Rexford Industrial Realty Inc (REXR) 2023 Q1 法說會逐字稿

Greetings, and welcome to the Rexford Industrial Realty, Inc. First Quarter 2023 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to David Lanzer, General Counsel. Thank you. You may begin.

We thank you for joining Rexford Industrial's First Quarter 2023 Earnings Conference Call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and an investor presentation in the Investor Relations section on our website at rexfordindustrial.com.

On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined by federal securities laws. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information about these risk factors, please review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future.

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

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

Now I will turn the call over to Michael.

Thank you, David. I'd like to welcome everyone to Rexford Industrial's First Quarter 2023 Earnings Call. I will begin with a brief introduction. Howard will discuss our operations, followed by Laura, who will discuss our financial results and guidance.

Our strong first quarter results reflect our entrepreneurial approach to creating value and the strength of the infill Southern California industrial property market. For the first quarter, Rexford increased earnings or FFO per share by 8%, enabled by a full 34% increase in core FFO, and we grew consolidated NOI by 33% compared to the prior year quarter, driven by strong and accretive internal and external growth. We completed a robust 1.8 million square feet of lease activity during the quarter, achieving leasing spreads of 80% on a GAAP basis and 60% on a cash basis. Interestingly, if we exclude one legacy renewal on a lease with the county of Los Angeles, who exercise their 3% fixed option, our leasing spreads were 97% on a GAAP basis and 77% on a cash basis.

The estimated mark-to-market for in-place leases throughout our entire portfolio is 66% on a net effective basis and 52% on a cash basis, which alone is projected to contribute an incremental $1.90 of core FFO per share, equal to a full 89% increase assuming today's market rents, with the remaining weighted average lease term of just under 4 years. In addition, our team completed $762 million of investments for the quarter.

Tenant demand and market occupancy remain at historically high levels within infill Southern California, the strongest industrial market in the nation, with a virtually incurable supply-demand imbalance continuing into the foreseeable future. From an operational perspective, we believe Rexford is favorably positioned to outcompete within our markets, driven by 2 key facets of our business.

To begin with, our mandate is to own the best locations and the most functional product within our submarkets. Our proactive value-add repositioning work positions our portfolio to outperform through economic cycles due to our superior quality and functionality. Based upon our experience and the relative performance of our portfolio today, Rexford's higher-quality portfolio is expected to continue to outperform the lower quality product that makes up the vast majority of our infill markets, which includes over 1 billion square feet of product built prior to 1980. Secondarily, we continue to see substantial new tenant demand from a range of sectors that may not be as prevalent in other national markets, from the electric vehicle sector to food and aerospace, to name a few.

We are also seeing strength and incremental demand from the 3PL and e-commerce market as Southern California, the nation's largest regional consumption base continues to be underpenetrated in terms of short time frame and omnichannel delivery capability. By way of indication, our customer solutions and leasing teams are proactively tracking over 40 million square feet of leasing requirements within infill Southern California. This includes our active engagement on over 3 million square feet of tenant requirements that are proprietary to Rexford through our strategic customer outreach program.

As we look forward, we have substantial embedded internal NOI growth estimated at 35%, equal to an incremental $175 million of NOI contribution over the next 24 months as we roll deeply below market in-place leases to higher market rents, lease up our repositioning assets and realize incremental NOI contribution from our recent acquisitions.

With regard to our external growth and investment activity, our team is leveraging our deep sharpshooter advantage and proprietary access to the infill Southern California market. We are capitalizing upon current market dynamics and diminished levels of buyer competition to achieve superior investment yields that are the strongest we've seen in well over a decade. Our investing activity is positioning Rexford for very favorable cash flow and net asset value growth into future periods.

Moving to our capital structure. We continue to maintain a fortress-like best-in-class balance sheet at about 13.6% net leverage to total enterprise value, affording the company the ability to protect against economic uncertainty, while positioning us to capitalize upon highly accretive internal and external growth opportunities. Above all else, we thank our Rexford team for your tremendous work and dedication that continue to set our great business apart.

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

Thank you, Michael, and thank you, everyone, for joining us today. I also want to complement our Rexford team for their excellent performance this past quarter. Rexford began the year delivering strong results, a testament to the superior quality and functionality of our portfolio and the strength of our markets. Vacancy across our infill Southern California markets continues at historically low levels at 1.5% for the quarter, according to CBRE.

In regard to market rent growth within Rexford's portfolio, we realized approximately 13.5% year-over-year rent growth. During the quarter, we saw the Rexford portfolio outperformed the overall infill Southern California market, which is largely comprised of lower quality and lower functionality product. By way of example, CBRE indicated negative market absorption in the Central Los Angeles market for the quarter, while the Rexford's Central L.A. portfolio in contrast had net positive absorption.

Interestingly, the negative absorption indicated by CBRE was principally driven by lower quality dysfunctional buildings vacated during the quarter. Additionally, CBRE indicated an increase in overall market sublease activity. And again, in stark contrast, Rexford's portfolio experienced a reduction in sublease activity to a historically low level of 10 basis points of occupied square footage for the quarter, well below our 50-basis-point average over the last 4 years. These key leading indicators reflect Rexford's ability to outperform due to our higher quality portfolio, operating expertise and information advantage.

As Michael mentioned, over the next 24 months, we are positioned to deliver 35% projected internal NOI growth. This is comprised of $52 million of incremental NOI contribution as we roll below-market leases with a weighted average mark-to-market on 2023 and 2024 expirations estimated at 78% on a net effective basis and 63% on a cash basis, plus $24 million of incremental NOI generated from contractual annual rent steps embedded within our leases, and $56 million of incremental NOI from lease-up of repositioning and redevelopment projects over the next 24 months.

Lastly, incremental NOI of $43 million from acquisitions closed year-to-date. Our proven investment strategy and data-driven acquisitions methods continued to enable the execution of extraordinary industrial real estate opportunities, driving substantial cash flow growth, including 2 transactions closed subsequent to quarter end. Year-to-date investment activity is now $804 million, collectively generating an initial yield of 5.1% and a projected 6% unlevered stabilized yield on total cost. Over 85% of these acquisitions were sourced through off-market or lately marketed transactions.

In addition, we disposed of one property for $17 million with an unlevered IRR of 16.8%. Furthermore, our pipeline of highly accretive transactions under contract or accepted offer is about $120 million, which are subject to customary closing conditions. These forthcoming investments are projected to generate an aggregate initial yield of 5.4%, growing to a 6% stabilized unlevered yield on total cost.

Finally, we have 3.6 million square feet of value-add repositioning and redevelopments in process or projected to start within the next 24 months at a total projected investment of nearly $1.3 billion, with the remaining incremental spend of approximately $415 million. These investments are projected to deliver an aggregate unlevered yield on total investment of 6.4%, representing an estimated $525 million of value creation, assuming today's market rents and no further rent growth.

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

Thank you, Howard. Our first quarter results were strong and ahead of expectations. Same-property NOI growth for the quarter was 10.7% on a cash basis and 7.3% on a GAAP basis, driven by higher rent spreads and lower concessions. Average same-property occupancy and ending occupancy were both 98% for the quarter and in line with expectations. Strong tenant demand and landlord pricing power continues to be reflected in the annual contractual rent steps in our executed leases. In the quarter, annual contractual rent steps embedded in our executed leases were 4%. Excluding the legacy fixed renewal option Michael mentioned, annual contractual rent steps were 4.2% and largely in line with 2022. Notably, the average annual rent steps for our total portfolio continue to increase and are now at 3.4%.

The continued strong credit of our diverse tenant base is demonstrated by low levels of bad debt as a percentage of revenue. In the quarter, bad debt as a percentage of revenue was 20 basis points, outperforming our guidance expectations and well below the historical average of 50 basis points. This strong operating performance, combined with our accretive investments, drove first quarter core FFO per share growth of 8% over the prior year quarter.

We continue to maintain our low leverage fortress balance sheet that uniquely positions Rexford to capitalize on accretive growth opportunities, both internally and externally, enabling us to execute on our proven business model through economic cycles.

At quarter end, net debt-to-EBITDA was 3.6x, below our target range of 4 to 4.5x. In the quarter, we demonstrated access to accretive debt and equity capital sources. We settled 11.5 million shares of common stock associated with forward and regular way equity sales for a total of $657 million in gross proceeds. And we completed a public bond offering, issuing $300 million of 5% senior unsecured notes due in 2028. In the quarter, we also fixed our remaining floating rate debt through a series of swap transactions. As a result, 100% of our debt is now fixed.

At quarter end, we had total liquidity of $1.25 billion, encompassing $253 million of cash on hand and full availability under our $1 billion revolver. We also have approximately $1.1 billion of remaining capacity under our ATM program.

Turning to guidance. We are increasing our 2023 core FFO guidance range to $2.11 to $2.15 per share from our previous range of $2.08 to $2.12. Our revised guidance range represents 9% year-over-year earnings growth at the midpoint. As a reminder, guidance does not include acquisitions, dispositions or related balance sheet activities that have not closed, and a roll forward detailing the drivers of our revised range can be found in our supplemental.

Key highlights include: our same property NOI growth has been increased to 9.5% to 10.25% on a cash basis and 7.75% to 8.5% on a GAAP basis, a 12.5 basis-point increase at the midpoint driven by strong performance in the quarter. We continue to project cash leasing spreads of 55% to 60% and GAAP leasing spreads of 70% to 75%. Average same property occupancy of 97.5% to 98%, bad debt as a percentage of revenue of 35 basis points and year-end occupancy of about 98%.

Acquisitions closed since our previous guidance are projected to contribute approximately $18 million of incremental NOI. Lastly, our components of guidance also include the impact of our equity issuance in the quarter and timing associated with repositioning and lease up outside of our same property pool.

Finally, I want to thank our dedicated Rexford team for your passion and commitment that position Rexford for future success.

Thank you all for joining us today, and we now welcome your questions. Operator?

(Operator Instructions) Our first question come from the line of Camille Bonnel with Bank of America.

Understand your mark-to-market could be changing depending on the leasing or investment activity done in a particular quarter, could you comment on what the portfolio mark-to-market would have been excluding the first quarter acquisition?

Camille, it's Laura. Thanks so much for joining us today. I think the better barometer of our continued expansion of market rent growth within our market is actually reflected in our same property mark-to-market. And that is because the same property mark-to-market would remove noise from changes in the pool sequentially that you discussed, such as acquisitions or moving a property to repositioning or redevelopment. So in terms of our same property mark-to-market, over the past 4 quarters, our same property mark-to-market has actually increased by 200 basis points. And that is an increase to 75% from 73%, 4 quarters ago in the second quarter of 2022. So importantly, the same property mark-to-market reflects continued market rent growth that we're experiencing even as we've rolled leases in the same property pool to market at 86% spreads on a net effective basis over the past 4 quarters.

In respect to the overall mark-to-market and your question around that change, which was about 600 basis points, a number of factors certainly impact that change, including the mix of properties that we -- that you mentioned. And in the quarter, that impact was outsized driven by a higher percentage of sale leasebacks within our acquisition pool. These properties certainly provide us with immediate cash flow growth and the ability to unlock substantial value creation through redevelopment in the near to intermediate term.

But I think, importantly, our market rent growth forecast is unchanged at about 15% for the full year in infill Southern California. And the change in our overall portfolio mark-to-market is not a reflection of market conditions changing. It's certainly just a reflection of rolling those properties to market, rolling properties to market at higher spreads as well as the change in the pool.

Appreciate all the color there. My second question was as acquisitions this quarter were notably high. Given expectations, we might get better clarity around pricing this year and the pipeline you're tracking, how should we be thinking about the magnitude and cadence throughout the rest of this year?

Camille, it's Howard. Well, we really aren't able to give you any guidance necessarily on how much we plan to buy through the remainder of the year. We're really focused on the opportunity set versus a goal in terms of any dollar amount. What's interesting, though, is if you think back on our first quarter call, we mentioned that we had -- I think it was about $100 million of acquisitions under LOI or contract. And we wanted a closing year-to-date now about $804 million. And what we're finding in the market is that there are some opportunities we've been working on for quite a while that just take longer in terms of the gestation time line. And there's just so much disruption and different needs that are emerging out there that there's a lot of deals that come to us and happen very, very quickly, but we just can't predict in what volume or when those type of deals will close.

Understand. And finally, just regarding the CBRE case study on Central L.A. Can you speak more broadly to whether net absorption is still trending positive for more competitive inventory? We've been hearing due to the combination of lower imports into the West Coast ports, rising occupancy cost for tenants and older stock, that demand has been shifting to more affordable locations like Inland Empire and Phoenix. So any thoughts on this would be appreciated.

Camille, it's Michael. Thanks so much for joining us today. Yes, I think generally, we're not really seeing an impact related to the factors that you described, whether it's imports or otherwise. And for comparable and competitive product to Rexford, we continue to see the type of demand dynamics that you see in our results, frankly, and net positive absorption through the Rexford portfolio, I think, is representative of that competitive set. And so -- and remember, our tenant base throughout the market is disproportionately serving regional consumption, and so inherently less impacted by externalities like changes associated with trade flows. Even impacts from the ports in prior years where we've seen slowdowns and shutdowns, we didn't really see any discernible change in tenant demand in infill Southern California and certainly not within our portfolio.

So I think it's just really important to remember the nature of the tenant in relation to some of these external factors.

Our next questions come from the line of Nate Crossett with BNP Paribas.

Maybe one on pricing, and I'm not sure if I heard it correctly, but I think you said embedded rent steps this quarter was 4.2% on new deals. I think last quarter it was 4.4%. So my question is have you kind of reached the ceiling on that? And what are the conversations with customers like? Are you getting more pushback on those lease escalations?

I'd say -- so Nate, thanks so much for joining us today. In terms of our rents steps signed in the quarter, rent steps on new deals was 4.3%. Overall, in the portfolio was 4%. And as I mentioned in the prepared remarks, that was impacted by a fixed renewal option that we have that was up 3%. If that's excluded, and you just look at the new deals, it's 4.3%.

And looking back at our rent steps that we signed in 2022, those averaged 4.3%, so really in line from a new perspective. And I'd say that, that's (inaudible), it feels like we're settling out in that 4% to 4.5% range from an embedded rent step perspective, which I think is certainly a reflection of the strength of the market and the continued landlord pricing power that we have in place as well as the high leasing spreads that you're seeing as well.

Okay. That's helpful. And then maybe just one, how should we think about leverage levels for the balance of this year? You guys are below your kind of 4% to 4.5% range that you've given in the past. What's the tolerance to take on more leverage here? And then also how are you thinking about addressing the 2024 debt maturity?

Yes, Nate, in terms of leverage, #1 focus for us is continuing to maintain a low leverage balance sheet. When we think about the 4 to 4.5x range from a net debt-to-EBITDA perspective, we're perfectly fine operating below that level because at the end of the day, we want to maintain this low leverage balance sheet because it protects us through all business cycles, and it enables us to continue to be opportunistic for future growth opportunities. So when we think about how we're going to fund going forward, we're going to look at attractive and accretive sources of capital that allow us to execute on these opportunities with a focus on maintaining that low leverage.

In terms of the 2024 debt maturity, that's primarily made up of a $400 million term loan that has 2 1-year options. So we do have the ability to extend that to effectively 2026.

Our next questions come from the line of Craig Mailman of Citi.

Laura, maybe just to circle up a bit earlier question about the 600-basis-point decline in the mark-to-market, could you give just a little bit more detail on the components of that 600-basis-point decline?

Yes, absolutely, Craig. So of the 600-basis-point decline, about 400 basis points of it is the impact from a negative impact from leasing activity in the quarter as we roll leases to market at significant spreads, 80% on a GAAP basis, 60% on a cash basis. And then another 100-basis-point drag from the embedded growth within the portfolio. I mentioned in the prepared remarks that our contractual rent steps now averaged 3.4%. So the base rent and the growth -- the base rent continues to grow within the portfolio, which is great.

So that -- to give that 400-basis-point impact from rolling leases and the portfolio growth and then layer into that a 300-basis-point impact from the change in the mix of properties that I mentioned earlier and that's mostly driven by that outpriced impact from acquisitions we closed in the quarter that had a few more sale leasebacks in place that have -- that don't have a mark-to-market.

And then lastly, the positive offset to that is the sequential market rent growth that we saw in the quarter of about 3%.

So as we think about how much of your portfolio is maybe these positive carry sale leasebacks that are ultimately developments down the road, what do you think the percentage of your book value or however you want to look at it, kind of how -- what's the magnitude do you think of that piece of the portfolio overall? And if you were to strip that out, maybe where that would kind of bring the mark-to-market up to [300-basis-points] just in the quarter, but is there another couple of hundred basis points throughout past acquisitions that are still in the -- of deals you haven't gotten to start redevelopments on yet?

Yes, Craig, I think it's a good question. I think the way to think about kind of the embedded -- there's 2 ways to think about it. I think we can go back to the same property mark-to-market that I talked about in terms of we're seeing -- if you strip all of that out, which -- with that noise from that noise from the mix of properties and those acquisitions, same property mark-to-market has increased over the past 4 quarters and is up to 75% from 73%, 4 quarters ago. So I think that's a really good indication of the market rent growth and the strength of the market today. I think the other important component to focus on is the embedded growth within the portfolio and the components of that.

So mark-to-market is only one component of the internal growth -- internal embedded growth within the portfolio. So over the next 24 months, we're projecting $175 million of NOI growth, and that includes repositioning and redevelopments that are currently in process or in the pipeline, and we'll deliver about $56 million of NOI. And then that's followed by the mark-to-market contribution of about $52 million and then another $24 million from rent steps. So I think it's important that we've got a -- it's important to really focus on all the components of our embedded growth, not just the mark-to-market.

And that's fair. I guess just one more point on the mark-to-market just from a bigger picture. So if we just exclude that 300-basis-points from acquisition rate, it would have been a net 200-basis-point fall off just given basically realizing that mark-to-market through leasing. I mean, should we be thinking about this level kind of what you guys have this quarter is the kind of the peak unless market rent growth reaccelerate way beyond the 15% you guys have in there that every quarter we should be losing out 100 to 200 basis points off that mark-to-market just because of the realization through leasing?

Yes, Craig, it's a good question. We have not provided guidance around where we expect for the mark-to-market to go over time. But obviously, we've got significant embedded growth within our rent steps. We're projecting leasing spreads on a net effective basis of 70% to 75% this year, and 55% to 60%. So we are going to -- we do expect to continue to roll leases to market and that will have an impact on the overall portfolio mark-to-market.

And then just separately, the case study was helpful, Howard, that you went through. I'm just kind of curious because there clearly are growing concerns about L.A. and Inland Empire given some of the broker reports out there. I mean, you guys (inaudible) of leasing in the first quarter. Is there any way you could give us an update on maybe what you've done April to date and what you think you'll close in April to give us sort of a run rate? Are we consistent with that [1.8]? Or has there been a fall off of that? Just kind of curious of the trend post quarter end?

Maybe I'll jump in here, Craig. We actually did see a little bit of a slowdown in the market in March from some of the banking disruption, but things really picked up again as we headed into April. So we have a lot of activity on really almost all of our spaces that are vacant. Rents that we're negotiating in many cases are above the rents we've underwritten. So we feel really great about where the market is at and the activity we're seeing right now.

Our next questions come from the line of Blaine Heck with Wells Fargo.

Michael, in your prepared remarks, you talked about tracking 40 million square feet of requirements in the market. Can you just put that into historical context, what's the average amount of requirements you're typically tracking in the market? And maybe what was it at the peak of demand during the pandemic?

Blaine, thank you so much for joining us today. I appreciate the question. Yes, in regards to sort of historical context, this is probably not far off. It was probably a little more intense during the frenzy time, during the mid and later stages of the pandemic, but this is representative of very healthy levels. Certainly, we had a very strong market, an exceptional market going into the pandemic. And, arguably, this is probably similar levels that we were seeing at that time. And -- but I think, importantly, this is a window into the market that is not available to all players in the market. And when I talk about the amount that we're tracking, particularly over 3 million square feet that is proprietary to Rexford, that is a lot of Rexford-driven proactive activity and engagement in the market that is the result of our focused approach to infill Southern California. We have a dedicated team. We call them the customer solutions team at Rexford.

It's a separate department, in addition to our leasing team, who are solely mandated with making sure that we are in front of and having conversations and engage in having the best relationships in the market with all levels of emerging tenant demand, whether they're currently our tenants or whether they are prospective or potential tenants.

And so when we talk about tracking, that's not necessarily just sort of what's available to all market participants. And I think that's a very important aspect of the work. Nobody has better information in infill Southern California than we do. We're, on average, consummating a lease -- a new lease or a renewal more than 2 lease transactions every business day. And combined with that proactive outreach into the market, we really do have sort of a unique window into activity. And I think you're seeing that flow through the results, frankly, as Howard highlighted in our prepared remarks, kind of differentiated from the marketplace.

Great. Also in the presentation, we noticed first year -- first quarter year-over-year rent growth was around 13.5%, which obviously, I think, indicates that you're expecting some year-over-year acceleration in the rest of the year to hit your 15% target. Can you just talk about what gives you confidence in that number, and whether there was anything nuance in the first quarter, whether it be a tougher comp from last year or anything like that?

I'll just comment briefly and then maybe -- go ahead, Howard.

No, I was just going to state that...

I was just going to comment briefly and then Howard can continue with some more detail. But I think as Howard just noted a few minutes ago, we actually had, call it, I wouldn't call it a pause or maybe a slight calming effect in the latter part of Q1, but we're seeing things pick up again. And it's similar to what we saw during Q4. And based on the current activity we're seeing in the market, I think that's what gives us the comfort. And with that, I'll turn it over to Howard for any more detail.

You covered it. Thank you.

All right. Great. Last one for me. Can you talk about the potential for a strike at the port and maybe how that could affect your portfolio from a leasing perspective?

Just briefly on the port activity and what's happening there, we've seen this before. The port negotiations with the dock workers have been contentious in prior periods. In 2002, 2014, we even saw a slowdown and shutdown of the port. And in our prior experience, we've never seen any discernible impact to our tenant demand. So we do expect that the negotiation of dock workers will be resolved, hopefully in the near term. But we're not seeing any impact with regard to our tenant base.

Remember, our tenants are disproportionately serving local regional consumption directly to businesses -- or indirectly through businesses or directly to consumers. And these sorts of disruptions of the port or changes in trade flows are going to impact the big box markets that are focused more on super regional trade and distribution, but really have never demonstrated an impact to our infill markets.

Our next questions come from the line of Nick Billman with Barrick.

Maybe touching on leasing a little bit. Retention seems pretty high generally, but maybe on the 20% that doesn't renew, what's the usual reason for leaving? Is it expansion space? Or are rents -- are they getting priced out of the market just kind of get a picture of kind of the credit quality?

Nick, it's Howard. There's not one real driving reason on some of those vacates. A lot of them are growing. A lot of them relocate here and there. I was looking at some data in Vernon, we were talking about some of the big -- larger amount of vacates there. There was one 300,000-foot building that was a little clear, inferior in quality and that tenant moved to Orange County, where they had other space. So a lot of it is moving around the markets and really very little movement out of the markets. As Michael mentioned, most of the tenants here are focused on the consumption that's occurring and, frankly, anyone that didn't have to be here has left the [Southern California] market than many years ago where their businesses didn't require them to be in the market here.

Nick, and I'll just step in, in terms of the credit quality part of your question. We continue to see very low levels of bad debt below our expectations and certainly below what we've seen pre-COVID this quarter coming in at 20 basis points, and that's certainly lower than historical averages at about 50 basis points pre-COVID. Our tenant base continues to be very strong and exhibit stability. Just to put the numbers around that, our watch list currently represents the lowest percentage of ADR over the past several years. We only have 6 tenants that we're currently monitoring on that watch list of over 1,600 tenants. So we're continuing to see very strong performance at our tenant base.

That's very helpful. And then maybe turning to the acquisition pipeline. Have you seen any sort of shift on the types of assets in there, maybe more value-add versus core? I know you've mentioned a little bit more sale leaseback in this quarter. So just has that mix shifted at all or anything more interesting than other segments today?

I think a lot of the acquisitions we did, probably almost 60% in the first quarter, had some value-add component. But what was interesting is very, very little of what we bought year-to-date didn't have [income in] place. The inbound yields on the year-to-date acquisitions are about 5.1% with projected stabilization of 6%. And so, today, we have more opportunities to buy assets that have strong cash flow in place. And so we've sort of been focusing and looking for those type of opportunities in the market at the moment.

Our next questions come from the line of John Kim with BMO Capital Markets.

For various reasons, there has been a pickup in onshoring or near-shoring. And I was wondering how you think that impacts your markets. And if this trend continues, are there markets outside of SoCal that look potentially attractive to you?

John, thank you so much for joining today. And there may be a trend to near-shoring or on-shoring, but we're not really seeing an impact. We don't expect to see an impact with regard to our tenant base because, again, they're disproportionately serving consumption. So they're less concerned with where the goods come from. So we don't really see that. We -- generally, it's probably a good thing for our tenants net-net. And no, we're not really looking at other markets. We think that we're focused on the strongest market in the country. We currently have a mere 2% market share in infill Southern California. This is where we believe we can create the most value. I think I mentioned in my prepared remarks, for instance, we have over 1 billion square feet built before 1980 right here in our own backyard. So we have a nearly limitless pallet of value creation in front of us, probably for many management teams to come at Rexford. So no, we're not looking, and we don't really have a view on other markets.

Okay. Your tenant improvement costs were low this quarter compared to prior quarters. I'm wondering if this is just a sign of the market? Or is this quarter just unusually low, and we should see go back to trend later this year?

John, I think this quarter is just unreasonable low. We had a -- we did a fair volume of renewal versus new leasing activity this quarter and have not seen a material change in terms of TIs. They've actually been really low for the past several quarters and expect for that trend they continue.

Next questions come from the line of Vince Tibone with Green Street.

Could you discuss how you view your cost of capital today? It's just a bit more complicated than normal given you're doing sale leasebacks, it's low [5] initial yield, while your implied cap rates in the low [4s], so that's on today's NOI. And obviously, there's a big mark-to-market there. So just -- how do you think about the attractiveness of your cost of equity we're making some of these acquisitions in the first quarter?

Vince, thanks for your question. We will continue to be -- we have been and we'll continue to be extremely selective and focused on opportunities that are going to drive accretive cash flow and long-term NAV growth. As we've discussed in the past, we take a long-term view on our cost of capital, and that's how we're making our capital allocation decisions today. Our valuation remains very attractive. And when you take into account the higher yield at which we're swapping to today, 6% on a stabilized basis, even at today's higher cost of capital, for every dollar that we invest, that investment is 40% more accretive to earnings or core FFO compared to our 2022 investment. So said another way, the higher yields which we're solving to today are more than overcoming today's higher cost of capital, and we're driving substantially more accretion.

That's helpful color. Are you able to share maybe what the unlevered IRR you're expecting on that kind of 6 stabilized deal. I'm just curious kind of what you guys are solving for on an unlevered IRR type basis.

Vince, we look at IRR as a guidepost on some of the acquisitions, but we're mainly focused on the cash flow and, as Laura mentioned, the accretiveness of the cash flow that we're generating through these investments.

Okay. Got it. And then another one for me just on kind of the sale-leaseback activity. I'm curious if you think any of the sale-leaseback transactions are a direct result of the banking crisis and tighter debt availability for some of these users who could make a sale-leaseback more attractive to them? And if that's the case, if you think sale-leaseback may be kind of a growing part of the acquisition pie over the next few quarters or so?

Yes. Well, we've always done sale-leaseback transactions. We can't predict the timing of when they happen. But obviously, this quarter had more sale-leasebacks than others. It could very well be a more attractive source of capital to some of the people we're working with, but it's just really hard to predict going forward what that volume could be if it would be increasing or more in line with what we've seen in the past.

Our next question come from the line of Vikram (inaudible).

Maybe just first one, the dispersion you referenced sort of your own portfolio versus peers that you're starting to see, I'm assuming that's a bit of a change versus, say, the last 2 years when sort of everything was doing very well. Can you maybe just give us some thoughts on, or maybe more color and anecdotes on how much this dispersion can widen as we go forward in terms of the vacancy or market rents or maybe even like TI packages?

Vikram, it's Michael, thank you so much for joining us today. Maybe I'll talk a little bit how the dispersion is reflected in our performance and then maybe Laura and Howard can drill down to a little bit of the operational dispersion or differentiation. And I think your question an issue -- the first part of your question was related to how does this dispersion or differentiation between our portfolio and peers compared today to prior periods? And what's interesting is if you roll up all of our performance, Rexford has generated about a 15% CAGR on our FFO per share growth over, call it, the last 5 years or so and the peers have been around 10%. So we've generated around 50% greater FFO per share growth as compared to the peer set. And I think that is a direct result of the Rexford business model.

Because, to your point, industrial has been pretty healthy over the last 5 years for all the peers. So Rexford's performance has been very differentiated. And I think it really comes down to our ability and focus on the value creation side and the assets themselves. And Rexford, when we started this business 20-some-odd years ago, there was virtually no market rent growth and capital was much more expensive than it is today. And so we needed to have a great business. We had to be able to create value at the property level without the tailwinds that we've had in the last 5 years or 10 years.

And so it's that physical repositioning, the intrinsic value creation of the assets that truly sets Rexford apart, and volume at which we're able to do that, and that's really the differentiator. And I think as we move forward, as the tailwinds maybe diminish for everybody, right, as the markets normalize a little bit, and we don't see the crazy trends in demand that we saw in the acceleration in demand that we saw during the pandemic, we still will all have, I think, very healthy markets. But I think the big -- the differentiation may widen. Rexford's differentiation may increase because we're going to continue with the value-add work that we have, that is not as available to our peers. And I think that's the key takeaway. I think that's a great question, Vikram. And hopefully, I answered that first part of it and open it up to Howard or Laura, if you want to dive into more of the components on the operational level.

Vikram, I'll just add a little bit more color in terms of your comment around the relative performance. And even in the frenzy market that we were in over the past couple of years, our portfolio still was differentiated. From a market rent growth perspective, our portfolio market rent growth increased 14% more than the overall infill Southern California market did. And then just kind of diving into some different dynamics into these different markets, Central L.A. as an example. In the period of 2020 to 2023, market rent growth in the Central L.A. market was 61%. In Rexford's portfolio market rent growth was 95%. So there has continue -- there has been a bifurcation and the differentiation of Rexford's portfolio because of our high-quality higher-functionality product. And we're starting to see that, as you mentioned, that bifurcation expand and which we would expect.

Okay. That's helpful. And I guess just a follow-up to that is, if you're -- as you're anticipating more and more of this bifurcation, even within your submarkets, your [grander] submarkets, do you expect sort of, when you gain share, so your vacancy remains stable, others see higher vacancy, maybe partly, as you said, because of normalization partly because of economy. Could it become a more competitive market, meaning more TIs, more incentives to just garner share, your peer set just being more competitive?

If you want to compare it, for instance, the pre-pandemic periods, concessions were exceptionally low. And market vacancy was around 2% plus or minus. So if we're considering that to be generally speaking, a normalized market, then we would not expect to see any material or dramatic change in terms of concessions and whatnot and availabilities. And, frankly, based on the activity that we're seeing today, given the level of uncertainty in the market and the world and the banking issues and all the rest, I think we have comfort that we don't see the near term -- or into the foreseeable future, we don't see a dramatic expectation in terms of concessions and whatnot.

I'll add one other piece to that, Vikram. We focus on low finish industrial. So the TI is, anyway, aren't very significant, right? So this is not R&D or flex-type product where the TIs can be rather large. Tenants move in and out of our spaces with relatively low frictional costs. And so even when there is a change in the market, that change is relatively small in terms of those costs.

Our next question comes from the line of Mike Mueller with JPMorgan.

Just a quick one. On the redevelopment pipeline, I mean most of the projects have stabilized yields in the 6% to 7% range. But as you go through the list of what's the process and some of the planned ones, there are some that are in the mid-4s and high 4s. And I guess what are some of the attributes or what's going on in projects like that where the yields are notably lower than the average?

Mike, it's Howard. Nice to hear your voice. The real difference is the timing, right? Most of those projects you're seeing now coming on to the repo, redevelopment information, we purchased probably a year plus ago when market yields were a little bit different. And there's a bit of conservatism built into some of those numbers. You'll see us quarter-to-quarter updating based on changes in construction costs and market rents. And incidentally, recently, we did mix of adjustments based on construction costs that -- not necessarily the costs coming down, but the increases in construction costs that we built into our projections were moderating.

Last year, they were about 25% to 30% in terms of increasing cost growth. And this year, we're (inaudible) about 12%, and that's starting to look like it might moderate down going forward a little bit, too. So that also could have an impact on some of those yields in a positive manner, frankly.

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

Laura, I just want to circle back real quick, just to clarify. I think you guys kept the 15% market growth estimate intact. But you had mentioned when you went through the kind of the puts and takes on the sequential change in the mark-to-market, a 300-basis-point impact from changes in the quarter of market rents. I'm just trying to get at, are these -- should we be able to extrapolate that 300 basis points into that market rent growth? Or could you seem like that would extrapolate to a lower value than the 15%? Or could you just give us some color on kind of maybe how you get to that 15%? How do you stay comfortable with keeping it there given maybe some of the broker reports out there? Any color would be great.

Yes, absolutely. Thanks, Craig, for your question. In terms of our market rent growth forecast, we're continuing to assess that year-over-year growth at 13.5% and it's pretty close to that 15% number, and the sequential growth that we saw of about 3% is consistent with our projections. And maybe it's important to discuss how we get to that market rent growth forecast. And first of all, it's -- we generate the forecast based on our current activity in the market and within our portfolio. And year-to-date has been strong, and we've talked a lot about this on this call. Occupancy has held steady in our portfolio. We continue to achieve high spreads above our underwriting. Rent steps continue to be favorable. Retention was at the second highest levels this quarter that we've seen in 5 quarters. So overall, indications are that we continue to see strong demand within the portfolio. So that's certainly -- that's the first factor that goes into our overall forecast for the full year.

The second factor that goes into it is our ongoing informational advantage that we talked about on this call, our tenant outreach, our deep dive into the regional tenant demand within our infill Southern California market, and we're continuing to see a really wide diversity of demand. We talked about the tenant requirements that we're tracking in the market that our customer solutions and leasing team is tracking and then the 3 million square feet that's proprietary to Rexford. So -- and that 3 million square feet of this proprietary to us has actually grown. So I think all of those factors, including the overall and ongoing persistent supply/demand imbalance within our infill markets, is how we get to that forecast and how we get comfortable with that rent growth projection for the full year.

There's a little bit around it. You're rounding up a little bit to 15%, it sounds like?

Well, we're not providing the forecast on a quarterly basis. But for the full year, we're comfortable with that 15%.

There are no further questions at this time. I'd now like to hand the call back over to management for any closing comments.

We'd like to thank everybody for joining Rexford Industrial today. We wish you and your families a happy healthy period over the next 3 months, and we look forward to reconnecting in about 3 months. Thank you so much.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.