Rexford Industrial Realty Inc

NYSE:REXR

Earnings Call Transcript 2019-Q4

[Operator]

Greetings and welcome to the Rexford Industrial Realty Inc. Fourth Quarter 2019 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 conference over to your host, Mr. Steve Swett with ICR. Please go ahead, sir.

[Steve Swett, Investor Relations]

We thank you for joining us for Rexford Industrial’s fourth quarter 2019 earnings conference call. In addition to the press release distributed yesterday after market close, we posted a supplemental package in the Investor Relations section on our website at www.rexfordindustrial.com.

On today’s call, management’s remarks and answers to your questions 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 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, Adeel Khan. 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 and welcome to Rexford Industrial’s fourth quarter 2019 earnings call. I will begin with a summary of our operating results and some perspective on our market opportunity, Howard will then cover our acquisition and Adeel will follow with more details on our financial results and guidance. We will then open the call for your questions.

We are very pleased with the fourth quarter and full year 2019 results. Our team continues to execute on our strategy to create value by investing within the infill Southern California industrial market. For the quarter, we achieved company’s share of core FFO of $35.8 million, which is a 31.4% increase over the prior year quarter. Core FFO per share was $0.32 which represents a 10.3% increase year-over-year. On the same-property basis, NOI increased 5.5% on a GAAP basis and 7.2% on a cash basis and after excluding the impact from the lease up of properties and repositioning, stabilized same-property GAAP NOI increased by 4.1% and cash NOI increased by 5.1%.

During the quarter, we signed 115 leases for approximately 1.5 million square feet. Our comparable leasing spreads were 42% on a GAAP basis and 27.1% on a cash basis. We achieved 97.6% occupancy in our stabilized same-property portfolio at year end. We also completed 10 acquisitions during the quarter for an aggregate purchase price of approximately $258 million and completed $20.8 million of disposition. And for the full year, we grew company’s share of core FFO by 34.3% and by 9.8% on a per share basis. Same-property NOI increased 6.2% on a GAAP basis and 8.7% on a cash basis.

Excluding the impact from the lease up of properties and repositioning, stabilized same-property GAAP NOI increased by 3.7% and cash NOI increased by 6.1%. We signed over 400 leases totaling 5.3 million square feet and we completed 34 acquisitions for a total of $970 million of investment in our target infill Southern California industrial market representing a 24.7% increase in portfolio square footage. Approximately, 79% of 2019 acquisitions were achieved through off-market or lightly marketed transactions sourced through our proprietary originations method with 41% of investments providing value-add renovation and repositioning opportunities to increase cash flow and value over time.

2019 was also notable for the release of our inaugural, environmental, social and governance report which detailed numerous positive ESG impact achieved through the execution of our unique business model. We quantified the substantial environmental benefits associated with our value-add repositioning and recycling of industrial buildings, the higher value industrial use. The year was also notable as our team drove the dramatic growth of Rexford’s unique portfolio within the nation’s largest and strongest industrial market, while maintaining a low leverage fortress-like balance sheet which ended the year at 3.7x net debt to adjusted EBITDA.

As a result of these exceptional results, we are pleased to announce that we are increasing our quarterly dividend by 16.2% to $0.215 per share. This is our fifth consecutive year with a dividend increase and we have now raised the quarterly dividend by 79% since our IPO in 2013. With regard to market conditions, we continue to experience a substantial supply demand imbalance. Despite the extremely limited supply, incremental tenant demand continues to be driven by a few key factors, including a strong economy with Southern California positioned as the nation’s largest and most diverse zone of consumption. We also benefit from sustained e-commerce growth and the continued demand for shorter delivery timeframes. Our portfolio is 100% positioned within prime last mile infill Southern California industrial market located within and adjacent to the nation’s largest regional population. Our infill locations are critical to enable tenants to satisfy the increasing demand for short delivery timeframe.

Meanwhile, on the supply side, although certain other large U.S. industrial markets are experiencing an increase in supply, infill Southern California continues to experience diminishing supply due to a lack of developable land, permanent barriers limiting new construction and as product continues to be removed from the market through conversion to non-industrial higher value usage. As a result of these factors, our portfolio is operating at essentially full occupancy and we believe we are positioned to generate favorable NOI growth into future periods, our in-place portfolio, for example, assuming no additional acquisition is positioned over the next 18 to 24 months to potentially generate about 17% incremental annualized NOI growth compared to Q4 2019 equal to almost $40 million driven by the following go-forward contributions to NOI.

About $14.6 million from the completion and lease up of properties in repositioning, approximately $12.6 million through the mark-to-market of 9.3 million square feet of expiring leases with rental rates estimated to be about 15% below market, about $6 million from the impact of properties acquired in the fourth quarter, plus about $5 million generated by 2.4 million square feet of executed, but un-commenced leases. In addition, as our investment pipeline continues to grow in volume and quality, we expect to continue to acquire accretive investments within high demand infill Southern California industrial market, which we believe will drive additional NOI growth.

In closing, we couldn’t be more excited about our go-forward opportunities. Our team continues to execute at an outstanding level and we are grateful to our team members. Each of them makes an exceptional contribution towards our collective success. In particular, we would like to acknowledge and thank our Chief Financial Officer, Adeel Khan, for his exemplary service at Rexford over the prior 8 years. As we announced last month, we are excited and support Adeel as he seeks a new chapter in his career as he ultimately transitions out of the CFO role. Adeel plans to stay onboard serving as our CFO until a new CFO is transitioned into the role and thereafter, we hope to establish a new go-forward role for Adeel at Rexford consistent with his personal and professional objectives.

And with that, I am very pleased to turn the call over to Howard.

[Howard Schwimmer, Co-Chief Executive Officer]

Thanks, Michael and thank you everyone for joining us today. The infill Southern California industrial market continues to outperform with a supply demand imbalance maintaining the strong landlord market that allows us to continue driving rents and maintain high occupancy levels. Our target markets, which exclude the Eastern Inland Empire, ended the fourth quarter at 2% vacancy, with asking rents up 8.7% on a weighted average basis over the past 12 months according to CBRE.

Turning to acquisitions, the full year 2019 was stellar for our growth. We completed 34 acquisitions for a total of $970 million, which added 5.4 million rentable square feet to our portfolio. During the fourth quarter, we completed 10 acquisitions totaling approximately $258 million and adding 1.8 million square feet to the portfolio. 80% of these transactions were off-market or lightly marketed with 50% of the transactions value add. Our ability to source off-market investment opportunities derives from our unique sourcing methodologies and deep market relationships, which result in significant benefits to Rexford in terms of superior returns. Our projected stabilized yields remained very attractive and accretive ranging from 5.3% to 7.3% in the quarter.

In October, we acquired Slauson Commerce Center, a 336,000 square foot industrial complex located within the LA Central submarket for $41 million. The two-building property is in an extremely supply constrained submarket fully leased at rents that are estimated to be approximately 17% below market. Our initial yield is about 5% and growing thereafter. As a note, the yields I reference here and for subsequent transactions are presented on an un-leveraged basis. We acquired West Manville Street, a 60,000 square foot 22-foot clear industrial building in the LA South Bay submarket for $11.5 million. The property is fully leased on a long-term basis at an initial yield of 5.3%. Also, in October, we acquired Crestmar Point, a 56,000 square foot building in the Central San Diego submarket for $8 million. The two-tenant low coverage property has the opportunity to increase approximately 24% below market rents by renewing in-place tenants or repositioning the property. The initial yield is 4.8% with a projected stabilized yield on total cost of 7.3%.

In November, we acquired Berry Way, a 120,000 square foot three-building industrial property with excess land located in the Orange County North submarket for $27.6 million, which equates to a below market land value of $58 per square foot. The fully leased property offers future value-add opportunity and our initial yield is 5.6%. Also in November, Rexford acquired Motor Avenue, a 4.2-acre land site located in the LA San Gabriel Valley submarket for $7.2 million. We intend to construct a 97,000 square foot, 32-foot clear Class A industrial building on this infill land parcel. At completion, our yield on total cost is estimated to be 5.7%.

We also acquired East E Street located in the LA South Bay submarket for $14.9 million. The port adjacent 58,000 square foot modern property is fully occupied by three tenants at approximately 38% below market rents and includes excess paved land for container storage. Our initial yield is 3.1% and the estimated stabilized yield on total cost is 5.3%. Rexford also acquired Monarch Street, a 5-tenant 2-building complex located in the Orange County West submarket for $34 million. The project contains approximately 277,000 square feet and at lease expiration, we intend to redevelop one of the buildings with a state-of-the-art 97,000 square foot Class A industrial building and also improve functionality and aesthetics for the remaining building. Our initial yield is 4.6% and the projected stabilized yield on total cost is estimated to be 5.3%.

In December, we acquired Pomona Distribution Center, a 2-tenant industrial building located in the LA San Gabriel Valley submarket for $88 million. The property contains approximately 752,000 square feet with in-place rents estimated to be about 20% below market. At lease expiration, we expect to drive cash flow by re-tenanting at higher rates or by executing value-add repositioning, generating a projected stabilized yield on total cost of about 5.6%. Also in December, we acquired Del Amo Boulevard, a single tenant industrial building located in the LA South Bay submarket for $12 million. The 57,000 square foot building is fully leased at approximately 50% below market rent and contains excess land for container storage. Upon lease expiration, we expect to perform minor repositioning to drive rents to market. The initial yield is 3.6% and the projected stabilized yield on total cost is 5.8%. Finally, Rexford acquired Euclid Street, a single tenant industrial building located in the Orange County West submarket for $14 million. The 63,000 square foot property was acquired long-term sale leaseback transaction at an initial yield of 5.3%.

Turning to dispositions, during the fourth quarter, we sold two multi-tenant properties for an aggregate of $20.8 million. This brings our 2019 disposition total to $33.6 million and we expect to continue to sell assets on an opportunistic basis to unlock value and recycle capital. Now, I would like to take a moment to update you on our value-add repositioning program. During the fourth quarter, we completed repositioning of 110,000 square foot building in our Mission Oaks project in Ventura. The fully stabilized 462,000 square foot project has achieved a 9% return on cost, exceeding our initial underwriting by 160 basis points. For the full year 2019, we stabilized about 875,000 square feet of repositioning at an average stabilized yield of 8.1%. Moving forward, we have a deep pipeline for value creation of approximately 1 million square feet currently under repositioning or about to start construction and another approximately 400,000 square feet to start later in 2020 and 2021.

Finally, though 2019 was certainly a record year in terms of acquisition volume, our pipeline remained strong as we look ahead in 2020. We currently have $268 million of new investments under LOI or contract, which includes a $210 million portfolio recently announced. These acquisitions are subject to completion of due diligence and satisfaction of customary closing conditions. We will provide more details as transactions are completed.

I will now turn the call over to Adeel whom I’d also like to thank and acknowledge for his outstanding contributions to Rexford’s success over the past years. Adeel?

[Adeel Khan, Chief Financial Officer]

Thank you, Howard and thank you, Michael and Howard for your kind words. Beginning with our operating results, for the fourth quarter 2019, net income attributable to common stockholders was approximately $19.9 million or $0.18 per fully diluted share. This compares to $12.4 million or $0.13 per fully diluted share for the fourth quarter of 2018. For the 3 months ended December 31, 2019, company share of core FFO was $35.8 million as compared to $27.2 million for the 3 months ended December 31, 2018. On a per share basis, company share of core FFO was $0.32 per fully diluted share, representing a 10.3% increase year-over-year.

For the full year 2019, Rexford reported net income attributable to common stockholders of approximately $50.5 million or $0.47 per fully diluted share as compared to net income attributable to common stockholders of $36.1 million or $0.41 per fully diluted share for 2018. For the full year 2019, Rexford reported company share of core FFO for $131.1 million compared to $97.6 million for the year ended December 31, 2018. On a per share basis, company share of core FFO was $1.23 per fully diluted share for 2019, a 9.8% increase compared $1.12 per fully diluted share reported in 2018.

Same-property NOI was $39.3 million in the fourth quarter, which compares to $37.3 million for the same quarter in 2018, an increase of 5.5%. Our same-property NOI was driven by 6.7% increase in total rental revenue and a 10.5% increase in property operating expenses. Increase in property operating expenses were due to a favorable property tax adjustment in fourth quarter 2018 combined with an unfavorable property tax adjustment in fourth quarter 2019. Excluding the combined effects of these adjustments, property expenses increased by 4.1%. On a cash basis, same-property NOI increased by 7.2% year-over-year. Stabilized same-property NOI growth, net of the impact of repositioning, was 4.1% in the fourth quarter on a GAAP basis and 5.1% on a cash basis. For the full year 2019, same-property NOI increased 6.2% driven by a 5.7% increase in revenue and a 3.9% increase in property operating expenses. On a cash basis, same-property NOI increased by 8.7% compared to 2018. Net of the contribution from properties and repositioning, 2019 stabilized same-property NOI increased 3.7% on a GAAP basis and 6.1% on a cash basis.

Turning now to our balance sheet and financing activities. We continue to focus on maintaining a highly flexible balance sheet to support our growth objectives. During the fourth quarter, we issued approximately 3 million shares of common stock through our ATM at a weighted average price of $46.77 per share. This resulted in net proceeds to Rexford of approximately $137 million. We utilized this fund to fund our acquisitions for working capital and other corporate purposes. At the end of the fourth quarter, we had $78.9 million of cash, full availability on our $350 million credit facility and approximately $344 million available on our ATM program. We have no debt maturities through 2021, with our next maturity being our $100 million term loan in 2022. Finally, our net debt to adjusted EBITDA ratio at year-end was approximately 3.7x, which equates to about 12.3% debt to total enterprise value.

With regard to our dividend, on February 10, our Board of Directors declared a cash dividend of $0.215 per share for the first quarter of 2020 payable on April 15th to common stock and unit holders of record as of March 31. Additionally, our Board of Directors declared a Series A and B preferred stock cash dividend of approximately $0.37 per share for the first quarter of 2020 payable on March 31 for our Series A and B preferred stockholders as of March 13. Also, our Board of Directors declared a Series C preferred stock cash dividend of approximately $0.35 per share for the first quarter of 2020 payable on March 31 to our Series C preferred stockholders as of March 13. Finally, I would like to introduce our outlook for 2020. We expect to achieve company share of core FFO within a range of $1.30 to $1.32 per share.

Our guidance is supported by several factors. We expect year-end stabilized same-property occupancy within a range of 96% to 97%. We expect to achieve stabilized same-property NOI growth for the year of 3.7% to 4.2%. Please note that our 2020 stabilized same-property pool comprises 160 properties with an aggregate of 19.8 million square feet, representing approximately 75% of our consolidated portfolio square footage. This portfolio was 97.9% occupied at January 1, 2020. For G&A, we anticipate a full year range from $36.5 million to $37.0 million, including about $14 million of non-cash equity compensation. Please remember that our guidance refers to our in-place portfolio as of today and the pending acquisition of the 11-property portfolio previously disclosed in the Form 8-K filed in December 23, 2019. Our guidance does not include any assumptions for acquisitions, dispositions or capital transactions, which have not yet been announced. Also, our guidance for core FFO does not include acquisition costs or the costs that we typically exclude when calculating this metric. And finally, as a note for 2020, we are only providing guidance for stabilized same-store NOI, as we believe this is the best measure to compare the performance of our operating portfolio.

That completes our prepared remarks. With that, we will open the line to take any questions. Operator?

[Operator]

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Your first question comes from the line of Jamie Feldman with Bank of America/Merrill Lynch. Please proceed with your question.

[Jamie Feldman, Bank of America/Merrill Lynch]

Great, thank you. I guess just to start out, can you talk about your outlook for cash same store NOI next year, I know you provide GAAP.

[Adeel Khan, Chief Financial Officer]

Yes. Hi, Jamie. So the outlook for cash, and just for everybody, 3.7%, 4.2% was the GAAP numbers. Cash will be 5.2% to 5.7%, so 1.5% higher.

[Jamie Feldman, Bank of America/Merrill Lynch]

Okay. And then can you talk about your assumption for interest expense for next year, what's baked into the model and just how we should think about any kind of pieces of debt that might be, you know, I know you said you have no expirations over the next couple of years, but any other kind of unique financing we should be thinking about?

[Adeel Khan, Chief Financial Officer]

Right, Jamie, so Adeel here again. So for debt, just making certain that we are factoring in the model the debt that we placed last year, you are going to see the full year impact of that, but that was fixed debt, $75 million, $25 million, which was done in Q3 last year. So that needs to be in the model for everybody. And the other piece that is part of our guidance is relating to the 11-property portfolio, which is going to have some assumed debt and that 8-K was issued in December 23, so that's also factored into our interest expense for next year, which is also flowing into the FFO guidance that we issued.

[Jamie Feldman, Bank of America/Merrill Lynch]

Okay. And then – sorry to keep picking on some of these details, so like leasing spreads, what do you guys think that looks like next year?

[Howard Schwimmer, Co-Chief Executive Officer]

Hi, Jamie, it’s Howard. We don’t see really any changes in the market. Today in 2020, things are fast paced, we are signing a lot of transactions. And from what I’ve seen through the beginning of the year, we are pretty similar to where we’ve been in the past, maybe not as high as the past quarter we’ve just reported on in terms of those spreads, but very impressive spreads.

[Michael Frankel, Co-Chief Executive Officer]

And Jamie, it’s Michael. Good to hear your voice. I think we’ve indicated that the mark-to-market on expiring leases is about 15%.

[Jamie Feldman, Bank of America/Merrill Lynch]

Okay. And then just last from me. Some of your peers have talked about just how business feels today versus this time last year. How would you answer that question?

[Michael Frankel, Co-Chief Executive Officer]

It’s a great question and business feels equally strong as it did a year ago. We’re not seeing any signs of change in terms of tenant demand.

[Jamie Feldman, Bank of America/Merrill Lynch]

Okay, alright. Thank you.

[Operator]

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

[Blaine Heck, Wells Fargo]

Hey, thanks. Good morning out there. So clearly the coronavirus has been dominating headlines and has been a popular topic of discussion among retailers and some logistics companies. Can you just talk about whether you guys have seen any disruption in leasing or even discussions with tenants that might be worried about the impacts to their supply chain?

[Howard Schwimmer, Co-Chief Executive Officer]

Hi, Blaine, it’s Howard. Yes, it’s a great question and we really – we pulled all of our leasing people, the property management staff and I think really the best barometer that we’re seeing as a couple of our projects. One is a few of the small-bay, dock-high projects in the Inland Empire as well as the San Gabriel Valley and there is – one was a 1.1 million square feet project and we have two others that – really, they add up to about 1.5 million feet, they are occupied in the high 90% range. And our leasing people, surprisingly actually, were telling us there’s been a resurgence of leasing activity in the beginning of the year. So surprisingly, we are doing quite well and they’re not seeing any signs of a slowdown in those particular projects, which are, I would think, probably 80% or more occupied by Asian businesses. We also talk to a few of the different tenants we have that are expiring right now that we are already in lease renewal negotiations that are 3PLs. And interestingly, they are all telling us that they’re diversifying – rather their customers are actually diversifying where their goods are coming in from, so they’re not as reliant on China and some of these guys are actually talking to us now about even taking more space so again not really seeing any impact or a slowdown in demand or growth from the 3PLs.

[Michael Frankel, Co-Chief Executive Officer]

And Blaine, it’s Michael. I’ll add to that too as a reminder that our tenant base in infill Southern California in our portfolio is disproportionately – demand is disproportionately driven by local, regional consumption. And about 50% of all imports are distributed and consumed regionally, plus or minus. And we have seen other periods, where, historical periods where we have seen a slowdown or even a shutdown of the port, which would be a good proxy for a slowdown of imports driven by anything. For instance in 2002, we had an actual shutdown of the ports due to labor. And what we saw during those periods was literally no change at all in tenant demand within our portfolio. And again, it’s principally because it’s demand driven, consumption driven, as Howard stated. The tenants get creative, they need to in terms of where they find the goods or how they source the goods, but demand has not shown any signs of letting up.

[Blaine Heck, Wells Fargo]

Great, that’s helpful. Then great job on the renewal lease that you guys signed with Cosmetic Labs during the quarter. I think the other large expiration you guys have this year is 280,000-or-so square feet with Command Logistics. Can you just speak to the probability of renewal there or any discussions you guys are having with that tenant?

[Howard Schwimmer, Co-Chief Executive Officer]

Sure. This is Howard again, Blaine. So if you looked at our top 20 expiring leases, that’s about 1.75 million square feet that represents about 45% of all of 2020 expiration. And today, we are actually in discussions for renewals with about 70% of those top 20 tenants. And that certainly also includes Command, which, at this point, we feel there’s a high probability on their renewal as well.

[Blaine Heck, Wells Fargo]

Great. Last one from me. It was reported I think that you guys bought a property from Prologis this quarter, $41 million I think it was the Slauson Commerce Center. Can you just talk about any differences you guys may have seen in negotiating with a large kind of publicly traded REIT versus maybe some of them off-market deals you guys do with more local players?

[Howard Schwimmer, Co-Chief Executive Officer]

No, I would say, it’s always a pleasure to work with a professional. And most of the time when we deal with institutional sellers or large REITs such as Prologis the transactions go very smooth because we all know what we are doing.

[Blaine Heck, Wells Fargo]

Do you guys expect a lot more opportunity could come from PLD since they’re trimming down a couple of the large portfolios they purchased recently or is this more of an one-off?

[Howard Schwimmer, Co-Chief Executive Officer]

Well, we bought actually two properties from them, the other was the 700,000 chain distribution building in Pomona, that was also purchased from them as well. And we have ongoing discussions and we’d love the opportunity to buy more. But, obviously, we can’t predict or tell you anything about what’s happening today.

[Blaine Heck, Wells Fargo]

Alright. Fair enough. Thanks, guys.

[Operator]

Your next question comes from the line of Manny Korchman with Citi. Please proceed with your question.

[Manny Korchman, Citi]

Hey, everyone. Adeel, if we look at your occupancy guidance for the year, it shows a significant dip at year-end ‘20 versus January 1st of ‘20. Can you talk about sort of the – maybe the trend of occupancy throughout the year and what’s causing that year-end stat to drop as much as it is?

[Adeel Khan, Chief Financial Officer]

Hey, Manny. Thanks for the question. And yes, so just as a reminder, that’s a year-end guidance on the occupancy and that is a spot number at – as of 12/31/2020. So it’s not indicative of what the average occupancy might look like for the full year and that is going to be higher. The second piece that is important to note is that the occupancy that we guide, specifically the 97% on the high end at the end of the year are on the low end, and it is not directly correlated with the NOIs. So you are benefiting from the average occupancy that’s within the portfolio during the year. So there is not a direct correlation between those two. But that’s not different from what we’ve experienced in the past, those are just timing differences and nothing more than that. 1/1/2021, those things could be rectified pretty quickly and it’s based on the releasing spreads that you have seen over the 12 plus quarters, I think that gives us a lot of opportunity and ability to take those leases that are not being renewed and being push – able to push higher rents. So I think it’s an opportunity. There is nothing more than timing from that perspective, but the correlation to the NOI is not 1 to 1.

[Michael Frankel, Co-Chief Executive Officer]

Manny, this is Michael. Thanks for joining us today. I’d like to give a little insight in terms of how we think about expirations and occupancy on a go forward basis relative to cash flow growth and the opportunity to drive NAV growth. And so if you were sitting here at Rexford management, if you were in our shoes and you looked at those expiring leases through the end of the year and next year, for example, we have a lot of optionality associated with those choices. And quite – it’s not infrequent that we choose to not renew a tenant who would otherwise wish to stay in the space because we see an opportunity to drive additional cash flow and NAV growth. And I will give you a couple of examples. Let’s just say we have a space, take a typical property, 100,000 square feet. Let’s assume $10 per square foot rent per year and let’s say we’ve owned that property for a while. And as we have stated, we have about a 15% mark-to-market on expiring leases into the next year in few years. If all we did was roll that tenant and maybe we suffered a dip in occupancy for a short period of time to a higher tenant paying about 15% more rent, well, there alone we have driven NAV by 15%. Now, let’s take another example that gets even more interesting. Let’s look at our acquisitions last year. And of the 34 acquisitions we made last year, 28 of them had in-place inbound cash flow at about a 5% cap rate. And even though they may not have been fully leased and even though there may have been some value creation opportunities with low embedded rent. On average, those same 28 properties have a projected stabilized cap rate that’s projected about 6%. So now take that same property example, 100,000 square foot property, $10 rent today when we bought it, but at a 5% cap rate, that means we paid $20 million for the asset. Let’s assume that we saw for a 6% stabilized cap rate that drives rent to $1.2 million from $1 million, that’s a 20% increase in rent, much of which would fall straight to the FFO bottom line. And let’s remember that market cap rates are substantially lower than what we are typically buying at. So let’s assume a market cap rate around 4%, although we know that market cap rates are oftentimes below 4%. If you take that math together, the asset would then be worth $30 million, which would result in a 50% increase in NAV. Now, I am just going to take one more example and then I will finish up here, but let’s assume that another option for some expiring space is that we can reposition it and we do that a lot. Let’s assume that same asset, 100,000 square feet, starting with $10 rent, bought at a 5% cap. Let’s assume that we invest another 15% of the purchase price, so we invest another $3 million, the total cost becomes $23 million. But if you will notice, as we have disclosed last year, all of our repositioning work we saw to about an 8.1% un-levered stabilized yield on completions last year, it’s not to say we are going to do that every year, but it’s indicative of what our capacity is.

So if you take that math together and the total value creation there would be about 46 –resulting NAV would be about $46.5 million. And so that’s about – that’s over 100% increase in NAV on total cost of $23 million. So we have increased NAV by 2x. And frankly we do a lot of deals where we are increasing NAV by substantially greater amounts. So I think it’s really important to internalize and understand the Rexford business model that occupancy is not the primary measure of how we are creating value here at the company and that’s one of the beautiful things about Rexford that truly differentiates us from any other peer in the industrial sector and from many other REITs in the REIT universe and then we have a fragmented universe of tenants and spaces within our portfolio and within our pipeline of acquisitions, where we have continuous opportunities to create a tremendous amount of value. So oftentimes, you will see us trade occupancy for value creation.

[Manny Korchman, Citi]

Thanks, Michael. Just switching topics, the Prop 13 split roll has been a big topic of conversation recently. Can you give us your updated thoughts and impacts on your portfolio and whether it’s changed anything in the transaction market to-date with sellers trying to get ahead of it?

[Adeel Khan, Chief Financial Officer]

Hey, Manny, it’s Adeel. Thanks for the questions. So if the Prop is passed in November 2020 would be effective in 2022 and we ran a bottoms-up analysis and – based on our current leases and what the tax complexion looks like in terms of assessed values, so on and so forth. The impact would be less than a $0.01 of FFO if we were to do this today. So it’s not very material in terms of the FFO impact. The other thing that’s important to note is which we have always educated everybody is about 48% of our portfolio has been acquired over the last 3 years. So certainly, we are benefiting from that and I think that allows us to do things that are different. The other thing is that about 90% of our leases allow us to pass the increases back. So that’s why, the impact is very mitigated when I spoke about the FFO impact. So, it’s a pretty great spot for us to be. And I am sure Howard and Michael can add a little bit more color to just the opportunity set, what it does in terms of us playing in a leveling playing field in terms of comparing with the other landlords who are going to see this increase.

[Operator]

[Operator Instructions] Your next question comes from the line of Eric Frankel with Green Street Advisors. Please proceed with your question.

[Eric Frankel, Green Street Advisors]

Thank you. I just want to discuss the capital markets environment obviously REIT share prices have come up quite a bit since the start of the year. Has that changed the mindset of either you or your competitors in terms of just the investment landscape and what buyers are willing to bid in terms of perspective returns on acquisitions?

[Michael Frankel, Co-Chief Executive Officer]

Hey, Eric, it’s Michael. Thanks for joining us today. Obviously, we can’t speak for competitors out there, but we see intense activity on marketed transactions, lot of capital trying to get into Southern California industrial, because it’s the strongest market in the country. And but that’s – it’s been that way pretty much forever. Is it more intense today than it was a year ago? It’s equally intense I would describe it that way. And with regard to how we look at the world, I think that was the first part of your question, we don’t really think about our hurdle rates or weighted average cost of capital in terms of the spot cost of debt or equity, because that can change on a daily or almost hourly basis, particularly with the stock price. When we think about our weighted average cost of capital and the hurdle rates more in terms of steady state cost of capital and on the equity and debt side and so our hurdle rates are probably little higher than a lot of our competitors internally and that’s why you see us actually working so hard to identify off-market and lightly marketed transactions which comprised I think about almost 80% of our transactions last year. So what’s amazing with that intensity of activity that we turned down about 90% of the deals that we actually sent LOIs out on last year, we sent out LOIs on about $10.5 billion worth of transactions last year. And frankly, had we been willing to pay just a little more on a lot of those deals, we would have – we had the potential to deliver substantially higher transaction volume last year, but we are staying true to our knitting, staying focused, going to keep the discipline and hopefully that gives you a little insight to how we see our hurdle rates and the investment activity given in light of today’s capital markets.

[Eric Frankel, Green Street Advisors]

That’s very helpful color. Thank you. Adeel, just a follow-up on the Prop 13 split roll, could you maybe just clarify how much your reimbursed taxes would increase if the proposition came through and you had higher assessed values in 2022?

[Adeel Khan, Chief Financial Officer]

Yes, absolutely. So right now, again, obviously, we are looking at this analysis as of today right now. The gross dollar amount would be about $9 million approximately in terms of increase the dollars in terms of taxes. Keep in mind that it’s a 1% or maybe slightly higher increase just on an assessed value and the rest of it is direct assessments, which are not impacted. So, it’s about $9 million of which we are recovering most of it and that’s how we drove to that little less than $0.01 in terms of the net FFO impact after recoveries.

[Eric Frankel, Green Street Advisors]

Okay, thank you.

[Operator]

Your next question comes from the line of Jon Petersen with Jefferies. Please proceed with your question.

[Jon Petersen, Jefferies]

Great, thank you. In the 8-K you put out on the 11 property portfolio, which I know you guys said it in your guidance indicated that you might finance that through OP units. Curious if there is any update there on how you plan to – if you could still continue to do that and if how that is worked into the guidance?

[Michael Frankel, Co-Chief Executive Officer]

Hey, Jon, it’s Michael here. Thanks for joining us today. We are just not able to update at this time, but once the transaction closed, you will get all the information, I apologize for not able to give anymore information.

[Jon Petersen, Jefferies]

Okay. So I mean – but I guess how is it factored into the guidance then?

[Michael Frankel, Co-Chief Executive Officer]

You know, we really can’t comment, because we haven’t closed the transaction. And frankly, we don’t have that information yet, so…

[Jon Petersen, Jefferies]

Yes.

[Michael Frankel, Co-Chief Executive Officer]

But as soon as we know, you will know.

[Jon Petersen, Jefferies]

Okay. And maybe if you could just speak more broadly in terms of conversations you are having with potential sellers and the attractiveness of using your OP units as currency, I mean are you seeing more or less of that today?

[Howard Schwimmer, Co-Chief Executive Officer]

Hi, Jon, it’s Howard. Yes, we have seen those conversations growing in frequency. I think that from where we are as a company, we are much more stable and attractive business for people to consider trading their assets into. And frankly, I think at this point in the cycle, people appreciate the focus being in Southern California, the strength of the market here and most of the people we talk to obviously have – we are talking about their assets in Southern California, where they have great familiarity with the markets. And it’s a lot easier to understand what they would be getting for trading into a company like Rexford versus potentially another business that perhaps owns assets around the country, around the world. These people are used to being able to understand and make decisions locally. So, those conversations are getting more fruitful and we are hopeful that into the future that we will be able to transact more frequently on OP unit type basis.

[Jon Petersen, Jefferies]

Alright, thanks for the color. Thank you.

[Operator]

Your next question comes from the line of Michael Mueller with JPMorgan. Please proceed with your question.

[Unidentified Analyst]

Hi, good morning. This is Sarah on for Mike Mueller. Just a question on cash spreads, given that there has been 20% range, but do you see that being indicative of the overall portfolio mark-to-market today?

[Michael Frankel, Co-Chief Executive Officer]

I am sorry, could you repeat the question you are breaking up a little bit there?

[Unidentified Analyst]

Yes, given that cash spreads have been in the mid-20s, I guess, 2019, do you see that as being representative of the overall portfolio mark-to-market today?

[Michael Frankel, Co-Chief Executive Officer]

Did you ask cash rent growth as projected mark-to-market 20% in 2019, was that the question?

[Unidentified Analyst]

Yes. Is that representative of the overall portfolio mark-to-market given that they have been in the mid 20s in 2019?

[Michael Frankel, Co-Chief Executive Officer]

So, I think what we have indicated is on the expiring leases, there is about a 15% mark-to-market and then of course, on the in-place leases, typically we have about a 3% rental rate bump embedded in those contractually. So that’s sort of the color that we can provide at this point in time.

[Unidentified Analyst]

Okay, thank you.

[Operator]

Your next question comes from Chris Lucas with Capital One Securities. Please proceed with your question.

[Chris Lucas, Capital One Securities]

Hi, guys. Just a question on the G&A guidance for 2020, looks like about half of the bump in gross dollar increase in guidance from ‘20 to over ‘19 is related to non-cash comp. The rest of it, is there headcount increases associated with that or infrastructure investments or how should we be thinking about what you are doing with the sort of $3 million plus increase in G&A on the cash side?

[Michael Frankel, Co-Chief Executive Officer]

Yes, we appreciate it and thanks for joining us today. So there is some headcount increase, not so much on the facility side marginally, but more on headcount. And I think also if you look at the G&A increase, you brought up a great point, which is the bulk of it is non-cash equity and the bulk of that frankly is performance-based. And so at the end of the day, if we are not performing exceeding at high levels over the longer term, then we won’t actually receive that. Unfortunately, we have to account for it today. And I think also if you look at the G&A growth relative to the growth of the company, whether you measure it by FFO growth, whether you measure it by portfolio growth in terms of square footage, which sometimes drives headcount growth, you will find that the G&A growth has been substantially lower than the actual growth of the company. So we think we do have a good amount of operating leverage embedded in the company. And so maybe we are doing a little catch up this year on the organizational side, on the staffing side, relative to the growth we have seen over the prior two, three years. But I think as we move forward, you’ll continue to see more leverage in the operating structure of the company and those margins continue to grow – operating margins continue to grow as well.

[Adeel Khan, Chief Financial Officer]

And Chris, this is Adeel. Just to add just on the headcount piece, obviously, about a year ago when the leasing costs are not part of the G&A as our portfolio continues to grow, that’s some of the headcount that you are also experiencing, because that’s part of the G&A. And as our portfolio square footage is increasing very meaningfully and that takes certain caliber of people and just the overall headcount, so that’s also something you are experiencing, just wanted to add that color in terms of the headcount that Michael just talked about.

[Chris Lucas, Capital One Securities]

Okay, thanks. And just one more follow-up on that, which is just simply as it relates to the CFO transition, is there embedded costs associated with that process in the guidance or is that a sort of an extra deal?

[Adeel Khan, Chief Financial Officer]

Yes, Chris, Adeel, again. So we took a conservative approach and we essentially kept my comp in its entirety cash and stock in its entirety for the full 2020 year. So I think that was the most conservative way to do it. And obviously, once the transition is completed, we will have further announcements and we can further revise guidance if necessary, but right now, we took the most conservative approach.

[Chris Lucas, Capital One Securities]

And then Mike or Howard, could you comment in terms of where you are in that search process?

[Michael Frankel, Co-Chief Executive Officer]

Yes, we can comment a little bit, but of course we will disclose when we actually have more concrete knowledge. But I would say that the interest in the role at Rexford has been very, very strong. One of the side benefits of sending out the 8-K some weeks ago was to kind of put everybody in the finance world that operates or is interested in operating in a REIT on notice that there is an opportunity here. And we are very fortunate we are operating in the strongest industrial market in the country. I think we have got a great company, a great team, and frankly we are – in terms of what we are going to create here at Rexford, our vision for the future, we truly feel we are barely out of the starting gate. And so it’s an exciting opportunity for the right candidate. And so far, we are cautiously optimistic based on a very high quality of interest that we have received so far.

[Chris Lucas, Capital One Securities]

Great, thank you. That’s all I had.

[Operator]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

[Michael Frankel, Co-Chief Executive Officer]

On behalf of the company, we would like to thank everybody for tuning in today and we look forward to reconnecting in about 3 months.

[Operator]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.