John Kim: Okay. I wanted to ask about your redevelopment and repositioning portfolio and the leasing interest that you have on projects under redevelopment and particularly some of the larger assets, including 500 Dupont Avenue, if there’s strong demand or weaker demand for larger readouts?
Howard Schwimmer: Yes. So, well, first of all, I just want to frame how the market here functions. Most all of the assets in Southern California come to market generally on a speculative basis. Typically, there’s not a lot of pre-leasing, but it does happen here and there. We have many instances where we’ve pre-leased some of the assets. So we’re on the right path. There’s nothing unusual about our Repo redevelopment pipeline right now and any of the activity on it. But that said, we just completed the asset you were speaking to the 275,000 feet in the Inland Empire West, and we do have very good activity on it. We actually have two parties we’re trading paper with and we’re encouraged that we might exceed the lease-up time-frames with something in the very near future.
John Kim: Great. Thank you.
Operator: Your next question comes from the line of Craig Mailman with Citigroup.
Craig Mailman: Hey, guys. To go back to the rent question, I understand the methodology. I guess if you guys kind of just brought it out to a submarket level in aggregate versus maybe what CBRE kind of is reporting for the quarter. What sort of the outperformance of your specific pool versus what some of the brokerage firms have put out there? Could you give us a sense of if that spread between where you guys are estimating your market rents are versus where kind of the market view of rents are? If that’s held pretty steady in terms of your hit rate on accuracy versus the bigger picture kind of view of the markets that we all kind of focus on here from the headlines?
Michael Frankel: Yes. I think it’s a great question, Craig. Thanks so much for joining us today. And I think a couple of things. One, the primary difference in how we report rents and versus what you’re hearing in the market, in general, is that the market in general is fundamentally covering a different pool of assets. And I think consistently — to your question, consistently through time, we’ve observed that around 80% of the negative net absorption driving those numbers in the market overall is generally driven by very much lower quality, lower functionality, even obsolete product. And this is almost a two billion square foot market with over one billion square feet built well before 1980. So that is the vast majority of the marketplace.
And then in terms of driving our performance, it’s a function of the higher quality, higher functionality, better locations. And I think what’s interesting is that each quarter, we tend to give our view of market rents, which is also informed by our actual leasing activity. But what we’ve also found is that our actual leasing activity as we move forward has tended to exceed what we thought our rents were for our portfolio. So I think that answer to your question is, we’ve been pretty accurate and pretty consistent. If anything actually and this might be a little counterintuitive, it doesn’t necessarily predict the future. We’ve probably been underestimating very slightly for our portfolio.
Craig Mailman: Okay. That’s helpful. And then as we think about the Blackstone portfolio you guys just purchased, could you just go through a little bit on kind of the characteristics of it from a submarket perspective, how much of it is kind of traditional industrial versus maybe R&D? Just any kind of deeper dive into kind of what it consists of?
Howard Schwimmer: Sure. Hi, Craig, it’s Howard. Well, first of all, as I mentioned in a previous comment, we curated this portfolio with Blackstone. So it is right in the bulls-eye of the product that Rexford owns and operates in the marketplace. And what I mean by that is, it’s all low-finish, highly functional industrial. The product is primarily — 70% of it was in the LA markets, 30% of it was in Orange County and one mini scale 33,000 foot building was in Chino, which is the Inland Empire West. So it is exactly where we want to own real estate and it’s the best-performing markets that we’ve seen through cycles. So that said, the average size space in that portfolio is 43,000 square feet. And if you had done some deep research on deliveries to the market, what you’d find is that for decades, no one has been able to deliver space in those size ranges to the marketplace because the math doesn’t work between land values, construction costs and rents.
And so there’s huge barriers in terms of any competition around that type of product and especially when you get into the quality of the assets sort of back to Michael’s comments about what really comes to the market in terms of age and quality. So — and then looking at the portfolio, leases that were in place were about 10% below market in-place rent steps averaged 3.9% and the weighted-average lease term is 3.2 years. So that there’s this near-term stabilization, which gets us up to that 5.6%, but we’re locking in 4% escalators in these leases. So there’s a great compounding effect. And then, there’s a little bit of value-add work here and there just to do some light modernization and some functional improvements, maybe a little bit of loading we can add and some fenced yard and so forth that will add more value into future periods and potentially even more value creation down the road.
Craig Mailman: And one last one. Michael, I know you guys — your cost of capital, you try to find assets that are accretive to that. And so it’s not necessarily dependent on where your spot cost of capital is. But at these levels, would you be a buyer of assets here today at similar cap rates to what you just bought or if there’s cap-rate compression? Or would we expect to see Rexford kind of move to the sideline until your cost of equity improves?
Michael Frankel: Yes. We don’t give guidance on what we haven’t closed yet. But I will tell you that we are going to focus on investment opportunities that we believe give a lot lift to our cost — to our stock price that more than overcome the cost of capital at the time that we’re buying.
Craig Mailman: Great. Thank you.
Operator: Your next question comes from the line of Nick Thillman with Baird.
Nick Thillman: Hey, good morning out there. Maybe touching a little bit on just scrolling through your leasing activity over the last five quarters, around like 20% to 25% of leases expiring have been moved into repositioning or redevelopment. I guess looking into 2024 and 2025 expirations, are we expecting a similar level? Or is that just elevated from like the acquisition activity we saw in 2021 and 2022?
Laura Clark: Yes. I mean I think we talked a lot about last quarter and the opportunities that we’ve — within the portfolio to be able to execute on our value creation plans. And that comes at the point of acquisition where we set strategic plans around every single asset. And so last quarter, we moved a number of projects reposition — 10 projects into repositioning and redevelopment into the pipeline. And so we’ve looked — we try to look as far deep into the pipeline as possible and give you as much visibility as possible. And so we’re incorporating projects that we believe that there’s a reasonable likelihood that we’ll execute on a repositioning and redevelopment plan over the next 12 to 18 months. You’ll also notice that we didn’t move any additional projects into repositioning and redevelopment this quarter because we’re giving you that forward look and we included those properties last quarter.
Nick Thillman: So what’s in the disclosure is kind of what you planned and what you have visibility today?
Laura Clark: That’s correct. Over the next 12 months to 18 months. Yeah.
Nick Thillman: Okay. And then, Laura, maybe just touching a little bit on bad debt in the quarter. You guys did call up one specific tenant but then reaffirmed kind of the guide expectations for the year. So just a little bit more color on that would be helpful. Thank you.
Laura Clark: Yes, absolutely. So our bad debt guidance for the full year is 40 to 50 basis points, in line with pre-pandemic levels. Our tenant health remains very stable. When we look at our watchlist, we have less than five tenants on our watchlist and we have over 1,600 tenants within our portfolio. And that’s remained very consistent and in line with what we’ve seen in the past 12 to 24 months. In terms of this quarter, we did see an increase in bad debt. It was isolated to a single tenant. Importantly, that tenant was on our pre-watchlist and that was already incorporated into guidance, which is why you’re not seeing us increase guidance. So we feel good about where our bad debt expectations are for the full year. Currently, for Q2 to Q4, that would imply bad debt of about 30 basis points through the rest of the year.
Nick Thillman: That’s it for me. Thank you.
Laura Clark: Thank you.
Operator: Your next question comes from the line of Vikram Malhotra with Mizuho.
Vikram Malhotra: Thanks for taking the questions. Maybe just first one, with the Tireco extension deal with Blackstone, what does that do to sort of your three-year outlook kind of to get to the 14 to 17 for the next two years that you sort of outlined last quarter?
Laura Clark: No change in our outlook as we communicated. This was within our expectations.
Vikram Malhotra: So you’re still expecting 2025 and 2026 to be — per FFO to be about 14% to 17%.
Laura Clark: Well, based on the math, again, going back to our forecast for the next three years is an average annual growth of 11% to 13%. This year, we’re anticipating growth of 6% on an FFO per share basis at the midpoint. So that would imply — that would imply higher growth in 2025 and 2026. And importantly, that’s being driven by the repositionings and redevelopments that we have in the pipeline or are projected to start and the delivery of those.
Vikram Malhotra: Got it. Okay. That’s helpful. Laura, I think you gave us the GAAP mark-to-market of the portfolio. Do you mind just giving us where the cash mark-to-market is today?
Laura Clark: Yes. The cash mark-to-market today is 33%. That compares to 38% at the end of the fourth quarter. I’ll give you the drivers of that, which I’m sure you’ll find helpful. So that’s a 5 percentage point change that’s being driven by 100 points from leasing that we — that we completed in the quarter, the conversion of the mark-to-market there. As a note that equated to $7 million of NOI annually that we’ve been able to capture through the conversion of mark-to-market just this quarter. A 100 basis-point impact from the — any vacates within the portfolio, a 100 basis-point impact from contractual rent steps of 3.6%, which is our portfolio average, and then a 200-basis-point impact from our first-quarter acquisition.
Vikram Malhotra: Okay. That’s really helpful. And then just last one. I guess, some of your peers have called out 3PL weakness in the broader sort of SoCal market. I know your markets are different, your boxes are different. But do you have a rough sense of whether these are larger 3PLs or maybe the smaller regional ones? What’s the portfolio exposure to 3PLs?
Michael Frankel: Hey, Vikram, thank you again so much for joining us today. It’s Michael. And again, when we hear a peer mentioned 3PLs, they’re talking about spaces larger than 200,000 square feet, actually averaging closer to 300,000 to 400,000 square feet. So it really is a different type of tenant base. And I think what we’ve seen within our infill markets is, yes, some movement among 3PLs, but not really dramatic relative to other tenants in other sectors and other industries. It’s been pretty balanced both on the demand side, on the positive and also to the side where there’s been a negative absorption. So a little more balanced within our infill markets.
Vikram Malhotra: Got it. Thank you.
Operator: Your next question comes from the line of Nikita Bely with JP Morgan.
Nikita Bely: Hey, guys. Are you aware of any other fixed renewal situations that are similar to Tireco that you had in your portfolio maybe over the next 12 months to 18 months?
Laura Clark: No material at this point.
Nikita Bely: And regarding the demand, like where are you seeing most activity in terms of demand and maybe specifically which tenant category, like what is — what is driving most of the activity today?
Michael Frankel: Well, I think that’s the beauty of our markets and our tenant base. It’s extremely diverse. And I think the trend is that there’s no strong single trend from a sector perspective, which is a great thing. It’s one of the many reasons we focus on infill industrial in Southern California and focusing on generic space, by the way, which enables us to appeal to the widest, deepest, broadest, and most diverse tenant base, probably in the country, maybe the world. And so the sources of demand are very, very diverse from aerospace, electric vehicle sector, consumer products, the building trades, which we expect to — they’ve really shown some positive momentum. And by the way that’s not surprising given the fact that California has a mandate to increase housing by at least 20%, representing over 1.5 million units of housing.
