Rexford Industrial Realty Inc

NYSE:REXR

Earnings Call Analysis

Rexford Industrial Reports Strong 2023 Results

In 2023, Rexford Industrial maintained nearly full occupancy at 98%, with a 26% increase in net operating income (NOI) fueled by substantial leasing activity, repositioned projects, and accretive new investments. Core funds from operations (FFO) per share grew by 14% in Q4 and 12% annually, outstripping guidance projections, while dividends rose by 10%. With same-property NOI growth at the high end of guidance, 10% cash basis, and 78% net effective rent spreads, Rexford exhibits strong growth and resilience, looking to leverage Southern California's market. A robust acquisition pipeline and further repositioning efforts underpin a favorable outlook for future growth.

Reflecting on a Decade of Consistent Growth and Resilience

Over the past decade, Rexford Industrial has demonstrated steady growth and resilience, especially within the Infill Southern California market. The company has maintained nearly full occupancy at 98% and has seen same property portfolio growth fueled by strong investment absorption and leasing activity. In the face of challenges like labor negotiations at ports and rising interest rates, Infill Southern California's industrial market showed stability with rents increasing by about 1.2% following an over 80% rise during the pandemic.

Strategic Operations and Robust Leasing Underpin Q4 Success

Rexford executed 1.9 million square feet of leasing in Q4, with a net absorption of 204,000 square feet, indicating sustained tenant demand. Investments in Q4 amounted to $315 million, expected to yield 6.8% unstabilized, and $1.5 billion for the full year with a projected 6.1% yield. Additionally, strong renewal activity suggests that tenants are healthy and able to bear rent hikes amidst a supply-strapped market. The company also anticipates a productive future, with a pipeline of investment opportunities and several redevelopment projects that are in the works or slated to begin soon.

Financial Highlights Reveal Strong Earnings and Increasing Dividends

Rexford experienced a 14% increase in core FFO per share in Q4 compared to the previous year, with full year core FFO of $2.19 per share outpacing guidance predictions, indicating a 12% growth in earnings. The company managed to achieve NOI growth at the upper end of its guidance, with leasing spreads surpassing expectations. Reflecting confidence in the company's performance and its commitment to shareholders, the board declared an increased quarterly dividend, continuing a trend of robust dividend growth over Rexford's tenure as a public entity.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings. Welcome to the Rexford Industrial Realty, Inc. Fourth Quarter 2023 Earnings Call. [Operator Instructions] I will now turn the conference over to your host David Lanzer, General Counsel. You may begin.

[David Lanzer, executive]

We thank you for joining Rexford Industrial's Fourth Quarter 2023 Earnings Conference Call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and investor presentation in the Investor Relations section on our website at rexfordindustrial.com. On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined by federal securities laws. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ.

For more information about these risk factors, please review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future. Additionally, certain financial information presented on this call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP reconciliations and explanations of why such non-GAAP financial measures are useful to investors.

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

Now I turn the call over to Michael.

[Michael Frankel, executive]

Thank you, David, and welcome, everyone, to Rexford Industrial's Fourth Quarter Earnings Call. I'll begin with a few remarks followed by Howard, who will provide some additional market and operational detail, then Laura will provide our financial results and outlook.

To begin with, I'd like to thank our Rexford team for your strong results across all of our value creation initiatives. As 2023 marked our 10th year as a public company and our 22nd year as a business, focused exclusively on creating value within Infill Southern California. It's a great time to reflect upon our growth and our current position as we look forward to our next decade.

Since our public offering 10 years ago, we've generated average FFO or earnings per share growth of about 15% per year, which has fueled a total shareholder return of 40% on average per year over the prior 10 years, demonstrating the strength of our team, our highly differentiated business model and our substantial market opportunity. 2023 was a strong year for the company. We maintained our same property portfolio at essentially full occupancy, averaging almost 98%. Our team increased consolidated NOI by over 26%, principally driven by the absorption of 4.3 million square feet of highly accretive new investments, 7.4 million square feet of leasing activity with 78% average net effective rent spreads and embedded rent bumps averaging over 4% and the lease-up of 0.5 million square feet of value-add repositioned projects.

Our Infill Southern California industrial markets also demonstrated a high degree of resilience over the prior year. We endured prolonged labor contract negotiations at the ports and a post-pandemic normalizing of tenant demand, exacerbated by increasing interest rates. Despite last year's headwinds, rents for quality products similar to our portfolio within Infill Southern California, demonstrated stability with nominally positive rent growth of about 1.2%. Stability and growth in rents after having increased by well over 80% through the pandemic are a testament to the favorable supply-demand fundamentals associated with our Infill Southern California industrial markets.

As we look forward, although we may see some near-term choppiness in demand for certain sized product in select submarkets, our extended market backdrop looks favorable. Port volumes are trending with accelerated growth driven by a resolution to last year's port labor negotiations, instability in the Middle East impacting the Suez Canal, a decline in capacity through the Panama Canal due to a long-term drought and lower cost and shorter time frames associated with importing from Asia via the ports of L.A. and Long Beach compared to the East and Gulf Coast ports.

In addition, a more stable interest rate environment may also enable tenants to more proactively commit to their growth and inventory needs. Overall, our team is exceptionally well positioned to monetize our substantial embedded internal growth which includes our value-add repositioning pipeline comprising over 9 million square feet of space and process are scheduled for repositioning over the next 4 years and our estimated 51% portfolio-wide net effective mark-to-market for in-place rents, providing an opportunity to roll expiring, deeply below market leases to substantially higher market rents.

Further supporting Rexford's favorable outlook, we remain focused on maintaining our investment grade, low leverage balance sheet, ending the year at 15% net debt to total enterprise value, which provides the ability to protect the company during uncertain times while also positioning Rexford to capitalize upon accretive growth opportunities as they may arise. We are also pleased to announce that we are increasing our dividend by 10%, bringing our average annual dividend growth to 23% since our public offering about 10 years ago. And with that, I'd like to acknowledge our Rexford team once again for your market-leading efforts that continue to drive substantial value creation for our shareholders.

And now it's my great pleasure to hand the call over to Howard.

[Howard Schwimmer, executive]

Thank you, Michael, and thank you, everyone, for joining us today. The Rexford team delivered strong fourth quarter and full year results, driven by our dynamic team's performance and our irreplaceable portfolio. Rexford's fourth quarter and full year operating performance demonstrates our advantageous position within the Infill Southern California market. In the fourth quarter, our team executed 1.9 million square feet of lease activity, driving 204,000 square feet of positive net absorption, highlighting the sustained demand for our highly functional portfolio.

Leasing spreads were 63% and 46% on a net effective and cash basis, respectively, and both fourth quarter and full year average embedded rent steps were 4.1%. We have observed an incremental increase in tenant activity as we ended the year and into the first quarter, with activity on over 85% of our vacant space. We have also seen strong renewal activity indicative of the health of our tenants, their ability to pay increased rent and the lack of available functional supply in the market.

In the quarter, market rents were flat sequentially for product comparable and quality to the Rexford portfolio. The overall Infill market vacancy remains exceptionally low, ending the fourth quarter at 2.75% with nominal positive net absorption according to CBRE. Additionally, port volumes at L.A. and Long Beach are rebounding with a 22% increase in activity over the prior year quarter while East and Gulf Coast ports saw a decrease over the same period.

Turning to our investment activity in the fourth quarter, we closed $315 million of investments, which are projected to generate an unlevered stabilized yield of 6.8% of total cost. For the full year, we completed $1.5 billion of investments, which in aggregate, are generating an initial yield of 5.4% and are projected to generate a 6.1% unlevered stabilized yield on total cost. Over 70% of these investments were sourced through off-market or lately marketed transactions. Additionally, we sold 2 properties for an aggregate sales price of $28 million, which generated a 21% weighted average unlevered IRR. Subsequent to quarter end, we acquired a two-building state-of-the-art distribution facility in the San Gabriel Valley submarket for $84 million that is generating a 5.4% unlevered initial yield. Looking forward, we currently have an acquisition pipeline of approximately $150 million of investments under contract or accepted offer, which are subject to customary closing conditions.

With regard to our repositioning and redevelopment activity in the fourth quarter, we stabilized 2 projects which was pre-leased in order, and we also pre-leased our Quay project achieving an aggregate 7.7% unlevered stabilized yield on the 3 projects. Notably, the pre-leased activity in the quarter exceeded our most recent rate projections. For the full year, we stabilized 6 projects comprising $197 million in total investment and achieved an aggregate 6.9% unlevered stabilized yield. In addition, we have 4.7 million square feet of repositioning and redevelopment projects in process or expected to start within the next 18 months. These investments have an aggregate remaining incremental spend of approximately $455 million with a projected stabilized yield of 6.2% on total investment.

Finally, I'd like to acknowledge our entrepreneurial Rexford team for their tremendous effort on achievements in 2023. And with that, I'm pleased to turn the call over to Laura to discuss our financial results.

[Laura Clark, executive]

Thank you, Howard. In the fourth quarter, core FFO per share grew 14% over the prior year quarter, driven by same-property NOI growth of 9.5% on a cash basis and 8.4% on a net effective basis. Full year core FFO was $2.19 per share ahead of our guidance projections, representing 12% earnings growth. Full year same-property NOI growth came in at the high end of our guidance range at 10% and 8.2% on a cash and net effective basis, respectively. Leasing spreads also topped expectations. With full year cash leasing spreads of 59% and net effective spreads of 78%. As a result of our strong full year performance and Rexford's continued commitment to delivering superior total shareholder return, our Board declared a first quarter dividend of $0.4175 per share representing 10% annualized increase over the prior year.

Turning to capital allocation and the balance sheet. We are committed to a disciplined capital allocation strategy focused on driving shareholder value, as demonstrated by our earnings per share growth, which has averaged 16% annually over the past 5 years, outperforming the peer group by nearly 50%. Our Fortress balance sheet positions us to execute on our value creation strategy. At quarter end, net debt-to-EBITDA was 3.6x and net debt to enterprise value was 15%. We maintained substantial liquidity of $1.2 billion, comprised of $138 million of net forward equity currently remaining for settlement, $33 million of cash on hand and full availability on our $1 billion revolver. We have no material debt maturities until 2026, inclusive of extension options.

As we look forward, Rexford's internal cash flow and earnings growth opportunity is significant. Over just the next 3 years, we project 42% internal cash NOI growth equal to $240 million of incremental NOI embedded within our in-place portfolio. This is expected to grow total cash NOI to over $800 million over the next 3 years, assuming today's rent and no future acquisitions. This includes $95 million of incremental NOI from repositioning and redevelopment stabilizing over the next 3 years, $95 million of incremental NOI related to the conversion of in-place rents to market rents, $40 million from the average 3.6% annual embedded rent steps in the total portfolio and $10 million from acquisitions completed in the fourth quarter and year-to-date.

This significant internal NOI growth within our existing portfolio is projected to generate average annual core FFO per share growth over the next 3 years in the 11% to 13% range. In addition, we expect to continue to capitalize upon our substantial external growth opportunity as we expand our current 2.5% market share within the 1.8 billion square foot Infill Southern California market. With regard to 2024 guidance, we are projecting core FFO per share in the range of $2.27 to $2.30. As a reminder, our 2024 guidance range does not include acquisitions, dispositions or related balance sheet activities that have not yet closed. 2024 cash and net effective same-property NOI growth is projected to be in the range of 7% to 8% and 4% to 5%, respectively, and full year average same-property occupancy is projected to be 96.5% to 97%.

Cash leasing spreads are estimated to be approximately 40% and net effective spreads of approximately 50%. Note that excluding the impact of an assumed fixed rate early renewal from a non-same property tenant in the Inland Empire West. Cash and net effective leasing spread guidance is approximately 50% and 60%, respectively. To provide further detail around the components of our same-property net effective growth, the mark-to-market on the in-place leases within the same property pool at 60% leasing spreads, contributes approximately 750 basis points of growth.

This growth is offset by a 200 basis point impact from lower noncash revenue related to the burn off of straight-line and below-market rents. Last year, we benefited from an outsized amount of early renewals, allowing us to increase rents to higher market rates. As is our practice, our guidance does not assume the same elevated pace of early renewals in 2024. Our net effective same-property guidance is also impacted by 100 basis points related to lower average occupancy, bad debt as a percentage of revenue that is expected to be in the range of 40 to 50 basis points and higher expenses net of recoveries.

In aggregate, these components impact same property net effective NOI growth by approximately 300 basis points, which would have otherwise brought our guided same-property net effective growth to 7.5%. Other components of our FFO per share guidance include 2023 and year-to-date investments are expected to contribute approximately $40 million of incremental NOI and repositioning and redevelopment stabilizations in 2024 are projected to contribute incremental NOI of approximately $13 million, equal to $0.06 per share, offset by a decline of approximately $13 million from NOI coming offline related to projects being placed into repositioning and redevelopment, rebooking and a net neutral contribution to 2024 core FFO per share guidance.

Before turning the call over for your questions, I want to thank our incredible Rexford team for an outstanding year and your continued commitment to excellence. Rexford's success is a direct result of your great work. Thank you all for joining us today, and we now welcome your questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Blaine Heck with Wells Fargo.

[Blaine Heck, analyst]

Michael, you mentioned some choppiness in demand in certain tenant sizes and submarkets. Can you talk a little bit more about that segment of the market? And how long do you think that could be a headwind? And then on the flip side, where are you seeing strength or improving demand conditions in your market?

[Michael Frankel, executive]

Blaine, thanks so much for joining us today. Appreciate it. No, it's a great question. And as I mentioned, our markets are generally performing well. And where we saw a little bit of excess supply would be in the Inland Empire West, for instance, where during the pandemic, we saw a little bit of exuberant development starts, and that's really impacting the larger space sizes above 100,000 square feet. And so it's very much isolated to the IE West where we also see a little bit of softness is in the Central Los Angeles market, really just impacted by the shift utilization of office space and the demand for housing and multifamily in downtown Los Angeles adjusting in the post-pandemic period. The bigger driver really is out in the IE West and we see that normalizing. We see absorption even of the larger space occurring over the near to fairly medium term, probably over the next 12 months or so. And the good news for Rexford, frankly, is we only have 2 spaces in that entire submarket. That even begin to compete in that larger size range.

Our average size space is closer to 25,000 square feet. So not really a material threat to Rexford, but it is impacting market dynamics out there for larger space, in particular. And in terms of where we see strength, quite frankly, throughout the rest of the Infill markets, meaning Greater L.A. and Orange County and pockets of Ventura and San Diego, where we own product. We actually saw about 4% market rent growth last year, that's excluding the IE West. And that's a pretty favorable growth rate, particularly considering the fact that those markets grew by over 80% during the pandemic.

So we're seeing great signs in the market that we're holding these rent levels. And by the way, I'll just touch back on the IE West. The IE West is a very interesting market also because during the pandemic, we saw rents in the IE West increased by over 160%. So the IE West was an outlier in positive and accelerated rent growth through the pandemic, which may also help explain why we're seeing normalization in the IE West a little bit different than the rest of the Infill markets. But again, we see near-term stabilization in the IE West as well. And with regard to 2024 guidance, I mean, it's true that we're seeing strength in the markets.

As I mentioned in my remarks, we believe that the markets are favorably positioned. But there are storm clouds out there with regard to geopolitical issues and therefore, continued economic stability, we're encouraged by a more stable interest rate environment, but we feel it's prudent at this point in time to be thoughtful and conservative about how we're setting near-term expectations. And that having been the case, and I'll just extend this a little bit, timing has a huge impact on near-term performance.

So what I mean by that, I'll just give you 1 significant example. Laura mentioned that we have about $0.06 of FFO per share coming in during 2024 as we lease up our value-add reposition projects. And while that's substantial, but on an annualized basis, on a fully leased up basis, that represents about $0.16 of FFO per share contribution. And although we don't get the full benefit of that this year, it sets us up to next year and the following year for great growth and actually, we estimate 2025 and '26 FFO per share growth to be in the 14% to 17% range each for each of those years. So interesting year for Rexford, but couldn't be more excited about how we're positioned.

[Blaine Heck, analyst]

That is very helpful color there, Michael. And then just switching gears real quick for my second question for Laura. Thanks for the commentary on GAAP and cash NOI differences. It seems like one of the biggest drivers there is just the early renewals that you guys did in 2023 that had free rent that will be burning off this year. I guess, how do you feel about that same thing happening this year? Or what gives you kind of hesitation that, that type of activity is going to be maybe more subdued this year?

[Laura Clark, executive]

Yes, Blaine, great question. In terms of how we forecast, I mean, we certainly take a conservative approach to the timing of renewals. So last year, we did have outsized early renewals, and that contributed, as I mentioned, to the higher straight-line rent revenue. And as we look forward, renewal activity [indiscernible] mentioned this in his remarks, has been very strong within our portfolio and was like that throughout the year.

So as we look forward, we're in discussions with tenants and more visibility into the timing of renewals, we'll certainly be updating our guidance accordingly.

[Operator]

Our next question comes from the line of Camille Bonnel with Bank of America.

[Jing Xian Tan, analyst]

I hear a bit of static, so I hope I'm coming through clearly. So it looks like you hit a new record with the 7 million square feet of leasing activity last year. And even on a deal level, you're up slightly from '22. So can you talk about how the leasing pipeline is looking for the first few months of the year? And do you expect to continue signing leases at a similar pace?

[Howard Schwimmer, executive]

It's Howard. We're really pleased with the activity we've seen building. Looking back in October, November, things had slowed down quite a bit. And then towards the end of the year, we saw a significant pickup, and that's continued through [indiscernible]. So we have a lot of activity. Of course, right now, we have to turn that activity into signed leases. So Michael mentioned some concerns over the economy and so forth. So sort of a wait and see. And while we are real, real excited, we've got some work ahead of us to do in that respect.

[Jing Xian Tan, analyst]

Are those concerns around the economy translating into you seeing any changes in the pace of the deals that are being signed? Or has it been more or less consistent with '23 activity?

[Howard Schwimmer, executive]

I think I'll use the word normalization, just thinking back to 2019 pre-COVID levels. Typically, a good example is just talking about some of our repositioned and redevelopment space. We were seeing that space lease up in 1 month, 2 months. And now we're seeing that lengthening out, looking more in the 4-month range, maybe even a little longer. So yes, definitely stretching out, but nothing unusual compared to what you'd see in a typically normalized functioning market. And also the activity we're seeing really picked up, I think, when you think about the first half of the year and then pushing really into the second in terms of our expirations also even going forward, I think we have a lot more space expiring later than sooner.

[Jing Xian Tan, analyst]

Right. So that actually leads me to my just last follow-up on the repositioning program and the guidance you provided around $0.06 contribution. Just given many of these are yet to be leased, how confident are you in reaching this target? And what are you tracking that needs to happen further to be upside to this?

[Michael Frankel, executive]

Camille, it's Michael. Yes. No, I think we're very confident actually in our -- the expectations we're setting with respect to the repositionings. And upside would be in the form of reduced time frame for lease-up and maybe we beat our target rents. And we're going to work hard to do both of those. But we'd like to set expectations in a way that we feel is appropriate given the environment and also maybe does leave the opportunity for some pleasant surprises.

[Howard Schwimmer, executive]

And Camille, I'll just add that these repositionings, redevelopments, especially even the redevelopments, they're really all in very tight Infill markets and when you start looking at the competing space, there's not much product that even comes close to competing with the quality as well as the size ranges. So that really lends optimism on our part in terms of our ability to lease the space up.

[Operator]

Our next question comes from the line of John Kim with BMO Capital Markets.

[John Kim, analyst]

I wanted to focus on Page 6 of your presentation with the NOI bridge and the growth potential. The -- certainly, a lot of organic growth that's forecasted. The mark-to-market seemed a little bit lighter than we were modeling or anticipated. Because if you look at that $95 million over the $568 million, which is NOI, so arguably, we should be using revenue, but that's 17% that you're expecting of growth from mark-to-market. Overall, you're expecting 51% mark-to-market over the entire portfolio, extending past 3 years. But just given the amount of leases expiring over the next 3 years, I thought that number would have been higher than $95 million. So I just wanted to ask about that figure.

[Laura Clark, executive]

Yes, John. I think a couple of things that I would note. Remember, this is only a 3-year period. So it doesn't capture us marking the entire portfolio to market. So I think that's probably the most significant piece of it. And then the other side of it is, we continue to, every day, mark the portfolio to market. So the baseline annualized NOI growth that you see there from fourth quarter includes leases that we mark-to-market in the fourth quarter and obviously impacts the future mark-to-market. So -- but I think the most important component here is that, that's only a 3-year look at the growth from mark-to-market. And obviously, as the portfolio continues to roll, we'll have additional mark-to-market to realize. The other thing I want to note about the bridge that you mentioned is that this includes no future rent growth.

So this assumes that over the next 3 years, rents are where they are today.

[John Kim, analyst]

That mark-to-market over the entire portfolio, the last quarter presentation had it at $350 million. And I know you took it out, but is that right on the ballpark of where you sit today?

[Laura Clark, executive]

We're -- yes, we haven't provided that number. We're going to continue to provide the essential components that allow you to incorporate, that allow you to be able to calculate and see that full mark-to-market within the portfolio.

[John Kim, analyst]

Okay. My last question is on your FFO growth guidance. At midpoint, it's 4.3%. Your GAAP NOI guidance is at 4.5% midpoint. The dividend growth that you announced was at 10%. So I'm just wondering how you came up with the 10% versus your FFO guidance. I thought that would have correlated a little bit stronger.

[Laura Clark, executive]

Yes. In terms of our dividend growth, and we've communicated this in the past, dividend growth is going to be pretty similar to what we're seeing in terms of earnings growth. Our earnings growth this past year in 2023 was 12%. Our dividend growth, we announced dividend growth of 10%. So those are pretty much in line as we're retaining the capital that we can. So you should see those growth rates continue to mirror each other as we track forward.

[Operator]

Our next question comes from the line of Nate Crossett with BNP Paribas.

[Nathan Daniel Crossett, analyst]

I was wondering if you could just talk about the Tireco lease expiration in January of next year. How should we be thinking about that in terms of probability of renewal and what spreads could be like? And then my second question is, how should we think about leverage levels for the balance of this year? I think you're well below your kind of guided range of 4% and 4.5%. So what is your kind of tolerance for more leverage right now?

[Laura Clark, executive]

Thanks so much for joining us today. In regards to the Tireco lease, just to get everybody the background of Tireco, the Tireco lease expires in January of 2025. They have a fixed rate renewal option that's 4%. The update that we can provide you on is that we are in constant discussions with Tireco. And based on our most -- very recent discussions, they have no intentions on vacating the space. So as is our practice, we'll provide you with an update upon lease execution around the Tireco lease.

In terms of leverage, from a leverage perspective, we are very focused on maintaining a low leverage balance sheet. And when we have those target leverage levels out there at 4 to 4.5x, it doesn't mean that we may not be below them for periods of times because maintaining a low leverage balance sheet really allows us to be opportunistic, no matter where we're at in the capital cycle. And so we look to really leverage the balance sheet that allows us to be opportunistic and take advantage of opportunities to drive accretion and shareholder value. When we think about leverage, we're really comfortable about where we sit today and really puts us in a great position for the year and moving forward.

[Operator]

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

[Craig Mailman, analyst]

Just want to go back -- I know you guys took out the disclosure around the mark-to-market in the quarterly, but I just had a question as it pertained to the $0.34 that you guys had expected to come in through the net effective mark-to-market as of the last presentation. I think $0.05 of that had expected to come in '23. So an incremental $0.29 was expected to come in '24. And I saw in the same-store, you guys are getting $0.11 basically from that. Just could you kind of give us a bridge from that incremental $0.29 to the $0.11? And what else would be embedded in guidance that would have been comparable to that incremental upside that was in the last presentation?

[Laura Clark, executive]

Yes, Craig, I think I've provided the components of guidance of our same property guidance. And then we also provide a roll forward of those components. And so I think what I can kind of walk you through that's helpful is the components of that same property NOI guidance that we put out on a cash basis. I know I gave you the components on a GAAP basis but on a cash basis and how we generate that 7.5%. So in terms of the 7.5% midpoint of our cash same property NOI guidance, 900 basis points of that is from base rent growth that's associated with the mark-to-market of our expiring leases within the same property pool with an average 50% leasing spread.

Included in that is another 300 basis points of rent steps, the embedded rent steps in our portfolio that averaged 3.6% on the total portfolio. That's offset by concessions of about 350 basis points. We're projecting concessions this year of about 1.5 months. That's in line with pre-COVID averages. In terms of average occupancy decline of 25 basis points, that has another 30 basis point impact, a bit higher bad debt assumptions given where we're at in the year, has about a 20 basis point impact and then higher expenses net of recoveries have another 50 basis point impact. So these components together bring you to our 7.5% cash same property guidance.

[Craig Mailman, analyst]

No, no. I was getting more at the FFO impacts of -- and maybe this goes back to John's question about the $350 million versus the $95 million this quarter. But if you just had looked at the old kind of disclosure you guys had in there that you guys called the near-term conversion of mark-to-market to FFO, assuming no incremental rent growth, right? It was $0.34 cumulative from 3Q '23 to the end of '24. And embedded in that $0.34 was $0.05 that would hit in '23, so that implicitly lease $0.29 in '24.

And I'm just kind of figuring out where in the bridge to your FFO guidance, I see $0.11 coming in from same-store GAAP into it, but I'm not seeing maybe where that incremental $0.18 would come into play and if there is a change in timing or if that's related to what you talked about, I don't know if there was a pull forward of retention in that previous number. I'm just kind of trying to bridge that $0.34 in the last presentation. I know you guys don't provide any more. Is that still $0.34 for year-end '24? Or is that number changed for what should come through FFO just from the net effective mark-to-market?

[Laura Clark, executive]

No. There's a lot of different components, right, that are going to impact that. Some of that is that we've already converted some of that mark-to-market in Q3 and Q4 of 2023. Some of that could be how we pulled the additional properties that we pulled into repositioning and redevelopment and we talked about that $0.06 impact from the NOI that's coming offline in 2023. And some of that is associated with additional share impacts as well from additional share count -- share issuance and so higher share count. So there's a number of different components that go into that. And I think we've provided a very thorough bridge. They get -- they walk you through the reconciliation in the roll-forward of our prior FFO same property guidance and then to our current FFO.

[Craig Mailman, analyst]

Okay. So part of it is just dilution from equity into the share count from the $0.34. So you're saying the nominal cumulative number for year-end '24 adjusting for kind of redevelopment coming in and out should be roughly the same? I don't want to put words in your mouth, I just want -- trying to bridge it.

[Laura Clark, executive]

Yes. I think I was really clear about what the components are that we've provided a really transparent look in terms of the components of guidance as we're seeing it today.

[Craig Mailman, analyst]

Okay. And then just one quick one. What's the updated cash mark-to-market? You guys gave the net effect of 51%, what's on a cash basis?

[Laura Clark, executive]

Yes. On a cash basis -- and we're happy to provide the cash mark-to-market. We do feel like the net effect of mark-to-market is much more helpful. It certainly captures the significant embedded rent steps that we're achieving in our leases. But that being said, the cash mark-to-market is 38% today. That's down from 43% in the prior quarter as a similar change that we saw from our net effective mark-to-market. It was impacted by about 200 basis points from the conversion of the mark-to-market in the fourth quarter of leases that we signed, about 200 basis points from rent steps and about 100 basis points from those properties moving under repositioning.

[Operator]

Our next question comes from the line of Greg McGinniss with Scotiabank.

[Greg McGinniss, analyst]

So I know you may be tired of answering the question, but just to expand on Craig's point, that $0.34 that was originally disclosed, was that the expected contribution to 2024 or the expected run rate contribution by year-end?

[Laura Clark, executive]

It was not a run rate. But I think let's go back to mark-to-market really quick. And one of the reasons that -- and I think that one of the reasons that we decided to take out that [indiscernible] is because our mark-to-market changes every single day. Mark-to-market is a point in time, and it's based on the leasing that we're doing. So in the fourth quarter, we marked the portfolio to market on a daily basis, some of those releases that were expiring this year, some of those releases that were expiring in 2024 and some even in 2025. So I think it's really important to really work holistically the portfolio mark-to-market and provide transparency into what we expect to achieve for marking the portfolio to market as leases role.

[Greg McGinniss, analyst]

Okay. Could you just walk us through the expected cadence of occupancy levels through this year that get us to the guidance range and while we're not looking for future guidance, whether this overall downward trend is expected to continue in 2025.

[Laura Clark, executive]

We are not providing 2025 occupancy guidance. In terms of the cadence of guidance, we don't provide the cadence of occupancy guidance on a quarterly basis. We provide you with the average occupancy number, which can allow you to appropriately model occupancy and those impacts through the year.

[Greg McGinniss, analyst]

Okay. Maybe just one follow-up here. Regarding the 1.5 months of concessions that are currently being offered in leases, I understand that's in line with pre-COVID levels. Have concessions ever gone above that level? And what is the risk of seeing concessions increase from here?

[Michael Frankel, executive]

I would say that on average, we have generally not seen levels rise above that. There are exceptional moments in time, for instance, during the great financial crisis, which obviously we don't really see anything of that nature on the horizon today. And those are very consistent levels during the probably many, many years pre-COVID, and oftentimes, we beat that on a submarket basis or a certain size product type, but it's probably a very reasonable assumption.

[Howard Schwimmer, executive]

But I think if we think about different product and market -- submarkets and what competition could be out there, on a case-by-case basis, you'll see a lot of variability perhaps, and Michael mentioned an example earlier about what's happening in the Inland Empire on some of those larger buildings, probably would see a little bit more concession on those, whereas the majority of the Infill markets, you wouldn't.

[Greg McGinniss, analyst]

All right. So we take 1.5 months as an average then, right?

[Howard Schwimmer, executive]

That's a good indicator.

[Operator]

Our next question comes from the line of Nick Thillman with Baird.

[Nicholas Thillman, analyst]

Can we start with Howard or Michael, maybe wanted a little update on the transaction market and kind of what you're seeing? Are you seeing like more competition in the market, larger institutions looking to buy? And do you see that as an ability to maybe recycle some more assets that you view as like noncore?

[Michael Frankel, executive]

Thanks so much for joining us today. Just briefly, I'd say, and Howard could add if he has more color. But generally speaking, the transaction market really hasn't seen much change probably over the last 6 months or so. I think -- and maybe the higher interest rate environment is a contributor or just some general uncertainty out there, which is good news for Rexford, quite frankly. It means that buyer competition is somewhat moderated, generally speaking, and we continue to find great opportunities as a buyer. So I would say no big change in the transaction environment. With regard to dispositions, that also can have an impact because if buyer competition is low, it means there might just be, generally speaking, fewer buyers in the market and will take a little longer on the disposition activity, although we do have a recycling program in place, we have assets that we intend to market for sale and our marketing for sale this year. So we'll see where that goes. But we're going to continue to use our best judgment in terms of how and when we transact on those.

[Nicholas Thillman, analyst]

That's helpful. And then maybe a couple of quick ones for Laura. Of this mark-to-market, is that still only 80% of the square footage just being represented in that statistic?

[Laura Clark, executive]

Yes, that's about right.

[Nicholas Thillman, analyst]

Okay. And then the other one is just on the bridge from the prior presentation to what you quoted on net effective spreads for 2024, I think the prior presentation said 67%, now you're quoting around like 60%. Is that just based on activity that's happened in the past?

[Laura Clark, executive]

Yes, that's correct. We saw flat market rent growth in the quarter. So that's a good assumption.

[Operator]

Our next question comes from the line of Vikram Malhotra with Mizuho.

[Vikram Malhotra, analyst]

Laura, I guess just you -- or Michael, you've given sort of a broader 3-year outlook on FFO growth for next 2 years, I think you said 14% to 17% annually. I'm wondering in the last few presentations, you usually give like a 2-year or a multiyear same-store growth. Since you've given us FFO, do you mind giving us sort of a broad kind of multiyear same-store growth? Just where are you thinking things will shake out?

[Laura Clark, executive]

Yes. We haven't provided a same-property outlook beyond 2024. But obviously, we are providing you with a 3-year look at our embedded internal growth, which is $240 million of NOI on a cash basis that represents 42% cash NOI growth.

[Vikram Malhotra, analyst]

And just to clarify, does that 14% to 17% assume steady state like no more properties are repositioned?

[Laura Clark, executive]

That assumes the current pipeline that we've disclosed -- current pipeline and what we have in process of repositioning and redevelopments, it does not have anything outside of what we've already disclosed.

[Vikram Malhotra, analyst]

Got it. Okay. Just second, you mentioned the pipeline sort of what's under contract or I think near-term close. But just from a broader perspective, given the kind of stress in the market, is there a sort of a broader dollar number you can talk about? Like what are you pursuing in 2024? We're just trying to get a better sense of like where volumes -- acquisition volumes could shake out for the year.

[Howard Schwimmer, executive]

We really can't offer guidance on acquisition volume because it's the one variable we really don't know. But as Michael pointed out, we have capital. There's not a lot of capital floating around that can be placed in the market. So we're in a great position to capture opportunities, but it's really -- it's just too difficult to give you an idea of what an opportunity could be like that we don't know about.

[Vikram Malhotra, analyst]

Okay. And just lastly, I wanted to go back sort of more a competitive question. You cited sort of your Infill SoCal markets, 2.7% vacancy, I'm just having a hard time reconciling like you have extremely low vacancy, yet you're seeing higher incentives, arguably no rent growth. I know you haven't given a market rent growth forecast, but just going by the last data point, no sequential rent growth, and then you talked a little bit about bad debt. So I'm just trying to wonder like how competitive is the market in general? And your product, what things are you watching to sort of say, "Hey, we're still going to see a gap in fundamentals between our product versus the broader SoCal market?

[Michael Frankel, executive]

Vikram, thanks so much again for joining us today. First of all, the markets have performed well. Let's be clear. I mean, with the exception of the IE West, for instance, we saw about 4% growth in the rest of the Infill markets that we're in, which cover 80% of our portfolio in the Greater L.A., Orange County, a little bit of San Diego, a little bit of Ventura markets. So the backdrop actually is strong, not weak. And those are great growth rates, actually, particularly given the uncertainty that we saw over the prior year with interest rates and all the rest. And so we're not too worried about fundamentals. And I think perhaps we were spoiled during the pandemic period, where we saw unsustainable fundamentals and rent growth and occupancy levels. And no matter how much we try to prepare the market for the fact that those were not very sustainable. Again, it's a change. The fundamentals remain very strong.

And I think the important thing also to remember is that although fundamentals are strong, reflecting more 2019 levels, which again was a very strong market. So when Laura talks about 1.5 months concessions and that sort of thing, that is a -- those are indicators of a very strong market. And yes, some space will lease up in much less time and less downtime. But on an average basis, that is a very strong market. And I think it's also important to remember that our product is vastly superior in terms of functionality and location as compared to the broader market. And so irrespective of what we may be seeing in the broader market, our portfolio has been outperforming, and I think there's some great data in our investor deck to that effect, and we expect it will continue to outperform in the general market because our properties are better positioned, more functional, our properties are actually of more value to tenants because they can be more productive within our spaces. So the outlook, I think, is not negative. Actually, to your question, it's quite positive in terms of the underlying fundamentals.

[Vikram Malhotra, analyst]

Okay. No, fair enough. I was just trying to square that with where the market rent growth is.

[Operator]

Our next question comes from the line of Vince Tibone with Green Street.

[Vince Tibone, analyst]

How much of the issues at the Suez Canal impact the SoCal Seaport? From what I've read, it seems like most ships now avoiding Suez are going around the Cape instead of going through the Pacific and into SoCal. So I'd just love to hear any color you have or you've been hearing from your tenants on this topic and how maybe shipping routes are evolving as the situation unfolds?

[Michael Frankel, executive]

Well, diverting the Suez to go down around the Cape increases time and cost. And even without that, we had a substantial time and cost advantage even compared to going through the Suez Canal, originally associated with coming direct to the Ports of L.A. and Long Beach. And so obviously, that benefit in terms of timing and cost here is accelerated and becomes a greater advantage. So we think it does have some positive impact. And I think it also -- there was some concern about diversification away from Los Angeles and Long Beach, and I think that that's just really not the case. Actually, L.A. and Long Beach turns out to be about the safest and most reliable entry point into the United States, which I think reflects in the volumes that we're seeing more recently.

[Howard Schwimmer, executive]

And I'd like to add to that also, I think really for the ports and this increased activity, a lot had to do with the labor contract finally solidifying and I saw JLL had some information recently that wrapped a 15% increase just associated with the port contract completion pretty quickly after that was done. So Suez, Panama, et cetera, could lead to incremental activity. But that's really not the driver. Again, it's Michael's comment to the cost and timing.

[Michael Frankel, executive]

And by the way, Vince, just to add one final note. I think it's important to recall with respect to our portfolio, that our tenant base demand for their goods and services is predominantly driven by regional consumption. So this is a great benefit that the ports are operating, labor is stable, et cetera, et cetera. But at the end of the day, we're very much distribution and consumption driven. And we're serving the largest zone of regional consumption, the most diverse economy in the country here in Southern California by far. So that really was what's driving these superior fundamentals.

[Vince Tibone, analyst]

No, that's all helpful color. I appreciate that. I have just one quick clarification on just the comments around concessions. I just wanted to confirm that 1.5 months of free rent per year is in regard to new leases? Or are you guys expecting to have to give any form of concessions on renewals to kind of keep people in their spaces?

[Laura Clark, executive]

Yes, Vince, that's an aggregate number, so that includes new and renewal.

[Vince Tibone, analyst]

Got it. And is like -- so is new -- like just in terms of the broader marketplace, like is new lease concessions increasing pretty significantly? I don't mean to keep asking the same question, but just any color on maybe what the overall market is doing versus just your expectations would be helpful as well.

[Howard Schwimmer, executive]

Vince, the new leasing concessions we're seeing are going to be a bit higher than renewals. And again, it's really space-driven and location-driven. So we've got an abundance of a certain product size in a particular market, you're probably going to see a little heavier concession being offered.

[Michael Frankel, executive]

And by the way, I'll just add one more thing here, Vince, where we do see maybe heavier concessions, for instance, in the IE West, we also see that stabilizing. We see absorption over the near term for the size ranges that have a little bit of additional supply compared to historical periods, and we do see that reverting to a more normalized supply/demand scenario, hard to predict, but arguably over the next 12 months or so.

[Operator]

Our next question comes from the line of Nikita Bely with JPMorgan.

[Nikita Bely, analyst]

I promise I want to ask about the bridge to earnings anymore. Easy one. Can you talk a little bit more about a $125 million loan that you guys extended? A little more color just how they all came about, what the loan is -- I know it's securitized by land, what do you plan to do with it, converting into ownership and when? And if you're going to build something on it, like what can -- how much investment can that site support over time?

[Howard Schwimmer, executive]

It's Howard. That was an amazing transaction. On surface, there was an effective interest rate of 8%. But what you're not seeing is the opportunity that Rexford has surrounding that. We have a right of first offer to purchase a site. We have a right of first offer to JV the site and if we choose not to do either of those, we actually have a [ ticker ] on top of these interest rates if the property is sold to somebody else, we're going to achieve a 5% net equity fee on that sale. And that's going to be in place for 20 years. So we really were successful in structuring a transaction around that loan that puts us in a great position to create value on the site. And our loan to value on that today is just about 50%, low 50s and the work that's being done on the site right now by the ownership is to fill in some of the other excavated areas there that this is a strip mining former use and on top of the buildable 60 acres there over time, the first completion within the next 3 years would drop the loan-to-value down to 35% at a very low value on the land.

So not only is it a very safe and secure transaction, but it has a lot of upside for us on the site. And I believe the site would accommodate upwards of 3.5 million square feet in development once the entirety of the land is available to be built.

[Nikita Bely, analyst]

How did you guys do this transaction? Was it something you've been working on for years off-market deal?

[Howard Schwimmer, executive]

It was an off-market deal. There was a lot of circling of relationships and so forth. And the borrower had a dire need to complete a transaction based on another loan that was -- repayment was due on. So that's, I guess, why we are in the driver's seat on this one to get some of the other goodies tossed in here.

[Nikita Bely, analyst]

Got you. Interesting, interesting. My last question is, did you talk about the -- your expectation for overall 2024 market rents for comparable properties for the full year?

[Laura Clark, executive]

Yes, Nikita, as we discussed last year, we're not going to be providing market rent growth expectations going forward. We're going to be providing an update on the market on a quarterly basis. We'll be very transparent around that. As you can see, we provided market rent growth by submarket and we'll continue to communicate what we're seeing in the market as we see it from a demand and activity perspective.

[Operator]

Our next question comes from the line of Anthony Hau with Truist Securities.

[Anthony Hau, analyst]

Laura, I have a quick one for you. What is the cadence of the $0.06 redevelopment and repositioning drag throughout the year?

[Laura Clark, executive]

It's pretty even throughout the year. And we provide actually within our disclosure on the repositionings and redevelopments, we provide the 4Q NOI that was realized in 4Q of 2023 from each of our repositionings and redevelopments that are in the pipeline. And then we provide color around and dates around construction start as well as completion and stabilization. So that should be -- should allow you to model appropriately in terms of the timing and the cadence.

[Anthony Hau, analyst]

And what's that on an annualized basis? Is it also like $0.16 similar to the contribution from redevelopment?

[Michael Frankel, executive]

That's correct. It's about $0.16 fully leased up annualized basis.

[Operator]

Our next question comes from the line of Vikram Malhotra with Mizuho.

[Vikram Malhotra, analyst]

Just my 2 quick clarifications. Just one on the equity line that you have in the guidance, it has a line there, which says there's and some additional equity for, I think, redevelopment. So I just want to be clear, are you assuming any more incremental equity in the guide?

[Laura Clark, executive]

It's a marginal amount. We have about $300 million of repositioning and redevelopment spend remaining for 2024 related to the projects that we've disclosed. We first fund that with free cash flow, and then we have $138 million of net forward equity remaining for settlement. And then remaining -- in terms of the remaining funding, we have a number of options. We could fund that with equity. We could fund that through debt. We could fund that through dispositions. So for purposes of the roll forward, we've attributed that to equity, but we've got a lot of optionalities in terms of how we may fund that as the year goes on.

[Vikram Malhotra, analyst]

Got it. And then just last clarification. The reported GAAP mark-to-market for the portfolio that you gave was a 50-plus percent. Does that include the impact of say, all the volume of acquisitions you've done over the last, call it, year or 2 years has been a big volume? And I just asked that because if you acquire those, you arguably, those are already marked up. And so I just want to understand if that is reflective of those acquisitions as well?

[Laura Clark, executive]

Yes, it's included.

[Operator]

We have reached the end of the question-and-answer session. I'll now turn the call back over to Michael Frankel for closing remarks.

[Michael Frankel, executive]

Well, we'd like to thank everybody for joining us today, and we very much look forward to connecting next quarter. Thanks, everybody. Have a great day.

[Operator]

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.