Rexford Industrial Realty, Inc. (NYSE:REXR) Q1 2022 Earnings Conference Call April 20, 2022 1:00 PM ET
Company Participants
David Lanzer – General Counsel and Corporate Secretary
Michael Frankel – Co-Chief Executive Officer and Director
Howard Schwimmer – Co-Chief Executive Officer and Director
Laura Clark – Chief Financial Officer
Conference Call Participants
Manny Korchman – Citi
Jamie Feldman – Bank of America
Blaine Heck – Wells Fargo
Connor Siversky – Berenberg
Mike Mueller – JPMorgan
Dave Rodgers – Baird
Chris Lucas – Capital One
Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.
Operator
00:05 Greetings, and welcome to the Rexford Industrial Realty First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
00:27 I would now like to turn the call over to David Lanzer, General Counsel. Thank you. You may begin.
David Lanzer
00:33 We thank you for joining us for Rexford Industrial’s first 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 www.rexfordindustrial.com.
00:54 On today’s call, management’s remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future.
01:26 And in addition, certain financial information presented on this call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP reconciliations and an explanation of why such non-GAAP financial measures are useful to investors.
01:44 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.
01:59 Now, I will turn the call over to Michael.
Michael Frankel
02:04 Thank you, David, and thank you, everyone, for joining our Rexford Industrial first quarter 2022 earnings call. We hope you and your families are well. I’ll provide some brief remarks followed by Howard, who will discuss our transaction activity, and then Laura will provide an update on our financial metrics and guidance.
02:24 As we start the new year, our exceptional first quarter performance demonstrates the extraordinary tenant demand that continues to strengthen even beyond last year’s historic levels. Rexford continues to differentiate itself as the nation’s fastest-growing and strongest performing industrial REIT. Our portfolio now comprises over 38 million square feet of industrial property, 100% located within Southern California infill markets, the strongest industrial market in the nation and the fourth largest industrial market in the world.
02:59 Our portfolio is performing at essentially full occupancy, with our same property pool, ending the quarter at over 99% occupancy. We are seeing an exceptionally deep and diverse range of tenant demand across sectors. Demand substantially exceeds supply with overall market vacancy tracking at well below 1%. We expect to continue to experience an incurable supply-demand imbalance, due to an extreme lack of developable land. This inability to increase supply within infill Southern California is a key feature that we believe will differentiate our markets into the foreseeable future.
03:40 In addition to this exceptional market backdrop, our entrepreneurial business model continues to position us to drive accretive cash flow growth and value creation well in excess of secular tailwinds. Our team is executing on a range of internal and external growth strategies that are unlocking tremendous value.
04:00 Leasing spreads for the quarter were a full 71% on a GAAP basis and 57% on a cash basis. On the external growth front, year-to-date our team acquired $458 million of assets sourced predominantly through off-market or lightly marketed transactions. And compared to the prior-year quarter, we grew net operating income by 41% and grew Core FFO by a full 58%.
04:27 As we look forward, we are very well positioned to continue to grow our cash flow and value. From an internal growth perspective, over the next 24-months, we project approximately $140 million, or 33% of annualized NOI growth embedded within our in-place portfolio assuming no further acquisitions, which includes $31 million of incremental NOI as our redevelopment and repositioning projects stabilized, $29 million of incremental NOI from recent acquisitions, and $82 million of incremental NOI contributed as we roll below market rents to higher market rates. In fact, the mark-to-market on rental rates for our entire portfolio is now estimated at 55% on a cash basis and 63% on a net effective basis.
05:18 In addition, we have an extensive pipeline of additional investments currently comprising over $500 million of acquisitions under contract or accepted offer, and we have an extensive originations pipeline beyond these transactions. To fuel our growth, we are favorably positioned with a low leverage best-in-class balance sheet closing the quarter at 10.3% net debt to enterprise value.
05:43 As a reflection of the company’s strong performance, our first quarter dividend represented a 31% increase, compared to last year. And with that, we’d like to thank our entire Rexford team for your extraordinary dedication, passion and entrepreneurial approach to growing our great company.
06:00 And now, I’m very pleased to turn the call over to Howard.
Howard Schwimmer
06:05 Thank you, Michael, and thank you, everyone, for joining us today. Rexford began the year with outstanding results, reflecting the high quality of our portfolio and the incredibly strong fundamentals of the Southern California infill markets. Based on Rexford’s internal portfolio metrics, market rents for comparable space continue to accelerate, increasing by 62% over the prior year. According to CBRE, quarter end vacancy decreased to 0.7% across our infill markets.
06:37 Due to the ongoing lack of availability within our supply-constrained infill markets and ongoing strong tenant demand, we see our markets continuing to perform at below 1% vacancy, positioning us well to capture strong rent spreads in the coming quarters. The consolidated portfolio weighted average mark-to-market for our remaining 4.1 million square feet of 2022 lease expirations is now estimated at 67% on a net effective basis and 58% on a cash basis.
07:11 Regarding external growth, in the first quarter, we completed 14 acquisitions totaling $458 million, representing 1.5 million square feet of buildings on 82 acres of land, including 13 acres for near-term redevelopment. Approximately 50% of acquisitions were value-add investments. In aggregate, our first quarter acquisitions generate an initial unlevered yield of 3.2%, growing to an estimated 4.7% unlevered stabilized yield on total cost.
07:45 Year-to-date, over 85% of our acquisitions were acquired through off-market or lightly marketed transactions sourced through our proprietary research-driven processes and deep market relationships. Looking towards the future, we currently have over $500 million of new investments under LOI or contract, which are subject to customary closing conditions.
08:08 During the first quarter, we stabilized a 111,000 square foot redevelopment property at a 6.6% unlevered stabilized yield on total cost, representing substantial value creation as this stabilized yield is about double the market yield or similar quality assets in today’s market. Although increase in construction costs are top of mind to continue to see rent growth well in excess of inflationary impacts.
08:38 The team is executing on a broad range of accretive internal growth initiatives. We have approximately $415 million of projected total incremental investment for value add and redevelopment projects underway are expected to start over the next two years. These projects are projected to deliver an aggregate return on total investment of about 6.7%, representing over $1 billion in estimated incremental value creation.
09:07 And with that, I’m pleased to now turn the call over to Laura.
Laura Clark
09:12 Thank you, Howard. First quarter results were exceptional with same property NOI growth at 8% on a GAAP basis and 11.7% on a cash basis, equal to 12.3% when normalized for COVID-related repayments. This strong performance was driven by continued occupancy gains and record leasing spreads.
09:33 Average same property occupancy was 99.2% in the first quarter, up 150 basis points year-over-year, ending the quarter at 99.3%. And leasing spreads executed over the prior four quarters averaged 46% on a GAAP basis and 32% on a cash basis.
09:54 Additionally, annual embedded rent steps on our executed new and renewal leases increased to 4.2% on average, compared to 3.9% in the prior quarter. This strong embedded internal growth combined with our accretive external growth enabled us to grow core FFO per share by 30% over the prior year to $0.48 per share.
10:19 Moving to our balance sheet and capital markets activities. At the end of the first quarter net debt-to-EBITDA was a sector low 3.7 times, below our 4 times to 4.5 times target. We continue to execute our strategy to maintain a low leverage investment grade balance sheet that opportunistically positions us to execute on strategic capital markets transactions through all points in the cycle.
10:44 During the first quarter, we sold 5.7 million shares of common stock through the ATM on a forward basis at an average price of $71.32 per share. At the end of the quarter, we settled forward sale agreement associated with this quarter and last quarter’s ATM sales issuing 4.4 million shares of common stock for net proceeds of $306 million. At quarter end, our liquidity was approximately $856 million, including $49 million of cash, $232 million remaining for settlement from our first quarter ATM sales and $575 million of availability on our revolving credit facility.
11:28 Now, turning to our full-year guidance. We are increasing our core FFO guidance range to $1.84 to $1.88 per share from our previous range of $1.77 to $1.81. Our revised guidance represents 13% year-over-year earnings growth at the midpoint. As a reminder, our guidance does not include acquisitions, dispositions or related balance sheet activities that have not closed.
11:57 We have provided a roll forward detailing the drivers of our revised guidance range on our supplemental package. A few highlights include same property NOI growth on a cash basis has been increased to 6.75% to 7.75%, up 75 basis points at the midpoint. When normalized for COVID-related repayments, cash same property NOI growth is projected to be 7.25% to 8.25%. Same property NOI growth on a GAAP basis is now projected to be 4% to 5%, also increased 75 basis points at the midpoint.
12:34 Assumptions driving same property growth include average occupancy of 98.25% to 98.75%, an increase of 25 basis points at the midpoint. Cash leasing spreads of approximately 50%, and GAAP leasing spreads of approximately 60%. Our projection for bad debt as a percent of revenue is now 25 basis points for the full-year, as compared to 35 basis points in the prior guidance, driven by the strength of our tenant base.
13:04 Finally, I’ll note that our overall same property expense growth is in line with our prior projections. The incremental NOI from the $288 million of acquisitions closed after we initiated guidance is projected to be approximately $11 million in 2022. Our revised guidance also includes approximately $5 million of incremental NOI from our repositioning and redevelopment properties and prior year acquisitions driven by higher occupancy levels and increasing rental rates.
13:34 Lastly, G&A expenses are now projected to be $59 million to $60 million and net interest expense is projected to be in the range of $39 million to $40 million.
13:45 This completes our prepared remarks, and we now welcome your questions. Operator?
Question-and-Answer Session
Operator
13:51 Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Manny Korchman with Citi. Please proceed with your questions.
Manny Korchman
14:33 Hey, everyone. Just given the massive amount of rental rate growth, how are the tenants in the market dealing with sort of that inflationary pressure? And specifically, maybe the tenants that have locations in your sub-markets that are national and so maybe they can’t push pricing as much as they can? Is it just that real estate becomes a bigger piece of the cost puzzle?
Michael Frankel
14:59 Hey, Manny, it’s Michael. Thank you so much for joining us today. Again, I’d just a reminder that the vast majority of our tenants, demand from those tenants is driven by regional consumption, and we have the largest zone of consumption in the country here. And so even your larger national tenants are — have an increasing need to push their warehousing capability in closer to the end points of distribution.
15:27 So just take an example of target, targets fundamentally change their business model actually over the last five, 10 years, by opening actually small footprint stores in and among the population centers, very diametrically opposed to their previous big box business strategy. And to deliver on that and the support that network of small footprint stores, as well as their e-commerce activity, they’re really forced to establish a greater presence of smaller warehouses throughout infill Southern California. So whether it’s a smaller business or a legacy business or a large national business operating in infill Southern California, the key driver is that in order to execute on their business model, in order to have a business, they need to have these spaces.
16:14 And we can talk — walk through a range of industry sectors, new and emerging businesses and industries, that they’re all experiencing the same set of circumstances. They can’t execute on their business, so they don’t have the space in infill Southern California. And frankly, companies that could afford to move out of the region did so many, many years ago, because this has been the most expensive operating environment for decades.
16:39 And with regard to your question about what are they doing by these increasing rental rates, they are absorbing them. They just don’t have a lot of option, we’re seeing a level of tenant demand and intensity that we’ve never seen before. And as I mentioned in my prepared remarks, even well beyond what we saw last year, those historic levels. And we can talk about this literally for a long time today. But I think what it really differentiates today is the deep diversity of demand that we’re seeing. And there are incremental drivers, I mean, California now has a mandate to increase housing stock by over 20%. It’s going to take over 20-years to achieve that. And so now we have demand from the building trades, which used to be more cyclical with a 20-year trajectory, and we’re seeing the impacts already. So it’s a unique time here for us. And really, remember, we have a market that cannot increase supply. We will actually continue to lose supply on average year-over-year.
Howard Schwimmer
17:36 So, Manny, one more comment on that. This is Howard, nice to hear your voice. The tenants are the ones setting the rents right now in the market. All our space, generally, we put out there’s is unpriced. We had a multitude of offers and the tenants are literally competing with each other and they are pressing this space. So it’s really to Michael’s point, these spaces are essential to their businesses and they are determining how badly they want them and pricing them in terms of what works for them to take the space.
Manny Korchman
18:15 Thank you for all the detail. And then Howard, while I have you on, in terms of the acquisition pipeline, is there any change in mix or asset type or the value-add component versus what you’ve been buying over the last few quarters?
Howard Schwimmer
18:29 Well, it’s going to vary quarter-to-quarter. This past quarter, about half of what we purchased was value-add type transactions. We had 13 acres for near-term redevelopment, but quarter-to-quarter, it varies. And we’re pretty pleased with the quality and the volume of opportunity that we’re still seeing in the marketplace.
Michael Frankel
18:56 Manny, it’s Michael again. I’d like to come back to your original question, because I realized we have some really interesting data when you ask about how are the national tenants responding to the dramatic increase in rental rates infill Southern California, and it’s interesting. If you compare our larger tenants, which is more comparable to the other industrial REITs that own across the nation, who have national portfolios, their tenant base is typically larger than Rexford’s on average in terms of their space sizes.
19:26 And if you look at a more comparable metric in our leasing spreads, that would more directly compare to the national REITs, national industrial REITs, for instance, for our spaces over 25,000 square feet in size, which will tend to be more of your national tenant, as compared to our smaller spaces. Our leasing spreads for the quarter were full 91% and so that’s a leasing spread, that’s more comparable to the leasing spreads you will hear, for instance, from the national industrial REITs.
19:56 And I think it’s an indication to your question that the national REITs, they’re adjusting. They don’t have an option. And frankly, the reason that the larger spaces are experiencing a higher leasing spread in our portfolio simply, because they don’t roll as often. The larger spaces tend to have longer-term leases, and so they have more time to build up that mark-to-market. And so we’re seeing that reflected in our higher leasing spread.
Manny Korchman
20:22 Thanks all.
Operator
20:27 Thank you. Our next question comes from the line of Jamie Feldman with Bank of America. Please proceed with your questions.
Jamie Feldman
20:34 Great. Thank you. We hear talk about buyers, kind of, rethinking maybe pricing or in the debt markets, cost of capital is certainly back up with higher rates. How are you thinking about the change in your required returns? I know you had mentioned your unlevered yields going in and you’re stabilized, but how is your firm thinking about what’s changed there? And how — and what kind of returns do you want on your investments?
Laura Clark
21:02 Jamie, it’s Laura. Great to hear you today. We’ll have some feedback here. All right. Jamie, it’s Laura. You hear me now?
James Feldman
21:17 Yes, sounds good.
Laura Clark
21:18 Okay. Great. Sorry about that. In terms of how we’re thinking about looking at capital raises and how we’re thinking about our cost of capital moving forward. I think you’re going to see us continue to take a very opportunistic approach to capital raises and how we deploy capital. Our balance sheet certainly allows us to take advantage of all attractive capital sources, including debt and equity, to fund all of our investment activities.
21:46 I think it’s important to note that we don’t focus on a cost of capital at a point in time. We take a much longer-term approach and view, because we built a business that’s enabled us to do that. We can execute it across all points in the capital cycle, because of the value creation opportunities that we’ve embedded into our portfolio through repositioning, redevelopment, below-market rent opportunities. And so when you think about how we invest, we really invest in a basket of goods that achieve a range of yields that overall increase our earnings growth and FFO.
22:23 So as an example, if you look at the projected yield for our recent acquisitions and our end process and pipeline, repositioning redevelopment investments. If you look at what’s going to stabilize in 2022, for example, the projected stabilized yield on that basket of goods is 5.8%. If we look ahead and we look at the stabilization occurring over the next five years, those are projected to yield up 5.9% in the years in which they stabilize. So I think even in the face of increasing interest rates and inflation, given these above-market yields, that really positions us to drive substantial NAV and FFO accretion over time.
Howard Schwimmer
23:06 And Jamie, I just maybe add to that. Somewhere in your question, I think, is interest in what’s happening with interest rates affecting cap rates. And maybe just point out that, because of the rent growth that you’ve seen in our portfolio and the market itself, there’s less sensitivity to cap rates and interest rates for investments that have shorter duration lease expirations, but we are starting to hear about some of the longer-term lease product. Not that we’ve seen a change in those cap rates yet, but perhaps, maybe there’s less buyers showing up to bid on them, because some of them are interest rate sensitive. So the first place we will see something in the market is going to be on the longer-term leased properties without an opportunity to reset to market.
Michael Frankel
24:05 Well, I think, frankly — hey, Jamie, it’s Michael. Thanks again for joining us today. I think what we’ve seen in prior cycles, we’ve been doing this for a very long time, and we’ve kind of seen this movie before in many respects. And what we’ve seen during the expansion phase of the cycle, that people chase the risk curve down, and they go to secondary tertiary markets and they drive those cap rates down disproportionately low in secondary tertiary markets, markets that are not as fundamentally strong over the long-term in Southern California.
24:32 And when the cycle starts to come back around due to inflationary pressures, interest rates, recession, whatever it might be, we see those tertiary markets, secondary market cap rates, sort of, start to vaporize. They start to go up fairly dramatically. Whereas, in infill Southern California in those prior cycles of those inflection points where the market stabilizes, we don’t see the same cap rate impacts in infill Southern California, simply because supply/demand here trumps these pressures over time, and that’s what we continue to see today. Except that today, supply/demand dramatically trumps these factors even more so than prior cycles from our experience.
Jamie Feldman
25:14 Thank you for that color. We’ve seen a number of ships waiting outside of the Port of LA decline meaningfully. I’m just curious, what has changed in terms of the demand profile or what tenants are saying or needing as it seems like supply chains are starting to get a little bit better? I know there’s obviously a lot of risk that they get worse, but what do you think we can expect if we do actually start to see supply chains improve?
Michael Frankel
25:40 I think if we start to see supply chains improve, we’ll start to see our tenants businesses functioning more efficiently, frankly. And I think the short answer to your first question is, we’ve seen no impact other than increasing demand consistent with the decrease in the backlog at the ports. Vessels waiting to dock are down from about 60 to 48 in March, but they’re still above 2021 levels. And frankly, import volumes are up 17% versus February, up 29% year-to-date. And the first quarter was the best quarter for the port system in Southern California ever on record. And so really, it’s more about fundamental underlying demand.
26:24 And people talk about increasing safety stock and all that sort of thing, but don’t forget, we have a market that’s already performing at full occupancy. Our markets are well below 1% vacancy. If you were to drill down into that — those vacant buildings to determine — off the vacant buildings, which or how many actually compete with Rexford on a locational or functional basis, and you’re probably looking at less than half of the stated vacancy actually even competes with us. And so we really — what it means in terms of reduced congestion of the ports is really enabling our tenants to operate more efficiently to replenish their inventories to service the backlog of orders, but we see no letup in tenants now. We see our tenants actually just increasing demand because they can run their businesses that the way they have plans for.
Jamie Feldman
27:18 Okay. Thank you.
Operator
27:24 Thank you. Our next questions comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Blaine Heck
27:30 Great. Thanks. Good morning out there. Laura, you guys are obviously off to a great start on same-store NOI this year with cash at 11.7% this quarter. But to hit your midpoint on guidance for the year, there’s a meaningful slowdown implied in the remainder of the year. Can you just talk about the cadence of same-store NOI that we should expect? Is there a big drop off in any specific quarter? And then, is the deceleration all due to expense growth as we’ve talked about earlier? Or are there other drivers behind that slowdown?
Laura Clark
28:05 Yes, Blaine, thanks so much for your questions today. The actual — the deceleration and same property growth that we’re projecting through the rest of the year is actually almost all tied to the cadence on our occupancy assumptions. So as you mentioned, our cash same property growth in the first quarter was 11.7% and our guidance for cash and property growth at the midpoint is 7.25%. So that does imply some deceleration. When you — and it really has to do with the cadence of our occupancy assumptions, compared to 2021.
28:38 So if you look at 2021, our average occupancy increased 130 basis points from Q1 to Q4. So 97.7% in the first quarter and grew to over 99% by the fourth quarter. What’s happening in 2022 is the opposite occurring. So in 2022, our average occupancy assumes the reverse. So average occupancy is starting at levels today at 99.2% and assumes roughly 120 basis point decline from Q1 to Q4. So that’s really what’s impacting the year-over-year comps and the primary impact to the deceleration.
Blaine Heck
29:20 Great. That’s helpful. And just to follow up on that, are there any specific kind of large move-outs that you guys are anticipating that’s going to drive that occupancy lower? Or is it lower retention as you guys push on rates? Or anything specific you can point us to there?
Laura Clark
29:36 Yes, Blaine, that’s a great question. So we’re currently sitting in occupancy, as I mentioned, at 99.2%. The midpoint of our average occupancy for the year is 98.5%. I will note that, that did increased 25 basis points over our prior guidance. But I’d say that the drivers of our assumptions are really two-fold. One, given our very current high occupancy levels and although market fundamentals continue to be very strong, we really feel like our forecast is prudent at this time, really driven by the timing of our expirations. So our expirations are very heavily back-end weighted to 70% of our expirations occur in the second half of the year. Actually, 40% of those are in the fourth quarter. So I think when we think about occupancy today and as we start getting more visibility into those spaces we’ll continue to update our assumptions, but it’s just pretty early in the year for those back-end weighted expirations.
30:38 I think the second impact is really around the visibility that we have into capitalizing on some expiring leases, which certainly gives us the opportunity to direct substantial value creation, because we are able to roll those to higher market rents. So we have about 300,000 square feet of spaces where we’re projecting leasing spreads is up about 90%. And so that’s going to drive substantial value creation, but it does come with a little near-term impact to occupancy in the form of downtime.
Blaine Heck
31:12 Great. That’s really helpful. And then switching to Michael or Howard, can you guys talk about your expectation for the trajectory of mark-to-market as we move throughout the year? Obviously, you’ve got older, lower rents that will be expiring and coming out of that in-place bucket each quarter, but market rent growth has been very strong. So how do you think about those two dynamics balancing each other out and influencing the overall portfolio mark-to-market as we progress throughout the year?
Howard Schwimmer
31:44 So we’ll continue to mark the portfolio of the market every quarter, right? So we saw a tremendous increase in the mark-to-market just from Q4 into Q1 here. And the reality is, there’s no space on the market, as Michael mentioned earlier. So there’s a tremendous pressure for market rent growth to continue. It’s really interesting. If you looked at the end of the quarter, we literally only had 300 — I think 40,000 square feet of vacant space in our portfolio. So we don’t have much to even lease on the new side.
32:22 So it’s really more about the renewals that we’re doing with tenants, and tenants are very conscientious of retaining their space. So they’re calling us all the time, about wanting to renew early. And we’ve been holding them off a bit if they have led expirations at the latter part of the year or some are calling you about next year. So there’s just still tremendous pressure out there. So it feels like we’re set up quite well to see continued strong market rent growth in our portfolio and probably in the entire marketplace as well.
Michael Frankel
32:58 And Blaine, it’s Michael. Thanks so much again for joining today. I think a great leading indicator also are the rent bumps that we’re contractually structuring into almost all of our leases, and we’ve seen a nice acceleration there as well. For example, Q1 rent spreads were 4.2% on average for the quarter. We actually had our first 6% contractual rent spread booked during the quarter. And those are annual rent spreads — I’m sorry, annual rent bumps that occur every year throughout the lease terms. So I think that’s a great leading indicator of maybe where things are going in the near-term.
Blaine Heck
33:44 Very helpful. Thanks, everyone.
Operator
33:50 Thank you. Our next question comes from the line of Connor Siversky with Berenberg. Please proceed with your questions.
Connor Siversky
33:56 Hi, everybody. Thanks for having me on the call. Really just one question for me. Curious on the Inland Empire. I think it was noted in the last call that it access somewhat of an overflow valve for LA proper. Noticing that the vacancy rate is exceedingly low at the moment, are we at a point where virtually any development project in that market is pre-leased before completion? I mean, if that’s the case, have you guys done any work to maybe identify what the next overflow valve looks like and whether or not you’d be willing to enter a new county?
Howard Schwimmer
34:27 Hi, Connor, it’s Howard. Well, we’re focused in the Inland Empire West. We really don’t buy or operate in Inland Empire East, which really is that overflow valve that you’re speaking of because there’s almost unlimited land just continuing to head East. You can build over the Arizona, if you needed to. But in the Inland Empire West, yes, the vacancy was astounding there. According to CBRE stats the vacancy in that market at 0.1%. So essentially, the market is beyond full capacity, right?
35:03 Coincidentally, that had the highest year-over-year rent growth on their stats, as well at almost 82%. So the Inland Empire is now a real infill market in terms of the Western Inland Empire. And yes, any time, literally, we even have a space that’s vacating, we’ll have tenants and brokers coming to us ahead of time. We’re able to actually even match our acquisitions now in that market, where we are buying a vacant building, we’ll pre-lease the building during the escrow. We’ve had a couple of instances of doing that recently. So it’s tightest of the tight market, but look, everything is sub 1%. Really all the infill markets are performing exceptionally well. So really, just in terms of a relief they’re going further East is really always the option.
Connor Siversky
36:02 Got it. Thanks for that. And then just a point of clarification and apologies if I missed this before. Given the rising rate backdrop, I mean — and the $500 million under LOI or contracted, does this change your calculus at all on how you fund these acquisitions? Specifically speaking, I’m wondering if you seek to use more equity in the debt to equity weight.
Laura Clark
36:22 Hey, Connor, no, it doesn’t change our approach. And as I mentioned before, we’re not as focused on our cost of capital at a point in time. When you look at the stabilized yields in which we’re investing on our recent acquisitions and process and pipeline repositions and redevelopments, pushing 5.8%, 5.9%. And even in the face of increasing rates and inflation, we’re very well positioned given our above-market yields.
Connor Siversky
36:53 Okay. Noted, I’ll leave it there. Thank you.
Laura Clark
36:56 Thank you.
Operator
36:59 Thank you. Our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your questions.
Mike Mueller
37:05 Yes, hi. I guess for the $450 or so million of acquisitions in the first quarter, I think the comment was about half were value-add. Does that mean about half of that pipeline is ultimately going to end up in your repositioning or the redevelopment pages in there? Or is it a little bit more way for a tenant to roll kind of mark it out? I mean, how should we think about that? And I guess, to get to that incremental stabilized 4.7% yield, is there a significant incremental capital commitment that ties to that? And just kind of what’s an overall ballpark timing to get there?
Howard Schwimmer
37:43 Hi, Mike, it’s Howard. I’ll probably respond to a few of those points and maybe Laura to talk about the capital. Value-add doesn’t necessarily mean that we’re going to have vacant product day one and push it onto the repositioning page. There were three — there were, I think, like two or three sites for 13 acres better near term for redevelopment, but some of those actually had some income in place on them. But those will show up on the repo page in the next year. But it takes time with a lot of these to wait out some of the expirations. It may take 18 months or two years or so.
38:29 But the nice part is that we’re achieving great cash flow in the interim. Three of our transactions were what we refer to as covered land sites where it might take a bit longer to actually get to and redevelop and those came in with inbound yields in the low to mid 4 cap range. So very strong cash flows to hold and have plenty of time for the planning and the timeline of those developments. So yes, no, it’s not all going to show up on the repositioning page in the next six months or so.
Michael Frankel
39:07 And Mike, it’s Howard — I mean it’s Michael. Thank you so much for joining us today. We often confuse ourselves for each other. We do know each other that well. I know what Howard is thinking before you think that in vice-versa. But I think it’s certainly interesting is, you’re seeing the Rexford business model truly executing on all cylinders, because we talk about the yields for the acquisitions that we’re buying. But equally important, if you look at the repositioning projects that we’re starting this year, we have a total spend almost $700 million of total spend represented by the ’22 starts, and they’re solving to a 6.7% unlevered weighted average stabilized yield. And that’s arguably more than double the market cap rates that we could turn around and sell those assets for in today’s market. So a tremendous amount of value creation embedded in the activity throughout the portfolio.
Mike Mueller
40:08 Got it.
Laura Clark
40:09 Mike, I’ll add one more thing to that. In terms of — you asked a question around kind of average stabilized. Your — tends to be in the 4- to 5-year area for this acquisition.
Mike Mueller
40:29 Okay. That was it. Thank you.
Operator
40:37 Thank you. Our next question comes from the line of Dave Rodgers with Baird. Please proceed with your questions.
Dave Rodgers
40:43 Yes, good morning out there. Michael, Howard, wanted to ask two questions, one on the acquisition pipeline and recent closings of acquisitions. In the last couple of quarters, we talked about OP units versus cash. So maybe talk about the seller mix. It looks like it’s been a bulk of cash, although you did do one unique transaction this quarter it seems like, but maybe is that just a function of seller mix? Is that just a function of price, say, let’s take our money as a seller and go, but maybe some more color on kind of how that’s playing out in the discussion.
Howard Schwimmer
41:12 Sure. Hi, David, it’s Howard. The UPREIT is an important part of our acquisition program. We are working with sellers that have owned assets in our market for many years. They understand our market, and they’re extraordinarily comfortable to invest in Rexford by contributing their assets into our operating partnership through UPREIT. And so that’s — most of the conversations we have close as UPREITs, many of them start as an UPREIT and turn into cash acquisitions. And they vary, obviously, from quarter-to-quarter. It was a smaller amount in this past quarter, there’s a lot of conversations happening with people that are very interested in UPREITs. And frankly, as we look ahead, even some of the conversations with — from a federal level, trying to eliminate the 1031, that really just plays right into more UPREIT-type activity. And also, many people today, a lot of times people sell because they’re kind of operating a property. It’s management intensive. It’s going to need a lot of capital, and so they will tend to sell and then do a 1031.
42:26 The markets are so tight that it’s very difficult to even find exchange properties. So we find a lot of people. Even if they’re looking for an UPREIT rather 1031, they’re asking us to build in some flexibility that we might allow them to do an UPREIT in the 11th hour, if the 1031 doesn’t even work out. So it’s a growing component of our acquisitions. The market in terms of the aging owners is really feeding into that, and that’s a huge opportunity for us going forward.
Michael Frankel
42:58 Dave, it’s Michael. I’ll just add a little bit to that because we’re really seeing the direct addressable market opportunity from an external growth perspective, increasing pretty dramatically both in volume and quality for Rexford. Now it doesn’t mean that our acquisition volume goes up linearly every single year, but it means that the direct addressable market opportunity overall is increasing substantially in quality. And the reason for that is really driven by multiple factors. And number one, Howard briefly mentioned, the aging out of this legacy ownership. We have over 1 billion square feet in infill Southern California, almost half the market built before 1980, and predominantly, owned by long-time private owners who bought build or aggregated these properties during the post-war two era. And frankly, just through the passage of time, we’re in the middle of a historical shift of these assets from one generation to the next.
43:52 And if you were to drill down and peel back the layers, what are the core drivers of the transaction activity, which is kind of getting to your question, the single greatest core driver of transaction activity one way or another is this transition — this historical transition of assets from one generation to the next. And today, given where values are they can actually replace the cash flow that they’re receiving from the properties in a pretty favorable way by monetizing the value of the assets and redeploying their cash flow either into Rexford through an UPREIT or otherwise. And so it’s a unique time and when you combine that with the fact that we’re simply deeper in the markets than we’ve ever been. Our team is better equipped. Howard and I grew up here. Our families grew up here. So our REITs go very, very deep. And then you look at the track record of Rexford, there’s just absolutely no reason that a private seller today wouldn’t consider an UPREIT. So we’re really we’re very fortunate, I would say, and benefiting from all those factors.
Dave Rodgers
44:55 I appreciate the color on that. My second question maybe is slightly more obscure, but around real estate taxes in California. You’ve obviously bought a lot in the last couple of years, and it probably takes some time before those tax bills start to come in to the tenant. Is there any slippage in that where you guys are facing kind of more taxes until you can reinstitute your version of the lease. Does that happen? Or are the leases institutionalized enough where that’s a tenant burden and you’re just not really seeing that. I guess, I’m just wondering if that’s something we should think about building in as you get reassessed here in the coming years on a short-term basis.
Howard Schwimmer
45:32 I’d say that most leases on properties we buy are very standardized. In Southern California, there’s a lease, let’s call it, the AIR standard industrial lease that was developed and modified over many decades here. And you find that most — all of these unsophisticated landlords that Michael was mentioning used that lease. And whether it’s a net lease or a gross lease, they all provide for increases in property tax to be passed through to tenants. Now occasionally, a tenant might have negotiated for a tax stopping in terms of the sale increases, but we’re building that into our underwriting, and so — but that’s very rare. That’s very rare that we stumble across that.
Laura Clark
46:19 Yes. And I’ll just add now, Dave, that we have not seen an impact and from a recovery rate perspective and collection — tenant collections of those increased taxes.
Dave Rodgers
46:33 Got you. That’s helpful. And then last, Laura, for you. On the same-store expenses, you had mentioned last quarter that they would be elevated this year. You added some personnel around. Should we expect kind of sequentially for that to continue to increase? Or is that kind of all loaded in the first quarter?
Laura Clark
46:48 Yes. Good question. Thanks, Dave. Our full-year guidance, as we talked about last quarter, included a negative 110 basis point impact from expenses net of recoveries, and there has been no change in that overall expense guidance. Just as a reminder, that impact was related to a couple of things. One was related to occupancy assumptions for the full-year, and the second was related to an increase in non-recoverable expenses related to operating really overhead cost. So when you look at our Q1 expense impact, net of recoveries was actually 150 basis points, so lower than what we’re assuming for the full-year. And so that would imply higher expenses or a higher run rate there for the rest of the quarters, and that actually is in line with our expectations. And what’s driving that is really the decline in recoveries, it’s directly tied to our occupancy assumptions.
47:51 So obviously, as your occupancy declines, that would impact your recoveries a bit. And what happened last year, and we talked about — I talked about this earlier on the call is last year, we were seeing an increase in occupancy through the year and then an increase in recovery rates. And so the opposite is happening this year that we’re having kind of the reverse impact there. So that will accelerate the expense impact through the rest of the year, but again our guidance is no change to our overall guidance, and everything from an expense standpoint is tracking in line with our expectations. And I think it’s important to note that even with this increase in expenses and this impact we’re having we’re still projecting very strong same-property growth at 7.25% at the midpoint, and FFO growth of 13% at the midpoint from an earnings perspective.
Dave Rodgers
48:50 Very helpful. Thank you.
Operator
48:55 Thank you. Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your questions.
Chris Lucas
49:03 Hey, good morning everybody. Just a couple of quick ones, if I could. Just on the renewal lease term length little shorter than it’s been. Is that really mix related? Or is there something more fundamental as it relates to the strategy behind why that’s a bit shorter than it’s been for the past several quarters?
Michael Frankel
49:24 It’s really just circumstantial. There are two leases that were short-term renewals. And if you net those out, it goes back to our norm of about just over four years.
Chris Lucas
49:35 Okay. Thanks for that, Michael. And then just as it relates to sort of the impact, I think Michael, you touched on this. I guess it looks here a little bit more. As market rents have moved higher and really accelerated, how that’s impacted sort of your opportunity set? And maybe if you could touch on that as it relates to sort of the existing portfolio and the redevelopment opportunity within that. Has that changed at all the dynamics there based on the significant move in market?
Michael Frankel
50:08 I think there’s two embedded questions there. One is sort of the external growth and then the others would internal growth. And yes, externally, it is contributing to expanding the opportunity set without a question. And on the internal front, it’s true. Every — really in real time, but on a more formal basis every month and every quarter, we look inward at our portfolio, and we try to determine based on market realities at that point in time, meaning rental rates, construction costs, tenant demand, all the rest. What additional opportunities do we have in our portfolio, where it now may make sense, given the acceleration in rental rates to reposition a property that may not have quite penciled as well even as recently as one or two years ago. And so we do believe that the growth of the market in terms of value and rental rates is continuing to unlock a very exciting opportunity internally for us as well.
Howard Schwimmer
51:03 And Chris, I’ll just add one more comment, the set of sellers that Michael mentioned earlier, the aging property owners. When they operate their properties, they tend to focus more on occupancy as opposed to pushing rents. So the spread between in-place rents on those type of assets and the mark-to-market is enormous. It’s not unusual to see us buying something and reporting. There’s a 60% below market rent in place. So to Michael’s comment that opportunity set is growing as that gap widens. So there’s a huge opportunity for us to buy assets like that and even do some value-add work to the buildings to further unlock incremental value well beyond just the rental rates that are in place to the market even today for the quality of the asset in the current state.
Chris Lucas
52:01 Okay. Thank you for that. And then just last question for me as it relates to sort of the development — redevelopment scale. Is there a — do you have sort of a percentage of enterprise value or some metrics that you’re using to sort of maintain a risk profile that you’re comfortable with? Is there some max amount that you guys have sort of internally marked as the limit as to how much redevelopment — development you’re willing to put in play?
Michael Frankel
52:28 Yes, we are cognizant of managing risk in that respect. And one of the reasons that Howard and I built this business around industrial value creation and industrial property assets is that the incremental capital required, these are relatively simple structures. It’s not like building an office building or a multifamily structure or even retail. We have concrete tilt-up walls and a roof structure. And typically, we are building to a very low percentage of office build-out, and it’s generic finish, not high finish, and that’s really the beauty of the business model. It’s really nominal incremental capital spending to drive the reposition activity. So I think you’ll continue to see that be relatively nominal relative to the enterprise value of the company as we continue to grow the company into the future.
Chris Lucas
53:25 Thank you. I appreciate the time.
Operator
53:30 Thank you. There are no further questions at this time. I would now like to turn the call back over to Michael Frankel for any closing comments.
Michael Frankel
53:38 I’d just want to thank everybody for joining us today and your interest and support of the company. We look forward to reconnecting in about three months. We hope everybody stays well and healthy, and we’re certainly hoping for peace across the world. Thank you so much.
Operator
53:54 This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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