Rexford Industrial Realty Inc

NYSE:REXR

Earnings Call Transcript 2022-Q4

[Operator]

Greetings. Welcome to Rexford Industrial Realty, Incorporated Fourth Quarter and Full Year 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 will now turn the conference over to Aric Chang, Senior Vice President of Investor Relations and Capital Markets. Thank you. You may begin.

[Aric Chang]

We thank you for joining Rexford Industrial’s fourth 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 by federal securities laws. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information about these risk factors, please review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future.

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

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

Now, I turn the call over to Michael.

[Michael Frankel, Co-Chief Executive Officer]

Thank you, Aric. I’d like to welcome everyone to Rexford Industrial’s fourth quarter 2022 earnings call. I will begin with a brief introduction. Howard will discuss our investment activity followed by Laura, who will discuss our financial results and guidance for 2023.

Our strong results reflect our unique position as the nation’s largest pure-play U.S.-focused industrial REIT driven by our entrepreneurial approach to creating value within infill Southern California.

For the full year 2022, Rexford increased earnings or FFO per share by 20%, enabled by a full 45% increase in core FFO. This brings our average earnings per share growth over the prior three years to 22%, substantially exceeding the earnings growth of all other industrial REITs, which averaged 13%. We grew consolidated NOI by 40% compared to the prior year driven by strong internal growth, lease-up of our value-add repositionings and accretive external growth.

We completed 5.1 million square feet of lease activity during the year, achieving leasing spreads of 81% on a GAAP basis and 59% on a cash basis. Our team closed on a record $2.4 billion of investments for the full year, 90% of which were acquired through off-market or lightly marketed transactions, thereby enabling substantially above-market projected return on investment.

Although we face a higher level of potential economic uncertainty this year, we continue to see strong tenant demand. Our infill Southern California markets are operating at well above structural full occupancy of about 1% market vacancy and with the highest year-over-year market rent growth of any major industrial market in the nation.

Infill Southern California continues to experience a virtually incurable supply demand imbalance due to an extreme scarcity of land and development constraints that prevent any material increase in new supply. In stark contrast, many other major industrial markets are experiencing increased new supply, reaching record levels.

Looking forward, Rexford is exceptionally well-positioned with embedded internal NOI growth of 43%, equal to an incremental $200 million of NOI contribution over the next 24 months assuming no further acquisitions and assuming today’s market rents without further growth.

This includes $78 million of incremental embedded NOI driven by the mark-to-market on our leases and our contractual annual rent steps plus $48 million of incremental NOI from repositioning and redevelopment projects stabilizing over the next two years and $74 million of incremental NOI projected over the next 24 months from recent investments closed during the fourth quarter and year-to-date.

We continue to operate with a low leverage balance sheet at about 15% net debt to total enterprise value. This achieves the dual outcomes associated with protecting our business during uncertain economic times while also positioning the company to continue to capitalize upon highly accretive internal and external growth opportunities.

Thanks to the hard work of the Rexford team, we are pleased to announce an increase in our first quarter dividend to $0.38 per share, which represents a 21% increase over the prior year. With this increase, our five-year dividend per share growth averages 19%, which ranks among the highest in the REIT industry.

Above all else, we acknowledge that the primary determinant of our future success is the quality of our people and our deeply collaborative entrepreneurial team. We thank Team Rexford for your extraordinary work, creativity and dedication that continue to differentiate our great business.

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

[Howard Schwimmer, Co-Chief Executive Officer]

Thank you, Michael. I also want to acknowledge and thank our Rexford team for their excellent 2022 achievements. Our stabilized portfolio is operating at historically low levels of vacancy, and we continue to see a strong diversity of tenant demand. By way of indication, we have current leasing activity on over 90% of our vacant space available for occupancy. Based on our internal portfolio metrics, market rents increased 25% in 2022. And the weighted average mark-to-market for our entire portfolio is now 73% on a net effective basis and 58% on a cash basis.

According to CBRE, vacancy across our infill markets was 1.1% at the end of the fourth quarter. Two of our largest submarkets, Orange County and South Bay, comprising nearly 0.5 billion square feet saw vacancy decline to 0.7%. Many other submarkets, including LA Mid-Counties, Commerce Vernon, San Fernando Valley and Ventura County, still have vacancy below 1%. Based on these unique market dynamics and our current leasing activity, we believe there is potential for upwards of 15% market rent growth this year within our infill Southern California markets.

With regard to the investment market, we continue to see marketed transactions within our infill markets trading at cap rates in the mid-3% to low 4% range as buyers are still drawn to our market’s consistent outsized rent growth and stability through economic cycles. We continue to focus our acquisition efforts on highly selective off-market opportunities that we originate through our proprietary data-driven acquisition sourcing.

For the full year, we completed $2.4 billion of investments across 52 transactions totaling 5.9 million square feet and 31.5 acres of land for near-term redevelopment, which, in aggregate, are projected to generate an unlevered stabilized yield of 4.8% on total cost. 90% of these investments were sourced through off-market or lightly marketed transactions.

With regard to the fourth quarter, we completed $358 million of acquisitions, which are projected to generate an unlevered stabilized yield of 5.4% on total investment. Subsequent to quarter end, we closed two stabilized transactions totaling $405 million, which are currently generating an aggregate 5.1% initial unlevered yield, growing through contractual rent increases of about 4% per annum.

We currently have a pipeline of over $125 million of highly accretive transactions under contract or accepted offer, which are subject to customary closing conditions. These prospective investments are projected to generate an aggregate initial yield of 5%, growing to a 6% stabilized unlevered yield on total cost. Rexford’s differentiated acquisition strategy continues to enable substantial growth opportunities with $405 million of investments closed year-to-date, $125 million in our near-term pipeline and 250 million square feet of off-market opportunities with identified catalysts tracked through our proprietary origination methods.

With regard to our repositioning and redevelopment activity, for the full year, we stabilized 7 projects totaling $140.1 million in overall investment at an aggregate 8.9% unlevered stabilized yield, generating an estimated $175 million of value creation. In addition, we have another $1.1 billion of repositioning and redevelopment projects representing 3.3 million square feet in process or projected to start within the next 24 months. These investments have a remaining incremental spend of $385 million and are expected to generate an aggregate unlevered yield on total cost of 6.5%, representing an estimated $500 million of value creation, assuming today’s market rents and no further rent growth.

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

[Laura Clark, Chief Financial Officer]

Thank you, Howard. I want to first acknowledge our incredible team who produced another remarkable quarter of results and an exceptional year that exceeded expectations. Same property NOI growth for the quarter was 7.3% on a GAAP basis and 10.7% on a cash basis. For the full year, same property NOI growth was 7.4% on a GAAP basis and 10.5% on a cash basis, driven by our record 2022 leasing spreads of 81% and 59% on a GAAP and cash basis respectively.

Strong tenant demand for our high quality portfolio coupled with low market vacancy resulted in average same property occupancy for the full year at 98.7% and 98% for the quarter at the high end of our guidance expectations. Annual embedded rent steps in our fourth quarter executed leases continue to remain at record levels at 4.4% compared to 3.9% a year ago. Bad debt as a percent of revenue was approximately 10 basis points positive for the full year, driven by the exceptionally strong credit of our diverse tenant base and reversals of prior reserves.

Note that even if these reversals were excluded, bad debt as a percentage of revenue would’ve been approximately 20 basis points well below the historical average of 50 basis points. This solid operating performance combined with our accretive investments drove fourth quarter core FFO per share growth of 9% over prior year and 20% for the full year.

As a result of this strong performance and Rexford continued commitment to delivering superior total shareholder return, our Board declared our first quarter dividend of $0.38 per share, representing a 21% annualized increase over the prior year.

Turning to the balance sheet and capital markets, our capital allocation strategy includes a highly selective investment process and fortress balance sheet that delivers accretive near and long-term cash flow and NAV growth. Our low-leverage balance sheet with net debt to EBITDA at 3.7 times provides tremendous flexibility and access to attractive sources of capital to fund accretive future internal and external growth opportunity.

In recognition of our balance sheet strength and the quality of our growth in 2022, we were upgraded to BBB+ from S&P and Fitch and to Baa2 from Moody’s.

In the fourth quarter and subsequent quarter end, we executed on a number of capital markets transactions to fund investment activities. We sold a combined 12.5 million shares of common stock on a forward basis through the ATM and a public offering for total gross proceeds of approximately $700 million.

In addition, we settled 14.1 million shares of common stock associated with forward equity sales for a total of $813 million in net proceeds. We currently have total liquidity of $1.1 billion, comprised of 73 million of net forward proceeds remaining for settlement, 51 million of cash on hand and full availability under a $1 billion revolver.

Moving to our 2023 outlook. Our core FFO guidance range is projected to be $2.08 to $2.12 per share, representing a 7% increase at the midpoint over the prior year. 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 in our supplemental package. A few highlights include same property NOI growth is projected to be 9.25% to 10.25% on a cash basis and 7.5% to 8.5% on a GAAP basis. Components of our same property growth include full year cash leasing spreads of 55% to 60%, and GAAP leasing spreads of 70% to 75%.

Year-end same property occupancy is expected to be 98% in line with year-end 2022 occupancy. Average same property occupancy for the year is projected to be 97.5% to 98%, and bad debt as a percent of revenue is projected to be 35 basis points.

Finally, our acquisitions completed in 2022 and year-to-date are projected to contribute approximately $73 million of incremental NOI.

This concludes our prepared remarks and we now welcome your questions. Operator?

[Operator]

Thank you. [Operator Instructions] Our first question comes from Craig Mailman with Citigroup. Please proceed.

[Craig Mailman, Citigroup]

Hey, everyone. Laura, I noticed from the operating update today, you guys raised the mark-to-market assumption in the portfolio. Could you just give a sense of what you’re seeing in the last 30 days? It gives you comfort with that and also I noticed you gave the 15% market rent growth assumption. Seems like the first time you guys have put that out there. Maybe if there’s differences in some of the submarkets that you guys invest in relative to that average?

[Laura Clark, Chief Financial Officer]

Hey, Craig. Yes, thanks for your question. To answer your question, yes, we did project market rent growth of approximately 15% in 2023. And I think it’s important to talk about kind of the factors that went around generating that forecast. And part of that is the current activity that we’re seeing in the market. So first, really three factors went into that forecast.

First is the current activity in the market and within our portfolio. Year-to-date is on pace to exceed our recent expectations. We’ve seen a pickup and activity since the beginning of the year. We have activity on over 90% of our vacant spaces, and while one month certainly doesn’t represent a trend, we saw a sequential market rent growth in January of about 1.5%.

The second factor going into that forecast is really our ongoing tenant research and outreach. We conducted a very – as we can – we always do a deep dive into the regional tenant demand with an infill Southern California, and we continue to see a very wide diversity of demand. And then lastly in that forecast is we really take into account the ongoing and persistent supply and demand and balance that we expect to continue within our infill markets.

[Craig Mailman, Citigroup]

That’s helpful. Maybe just on the mark-to-market commentary there and kind of is that just a space-by-space buildup that’s giving you that with all the activity you guys have on vacancy or is that an output of this 15%?

[Laura Clark, Chief Financial Officer]

Yes, we – so we – mark-to-market our portfolio quarterly and we do that from the bottom up from a state-by-state [ph] basis. We did that in our 4Q outlook that we posted about 30 days ago. We had done a mark-to-market in order to get that as current as possible. We did another mark-to-market of the portfolio over the – about a week ago. So we wanted to be able to provide an update on what that market rent growth looks like within the portfolio over the last 30 days. And we’ve certainly seen a strong resurgence of tenant demand and our forward outlook remains really strong. And that’s 1.5% sequential growth that we saw in market rents over the last 30 days.

[Craig Mailman, Citigroup]

And then just turn into the acquisition market. I mean, it’s – you guys are coming out of the gate strong with the 405 million. Could you – and you guys are getting these at stabilized yields on your basis of 5% and higher. Could you just talk about how you guys continue to get these over the last couple months and it seems like spot cap rates are kind of all over the place from a market perspective with the longer-term leases seeing more pressure and maybe other shorter-term deals kind of not seeing as much pressure. So just any viewpoints on that would be helpful?

[Howard Schwimmer, Co-Chief Executive Officer]

Sure. Hi, Craig. It’s Howard. Yes, deals seem to be all over the place in the market. There’s still plenty of capital chasing transactions and we’re seeing that marketed transactions. As I mentioned in prepared remarks are still trading in those low 4% even, sub 4% in some instances. But the secret sauce here at Rexford is really the research we do, the relationships and our ability to transact in an off market or lightly [ph] marketed manner. For the year, we transacted 90% off market. For the quarter 100% off market. And relationships do pay off and we’re able to find situations where there’s a need by a seller. And for instance, the transaction we just mentioned closing in – the earnings disclosures, the 1 million feet in Inland Empire West. We actually had a relationship with that seller and they had a need to close quickly. And because of that, we were able to capitalize on those needs and were able to achieve a 5% yield on a building that you typically see trading well below 5%.

[Craig Mailman, Citigroup]

And the one kind of topic that we’ve been hearing more recently, and I know I’ve brought up to you guys is when you look at issuing equity, you guys did the last deal sub 4%. But given the mark-to-market in your portfolio, your stabilized yield on your stock is probably in the mid-to-high 5s, right? And so you guys are putting that capital to work on your basis and stabilize yields in the mid-5s. Could you talk to maybe what – how you guys look at your stabilized yield or average yield over long term to put against that stabilized yield, right? It’s accretive on FFO, but long-term NAV, how should we think about the stabilized yields that you guys give versus maybe an average yield over a seven year to 10 year period as we think about sort of NAV accretion long term versus that stabilized yield where you’re issuing equity?

[Laura Clark, Chief Financial Officer]

Hey, Craig. It’s Laura, I’ll jump in here. I think it’s a great question about kind of how we think about growth. And when we think about, our stabilized yields that we’re acquiring at today, they represent a very healthy spread over current market yields. And certainly that – is what differentiates Rexford and our strategy. And I think that when you think about our business model, it’s about how we create value above market yields through our acquisition sourcing, through our asset management, through repositioning, redevelopment expertise. And so, when we think about investing, we’re investing a basket of goods. And so, we’re looking at core plus and value add opportunities. You’ve seen us acquire some core assets as well as our repositioning redevelopment.

And when you put those together, we’re generating very significant cash flow growth. And if you look over the last five years, our FFO per share CAGR has been 15% annually, and that compares to the peer group of 10%. So, our business model allows us to generate that outsized cash flow growth. And so when we think about investing internal or external growth are not mutually exclusive. And both diversify our overall risk profile and contribute to accretive NOI and NAV growth,

[Craig Mailman, Citigroup]

Is there a way to look beyond that 5.5% versus your cost of capital that maybe is a better gauge of where you guys are playing that capital out longer term in terms of, are you guys hitting high single digit unlevered hurdles? Is that five and a half plus bumps over the life getting you well in excess of that stabilized yield that you guys have on your stock? Just any kind of thoughts around that?

[Laura Clark, Chief Financial Officer]

Yes, that’s a great question, Craig. And I think a really good point. So when we quote these stabilized yields, these stabilized yields are a point in time. And the embedded rent steps within our leases are pretty powerful. If you look at the embedded steps that we signed in the fourth quarter within all of our executed leases, the average was 4.4%. For the full year 2022, the average rent step was 4.3%.

So when you look at the power and the compounding effect of those embedded steps, those stabilized yields grow considerably over time. So that 5.5%, 6% stabilized yield is going to grow through those 4.4%, 4.5% annualized rent steps.

[Craig Mailman, Citigroup]

Okay. Great. Thank you.

[Operator]

Our next question is from John Kim with BMO Capital Markets. Please proceed.

[John Kim, BMO Capital Markets]

Thank you. I wanted to ask about your leasing spreads in the fourth quarter very healthy compared to where it was historically. But just comparing every those last couple quarters, it did moderate a little bit and it seems like that’s going to continue next year. So I was wondering if you could just comment on that dynamic?

[Laura Clark, Chief Financial Officer]

Yes, John. In terms of our leasing spreads, maybe we continue to see extremely strong leasing spreads. In the fourth quarter, our leasing spreads were impacted by one lease that had a fixed option renewal at a 6% increase. So that lease had an impact, fixed option had an impact on our leasing spreads of about 700 basis points. So, if you were to look at leasing spreads without that lease, you look at GAAP and cash leasing spreads that are really in line with what we’ve experienced for the full year.

[John Kim, BMO Capital Markets]

Are there any leases like that in 2023? And when I look at your lease expiration schedule, it looks like the expiring rent of $14 is higher than it is in your overall portfolio and in subsequent years. So I was wondering if you could discuss that and if we could see potentially an acceleration of lease spreads in 2024 and 2025?

[Laura Clark, Chief Financial Officer]

Yes, in terms of our mark-to-market for 2023 is 61% on a cash basis and 75% on a GAAP basis. Our guidance incorporates cash leasing spreads of 55% to 60% and GAAP leasing spreads of 70% to 75%. So that would incorporate if we had – if there were any of these options, we don’t have a lot of fixed options within our portfolio. But if there were any of those anomalies that guidance would incorporate that. So when you look at the projected leasing spreads for 2023, we ended the year with 59% cash leasing spreads. And so our guidance is within – the 2023 guidance is within that range. As we look forward in terms into the mark-to-market over the next, call it two years. The mark-to-market for 2024 and 2025 is really within the area the 60% area that we’re experiencing in 2023 on a cash basis.

[John Kim, BMO Capital Markets]

Appreciate the color. Thank you.

[Laura Clark, Chief Financial Officer]

Thank you.

[Operator]

Our next question is from Nate Crossett with BNP Paribas. Please proceed.

[Nate Crossett, BNP Paribas]

Hey, thanks for taking my question. Maybe just the first one related to the funding question that was asked earlier. Historically, I don’t think you guys have done a lot of dispose, but clearly cap rates, like there’s support for high pricing right now to sell into. Would you guys ever consider doing more dispose as part of the funding calculus? Or what would change it, I guess?

[Michael Frankel, Co-Chief Executive Officer]

Hi, Nate. It’s Michael. Thanks so much for the question. Thanks for joining us today. Dispositions and recycling capital are part of the Rexford program. And we have an ongoing process where we’re constantly and continuously assessing the opportunity to recycle capital through dispositions. So you’ll see us doing that, and it will be on a selective basis. We don’t give guidance in terms of volumes, but it’s certainly a part of the Rexford program.

[Nate Crossett, BNP Paribas]

Okay. That’s helpful. Maybe just a few on the Production Avenue acquisition. I’m just curious if you could kind of speak to the level of interest in that. Maybe what were the number of bidders? What was the walls [ph] on the property? What was the kind of mark-to-market on in-place rents there?

[Howard Schwimmer, Co-Chief Executive Officer]

Yes. Hi Nate, it’s Howard. First of all, this was a very unique opportunity for us. It’s not often that we’re able to – to be able to buy a quality building like this cross-dock in a strong location in the Inland Empire West at a yield that we’re able to capture.

And it really had to do with timing on the seller’s part and urgency to close for some other capital needs that they had. As far as the rent, we believe there is some upside in the rent that was put in place. This was a sale leaseback. So the rent was negotiated at the closing.

So there is some upside in that. As far as the tenant and the buyer pool, there were other buyers, but timing and ability to perform were a priority for the seller. So there were some other buyers that perhaps were able to – are willing to pay more but that certainly may not have been there from the eyes of the seller.

We have a relationship with the seller on this particular asset. And the – that really came into play in terms of getting the seller comfortable in our ability to perform and perhaps our ability to achieve better pricing than maybe others were absence [ph].

[Nate Crossett, BNP Paribas]

Okay. That’s helpful. So is this the top tenant for you guys now? And I’m just curious.

[Howard Schwimmer, Co-Chief Executive Officer]

It will be, yes. It will be.

[Nate Crossett, BNP Paribas]

Is it a new top tenant or is it going to be additive to an already top tenant? I’m just trying to get a sense of concentrations.

[Howard Schwimmer, Co-Chief Executive Officer]

Well, it will be the top tenant in our next reporting cycle.

[Laura Clark, Chief Financial Officer]

Yes. And it’s a new tenant. It’s not in our top tenant list today.

[Nate Crossett, BNP Paribas]

Okay. That makes sense. Just maybe one last question on this. Does this tenant have other potential sale leasebacks they could do with you?

[Howard Schwimmer, Co-Chief Executive Officer]

They do have some other property in Southern California. They are national tenants. They have other assets in other markets. We, of course, don’t focus on those markets. So when you pursue those but there’s a possibility for that. There’s also a possibility that we might be able to do some build-to-suit construction for them as they expand. The sale and the capital generated here is for their growth. They’re in a growth mode, and we are discussing some other opportunities.

[Nate Crossett, BNP Paribas]

Okay. I’ll leave it there. Thank you.

[Operator]

Our next question is from Camille Bonnel with Bank of America. Please proceed.

[Camille Bonnel, Bank of America]

Hi, Laura, I wanted to follow-up on your earlier comments around the projected rent growth. As that continues to be a key consideration, that seems to be underappreciated in our conversation. Have you run any sensitivity analysis on this projection? And like, for example, assuming 15% is the base case, what do you see as the lowest level of rent growth you think we could see or the potential upside from that?

[Laura Clark, Chief Financial Officer]

Yes, Camille, thanks for your question. We haven’t actually – we haven’t put out a forecast in terms of – from a sensitivity perspective. So not something that we’re including in the guidance today.

And important to mention that the rent growth forecast that we have today is not included in our guidance metric. So it’s not our practice to embed rent growth into guidance. The more – to how we don’t include prospective acquisitions in our guidance. So as market rent growth is realized, we’ll adjust our guidance accordingly through the year.

[Camille Bonnel, Bank of America]

That’s very helpful. And on guidance, just trying to get a better understanding of what’s been factored into your occupancy outlook and the impact from the timing of expiry to lease commencement, could you update us on the typical downtime you’re seeing within the portfolio and how that compares to recent past and your expectations factored into guidance for this year?

[Laura Clark, Chief Financial Officer]

Yes, Camille, that’s a great question. So our occupancy is projected to be flat year-over-year. So we’re projecting in 2023 same-property occupancy to be 98% at the end of this year. That compares to 98% at the end of 2022.

But our average occupancy is projected to decline about 75 basis points at the mid-point compared to 2022. So what’s impacting that average occupancy is our projection around downtime, and downtime being the time between lease expiration and lease commencement.

Our 2022 downtime was abnormally low. Our 2022 downtime was 67 days, and that was driven by proactive move-outs where we had a tenant in place, and we were able to move out someone and then put a new tenant in with very little downtime. In fact, over 550,000 square feet of our new leasing had downtime of less than 15 days in 2022.

So as we look into our 2023 forecast, we’re projecting 90 days, so about three months of downtime. To put that into perspective, that’s really in line with the downtime that we’ve experienced in the prior two years. That’s averaged about 90 days as well. So – and if you look back to pre-COVID levels was over four months. So 90 days in 2023 certainly continues to reflect the strength of demand within our market.

The other thing that I’ll note is our expirations are skewed towards the latter half of the year. Actually about 1/3 of our expirations are in the fourth quarter. So as we get more visibility into our three and 4Q expirations, we’ll certainly provide updates to guidance as we go through the year.

[Camille Bonnel, Bank of America]

Really appreciate all the color there. And just finally for me, the operating dynamics of the 1 million square foot industrial property is very different from the typical asset within your portfolio. Should we expect a shift towards these larger acquisitions moving forward? Or was this more of a onetime deal?

[Michael Frankel, Co-Chief Executive Officer]

Hey Camille, it’s Michael. It’s a great and important question. And number one, we don’t expect a shift in Rexford’s strategy. And I think our strategy and our business model has been very consistent. I think even going back to the IPO, the way we communicate our business model and our strategy is that on average, you – one should expect us to be acquiring a high volume of single assets or smaller portfolios or even some large or medium-sized portfolios.

And once in a while from time to time, you should also expect us to buy larger assets or substantially larger portfolios. The larger assets and the substantial larger portfolios are harder to predict in terms of timing. And they also tend to be heavily marketed. So that’s why we tend to see fewer of those.

And however, one should expect to see some share of our investment activity to include larger assets and larger portfolios. And on average, we’re really targeting a blend of yield profiles through that activity. And there, one should expect 50% to 75% of our activity on the investment side should be able to have a core-plus or value-add orientation with relatively high yields.

And then maybe 25%, 30% over time over the long-term might include more stabilized assets, most often times will include a larger transaction. So that’s how we would encourage you to think about the activity.

[Camille Bonnel, Bank of America]

Thank you for taking my questions.

[Operator]

Our next question is from Jason Belcher with Wells Fargo. Please proceed.

[Jason Belcher, Wells Fargo]

Good morning, out there. Just wondering if you could talk a little bit about which types of tenants are creating the most demand across your portfolio today. And maybe if you could touch on tenant size and industry. And also if you’re noticing any differences in demand within or across your submarkets.

[Howard Schwimmer, Co-Chief Executive Officer]

Yes. Hi Jason, it’s Howard. Nice to hear your voice. I think really, it’s business as usual. There’s such a varied amount of demand in our markets that it’s really not typical to point to demand from any one particular user group. But yes, we’re – today, there are emerging industries and different groups that we see a bit more activity from.

We’ve seen some heightened demand from food and beverage users. There’s incremental demand from building construction materials, electric vehicle manufacturing, medical devices and stable industries like fashion and apparel and e-commerce as well.

In the past, we’ve seen some strong demand related to industries associated with housing and with some of the change in home-type sales. We’ve seen some declines in activity related to furniture and other household goods. But otherwise, very diversified still. And we’ve seen as Laura, I think, mentioned earlier, we see really a resurgence in demand after the New Year.

[Jason Belcher, Wells Fargo]

That’s great. Thank you. And then just on the contracts, I mean, on the acquisitions that you have under contract at this point, any color you can give us on the breakout between core deals and the portion that might be value-add or land place?

[Howard Schwimmer, Co-Chief Executive Officer]

Yes. Yes. We really like – don’t like to report in advance on what that mix is. Of course, we’ll report on closing because these things vary from quarter-to-quarter. And generally, the mix Michael just referenced seems to blend out over the course of the year with that 75% value-add, core plus and then about 25% to 30% in the core or stabilized bucket.

[Laura Clark, Chief Financial Officer]

Hey Jason, I’ll add to that, that when you look at our acquisition pipeline, I mean, we’re seeing – continue to see strong yields approximately 5% initial yield on that $125 million pipeline and 6% stabilized yields.

[Jason Belcher, Wells Fargo]

Great. Thank you. And then just lastly for me. Anything you guys can share on how you’re dealing with or mitigating higher construction and labor costs? And what kind of impact you might be seeing from that?

[Howard Schwimmer, Co-Chief Executive Officer]

Sure. It’s an interesting topic. And really, we think of it in terms of escalating construction costs. Costs are coming down here and there in different categories. Last year, we saw basically escalation that we were using in our modeling of 25% to 30% that occurred during the year.

Today, we’re looking at underwriting 12% escalation, and we see potential for that to come down further. So our cost, for instance, in our supplemental on all of our repositioning and redevelopment projects include the expected escalation. So quarter-to-quarter going forward, we may actually be able to lower some of those projected costs as that escalation continues to come in.

But typically, the main lingering issues out there are still permitting. Cities are under-resourced. So permitting occasionally takes longer than expected and labor, there’s a lack of available workforce. So really, it’s all about getting to the point where you can start the project because once we start a project, we’re generally going to be on track in terms of timing.

And to make sure about that, we’ve got a strong program in place where we’re buying a lot of the materials that are needed in advance to avoid any delays such as roofing materials, electrical switch gear, HVAC and so forth. So I think we’ve done all we can to mitigate some of the costs and delays and so forth. And we’re really pleased to see the escalations starting to trim back.

[Jason Belcher, Wells Fargo]

Encouraging to hear. Thank you very much.

[Operator]

Our next question is from Dave Rodgers with Baird. Please proceed.

[Dave Rodgers, Baird]

Yes, good morning out there. Maybe, Howard, Michael, you have talked about reacceleration in leasing and maybe a reacceleration of rent growth for the market in LA since the end of the year. But I guess going back to the fourth quarter market rent growth really kind of flatlined. Wondering about pushback from tenants on rents, I’m sure you always get it, but are they pushing back for more concessions?

And then when you talk about 2023 having kind of more downtime, is this really just a function of higher churn in the portfolio where tenants just can’t keep up? I want to get a better sense for tenant health overall. And since I’m talking tenant health, I’ll just throw the last question for Laura, which is bad debt in the outlook and kind of any experience with bad debt so far late in 2022 or early 2023.

[Howard Schwimmer, Co-Chief Executive Officer]

Yes. Why don’t I start, and then Michael and Laura can jump in? As far as tenant demand, yes, it’s really been strong. We’re really pleased. And we have – as Laura mentioned earlier, we have activity on 90% of our vacant space that’s available for occupancy. So that’s very encouraging. In terms of what’s happening, there was a little bit of a slowdown and a pause in the fourth quarter, and we were hearing from people that they were concerned about inflation. They were concerned about interest rates. They’re concerned about the economy. But I think what’s happened is – and some people, I think, probably have this wait-and-see attitude thinking, let’s wait a little longer, maybe rents are going to go down, and so that obviously hasn’t happened. There’s still rent growth.

And so the resurgence is really, I think, people realizing that they have to do something about their space needs, and they really can’t wait because they are hearing from the brokerage community that rates are going up. In fact, we – subsequent to quarter end, we signed a lease at a record lease rate on a renewal in the South Bay. We – on a – I think about 130,000 foot state-of-the-art building that we just renewed at $2.30 triple net. And that from our vantage represents fairly substantive near-term rent growth from similar buildings that were leased in that micro market just in the past 90 days. So we’re very encouraged with what we see.

[Michael Frankel, Co-Chief Executive Officer]

And maybe I’ll just add a little bit to that in that just sort of anecdotally, when we talk to tenants, and your question was around are we getting much pushback in terms of rents and given tenant expectations. And when you look at the availability of product in the market, in other words, if you look at what alternative space is available to the typical tenant, and we have an overall market vacancy of 1.1%.

And as Howard mentioned earlier, many of our largest submarkets are well below 1%. But if you were to actually look into those vacant buildings and say, well, of the vacancy in the market, how much of that actually even begins to compete with Rexford? Because, again, we’re typically the best locations and the most functional product in each submarket we invest in, also thanks to our repositioning activity.

And we believe that less than half of the stated market vacancy even begins to compete with our product on average on a locational and functional basis. So we continue to hear the same refrain from tenants, which is that, hey, they may not like the rent or the new rate, they may look around in the market, but it’s just so exceedingly difficult to identify alternative space for them that they eventually come back to the table in pretty short order typically.

[Howard Schwimmer, Co-Chief Executive Officer]

Yes. One other comment I’d like to add, Dave, is on subleasing. That is a very good indication of the health of tenants in the marketplace. And in the fourth quarter, we saw the fewest number of subleases occurred during the year. And if we then drill down and look at our sublease square footage as a percentage of our overall portfolio, it was lower than in 2019 pre-COVID, and it’s about half of what we’ve seen on average over the past three years. So that is a very, very close indicator that we track, which really speaks to the health of tenants in the market.

[Laura Clark, Chief Financial Officer]

And then, Dave, I’ll take your questions around downtime and then specifically around the health of the tenant and bad debt. In terms of downtime, as I mentioned, it’s really not directly related to anything that we’re seeing in the market in terms of demand. It’s more of that 2022 was abnormally low because of some of these proactive move-outs where we had very, very little downtime in the state.

And we haven’t underwritten those when we think about 2023, but it’s possible that those could continue. But at this point, our forecast is in line with the downtime that we’ve experienced in 2020 and 2021 of 90 days, which, as I mentioned earlier, is still considerably less than the downtime that we were experiencing pre-COVID of four-plus months.

In terms of the health of our tenant, our tenant base continues to exhibit incredible strength and stability. Obviously, as reflected in our bad debt was a positive 10 basis points in the full year 2022. Even if we exclude reversals, bad debt was 20 basis points compared to the pre-COVID average of about 50 basis points.

So our forecast of 35 basis points at this point, I think, is prudent given that we’re early in the year, there’s certainly still some economic uncertainty out there. But I’ll note that we have not seen an increase in tenants on our watch list. In fact, bad debt as a percent of revenue in the fourth quarter was only 10 basis points even when you exclude prior year reversals. So the health of the tenant base, I’d say, is stronger than ever.

[Dave Rodgers, Baird]

Thanks everyone.

[Operator]

[Operator Instructions] Our next question is from Jessica Zheng with Green Street. Please proceed.

[Jessica Zheng, Green Street]

Good morning. I was wondering if you could share your view on how the new transfer tax in LA might impact property values in the city and whether it has any impact on your external growth strategy?

[Laura Clark, Chief Financial Officer]

Hey, Jessica, thanks so much for your question. I think it’s a little too early to know the full impact of the transfer tax. But at this point, we’re not seeing a material impact on valuations in the transaction market. Importantly to note that the tax does not impact rental rates. So the impact on valuation actually could be potentially accretive to our yields on acquisitions. While it could have a modest impact on your IRR, it’s less impactful for us as long-term owners.

So – and for us as well, our exposure is a bit limited there. This tax only applies to the city of LA. In our portfolio, about – only about 15% of our portfolio is in the city of LA. Just – I referenced just 150 municipalities within our infill markets. So the city of LA is just one of those. And if you look at our 2022 acquisitions, only about 8% of our acquisitions, over $2.4 billion in 2022 was in the city. So we’re continuing to watch and track the impacts and potential impacts across other municipalities. But at this point, we’re not seeing a material impact.

[Jessica Zheng, Green Street]

Great. Thank you very much. And then just a second question from me. We’re seeing import container volumes at the ports of LA and Long Beach falling more than 20% year-over-year in the fourth quarter. Are you seeing any impact of that kind of trickling through to the warehouses at all? And then what’s your view on what it could mean for just overall tenant demand in the SoCal markets if this trend kind of persists in the next few months?

[Michael Frankel, Co-Chief Executive Officer]

Hey, Jessica, it’s Michael. Thanks for joining us today. First of all, the reduction in core volumes is principally and primarily a reflection of the comparison against last year, which was a record level for port volumes driven by the impacts of COVID and sort of the whipsawing effect of manufacturing and shipping and bottlenecks and all the rest as it flows through the supply chains globally. And actually, last year was the second best year on record in terms of volume. And I think about 8% greater volume than 2019 by way of indication. So there’s still a lot of noise in the market. We’re still – the full COVID whipsaw has – is still resolving itself throughout the supply chains globally to some degree.

And with regard to the impact to our tenant base, we really haven’t seen an impact to the tenant base, and in part because the reasons I described because volumes are actually still quite robust, but also and maybe more importantly, that our tenant base is truly disproportionately focused on regional consumption. And so they’re really less concerned about where the goods come from or how they are received, whether they’re over the ocean, through our ports or otherwise. And the fundamental tenants that are within our portfolio is more driven by regional demand in terms of business and consumer consumption.

And so we’ve seen even in prior years and prior decades when we’ve had port slowdowns or even port shutdowns due to labor or whatever, we’ve never seen a change in demand from the tenant base. In fact, not even – I can’t even think of an example of a tenant coming to us and saying, oh, gee, my needs have changed because of the ports. So I think we’re very fortunate in that respect.

[Jessica Zheng, Green Street]

Great. Helpful color. Thank you.

[Operator]

Our final question is from Mike Mueller with JPMorgan. Please proceed.

[Mike Mueller, JPMorgan]

Yes, hi. Just curious, how should we be thinking about, I guess, headcount, G&A trends over the next few years just given the continued pace on the acquisition front?

[Laura Clark, Chief Financial Officer]

Hey, Mike, nice to hear from you. In terms of G&A, we continue to realize economies of scale within our operating platform relative to our portfolio growth. And when you think about 2022, we grew NOI by 40%, and we also saw that’s an 18% expansion in our square footage. So significant growth, but at the same time, we’re realizing operating synergies at an accelerated pace. So when you look at our 2023 G&A as a percent of revenue, we’re projecting about 9.8% G&A as a percent of revenue, and that compares to 10.2% in 2022, and 2022 was down from 10.8% in 2021. So we do expect for that downward trend to continue as our platform is nearly fully built out, and our team is very focused on continuing to find the operating efficiencies as well as innovation through technology.

[Mike Mueller, JPMorgan]

Got it. Okay. Thank you.

[Laura Clark, Chief Financial Officer]

Thank you.

[Operator]

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

[Michael Frankel, Co-Chief Executive Officer]

On behalf of the entire company and our Board of Directors, we want to thank everybody for joining today. We wish you a great day, and we look forward to reconnecting in about three months. Thanks, everyone.

[Operator]

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.