everybody for joining us today for your focus on Rexford. And we wish everybody a great summer, and we look forward to reconnecting in about three months.

[Operator]

And this concludes today's conference and you may disconnect your lives at this time. Thank you for your participation.