Earnings Call Transcript - REXR Q1 2024

Operator, Operator

Thank you for joining us. My name is Fabilo, and I will be your conference operator today. I would like to welcome everyone to the Rexford Industrial Realty, Inc., First Quarter 2024 Earnings Call. All lines have been muted to minimize background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I will now turn the conference over to David Lanzer, General Counsel. You may begin.

David Lanzer, General Counsel

We thank you for joining Rexford Industrial's first quarter 2024 earnings conference call. In addition to the press release distributed yesterday after the market closed, we posted a supplemental package and investor presentation in the Investor Relations section on our website at rexfordindustrial.com. On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined by Federal Securities Laws. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information about these risk factors, please review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future. In addition, certain financial information presented on this call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP 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.

Michael Frankel, Co-Chief Executive Officer

Thank you, David. And welcome everyone to Rexford Industrial's first quarter earnings call. I'll begin with a few remarks followed by Howard, who will provide market and operational detail, then Laura will provide our financial results and outlook. I'd like to begin by thanking our Rexford team for your strong results and another quarter marked by substantial value creation across the Rexford platform. On the leasing front, the team completed 3.2 million square feet of leasing activity at very favorable spreads as we continue to monetize the substantial mark-to-market for lease rates within our in-place portfolio. And notably, we extended our largest tenant, which Howard will detail shortly. On the investment front, our team completed over $1 billion of acquisitions, delivering substantial initial and longer-term accretion. Our activity included a large off-market portfolio purchase acquired from a combination of Blackstone-affiliated entities for approximately $1 billion, comprising over 3 million square feet of high-quality warehouse products focused within Premier, Los Angeles and Orange County submarkets with tenant sizes averaging 43,000 square feet. The transaction is notable for the high quality of assets and significant levels of cash flow accretion contributed to our portfolio. In 2024 alone, the portfolio is expected to contribute an incremental $0.04 of FFO per share net of funding cost, along with an estimated 25 basis point to 50 basis point increase in operating margin. Additional growth over time will be driven by some value-add improvements, as well as the 3.9% embedded average annual rent increases within the portfolio. The investment was also unique as it was a result of an off-market collaboration between the Rexford and Blackstone teams. We work together to curate the portfolio by selecting assets to optimize the blend of quality, return on investment, and accretion to our business. The transaction is a testament to the benefits associated with working principle to principle to drive a superior outcome for both parties. The transaction is also indicative of a range of portfolios that we continue to track, which may be catalyzed from time to time by potential seller or market circumstances. With regard to market conditions, we are seeing some current choppiness, particularly within certain submarkets and size ranges. We expect some ongoing relative volatility within our markets through the near term, principally driven by heightened uncertainty in the interest rate environment, exacerbated by the current global geopolitical unrest. However, despite some relative market uncertainty, we believe our infill Southern California industrial tenant base will continue to prove itself by demonstrating the strongest tenant and supply-demand fundamentals over time. Although we can't predict how our market may perform in future periods, so far, we are seeing a distinct and accelerating differentiation between the stronger relative performance of our infill SoCal portfolio, whether measured by net absorption, change in rents, or related metrics as compared to the relative performance of larger products sized over 200,000 square feet, primarily located in non-infill big-box markets, such as the Inland Empire. Big-box larger space is typically part of a super-regional or global logistics network where space needs are relatively fungible across locations and where demand for any single space can be highly elastic and reactive to short-term demand drivers. In contrast, our smaller infill tenants are generally serving the nation's largest first and last mile of distribution focused on regional consumption within the country's largest and most diverse regional economy, where performance through cycles has tended to be more durable. Big-box markets such as Inland Empire are also subject to volatility, driven by substantial increases in new supply impacting occupancy through cycles as compared to our high-barrier infill market, which is subject to an ongoing scarcity of supply with a virtually incurable supply-demand imbalance over the long term. Consequently, and as we've observed through prior cycles, our Rexford tenant base, which averages 26,000 square feet in size and is 100% located within prime high-barrier infill SoCal markets is outperforming the big-box market and product type. Looking forward, the growth opportunity embedded within our existing portfolio continues to be substantial. Over just the next three years, we expect cash NOI to increase by $282 million or 47%, growing to $876 million in total NOI. Importantly, this assumes today's rents and no future acquisitions and is comprised of $94 million of incremental NOI related to repositioning and redevelopments stabilizing over the next three years, $88 million from the conversion of below-market leases to market rents, assuming today's rents and no future market rent growth, $58 million related to acquisitions closed year-to-date, and $42 million from the 3.6% embedded contractual rent steps within our current portfolio. We continue to be positioned to execute upon our expected 11% to 13% three-year average annual core FFO per share growth through 2026, which assumes no future acquisitions. Please note, we plan to update our long-term core FFO per share growth forecast on an annual basis at the beginning of the year. With that, I'd like to thank the Rexford team once again for your tremendous dedication and results. And I'm pleased to turn the call over to Howard.

Howard Schwimmer, Co-Chief Executive Officer

Thank you, Michael, and thank you all for joining us today. Rexford began the year with strong execution across our value-creation initiatives. During the first quarter, our team completed a very strong 3.2 million square feet of leasing by executing on the increased tenant activity we experienced during the first quarter, driving 140,000 square feet of positive net absorption. Notably, we extended Tireco, our largest tenant occupying 1.1 million square feet into 2027. During the quarter, Tireco's in-place rent increased by 4%, which was carried forward. The extension includes a 4% bump in year two and a two-month rent concession. With this lease execution, we derisked our largest near-term lease expiration, securing favorable and growing cash flow for the next three years. Excluding the Tireco extension, leasing spreads in the quarter were 53% and 34% on a net effective and cash basis, respectively, and were in line with our expectations. Concessions increased normally from a weighted average of 1.2 months to 1.4 months sequentially. Additionally, annual embedded rent steps averaged 4% for the first quarter executed leases continuing to demonstrate our diverse tenant base's ability to pay higher rent in future periods. Within our portfolio, with an average base size of 26,000 square feet, we observed market rent growth that was flat sequentially and approximately negative 2% year-over-year for highly functional product comparable in quality to our Rexford assets. As we have communicated, particularly with respect to select submarkets and size ranges, we expect to continue seeing some near-term fluctuations in market rents. However, as demonstrated by the leasing activity within our portfolio and what we are seeing on the ground today, tenants are evidencing their comfort with today's rent levels plus 4% embedded annual rent steps. According to CBRE, vacancy in the infill markets increased 45 basis points sequentially to 3.2%. Notably, Rexford's portfolio continues to outperform the market due to our superior quality and functionality. By way of example, Rexford's first quarter net absorption was positive 30 basis points in contrast to the overall market's negative 20 basis points of net absorption. In analyzing net absorption in the market, similar to prior quarters, nearly 80% of buildings that contributed to negative absorption were of lower quality, dysfunctional or obsolete, and generally non-competitive with Rexford's portfolio. In stark contrast to the market, Rexford's strong new and renewal activity in the quarter drove an exceptional retention plus backfill rate of 87%. We continue to see relatively healthy tenant interest for our higher-quality product with activity on approximately 85% of our vacant spaces. Turning to Rexford's investment activity during the quarter, we completed $1.1 billion of investments across 3.2 million square feet through off-market transactions. Subsequent to quarter-end, we closed one stabilized transaction for $27 million at a 5.5% initial unleveraged deal. Additionally, we have $275 million of pipeline acquisitions under contract or accepted offer, which are subject to customary closing conditions. The near-term pipeline investments, coupled with our year-to-date activity are projected to generate an aggregate initial yield of 5%, growing to a 5.7% unleveraged stabilized yield on total cost. Moving to our disposal position and capital recycling program. Subsequent to quarter-end, we disposed of one property for $10 million, generating a 13% unlevered IRR. In addition, we have approximately $50 million of dispositions currently under contract or accepted offer, which are subject to customary closing conditions. Regarding our repositioning and redevelopment activity, during the quarter, we stabilized and leased approximately 40,000 square feet of repositioned property in Central San Diego, achieving an aggregate 10.8% unlevered stabilized yield on total investment. Looking forward, we have 4.6 million square feet of value-add repositioning and redevelopments in process or projected to start within the next 18 months with the remaining incremental spend of approximately $410 million, which we expect to deliver an aggregate unlevered stabilized yield on total investment of 6.2%. Finally, I'd like to thank our Rexford team for their innovation and collaboration, driving another strong quarter of results. Now, I'm pleased to turn the call over to Laura.

Laura Clark, Chief Financial Officer

Thank you, Howard, and thanks to the Rexford team for your market-leading efforts that drive our strong near and long-term value creation. First quarter core FFO per share increased a strong 12% over the prior year quarter to $0.58 per share and was in line with our expectations. Same-property NOI growth was 8.5% and 5.5% on a cash and net effective basis, respectively. Leasing spreads over the trailing 12-month period of 71% on a net effective basis and 52% on a cash basis drove strong rental income growth. Turning to the balance sheet and capital markets activities, this quarter we opportunistically leveraged the balance sheet to fund accretive external, as well as internal growth opportunities, including funding incremental spend of $455 million related to the near-term pipeline of repositionings and redevelopments that are projected to generate an incremental return of approximately 15%. At quarter end, net debt to EBITDA was 4.6 times and we anticipate that embedded internal growth alone will reduce leverage within our target 4 times to 4.5 times range in the near term. During the quarter, we executed on a number of capital markets transactions. We completed the issuance of $1.15 billion of three-year and five-year exchangeable notes at an average coupon of 4.25% and a 30% conversion premium. Let me pause here and take a few minutes to describe the mechanics of these exchangeable notes, also known as converts. Recent changes in accounting rules combined with the ability to issue converts under the Net Share Settlement method known as Instrument C have created a unique opportunity and an additional attractive capital source. Under the Net Share Settlement method, the par value of the convert, which in this case is $1.15 billion in aggregate, is treated like a bond, whereby Rexford will pay the par value in cash at maturity. Regarding the conversion premium, if Rexford's share price at maturity is 30% or more than the price on the date of issuance, the excess conversion value over par is settled at maturity in cash, shares, or a combination of the two at Rexford's option. This provides us with maximum flexibility at any future point in the capital market cycle. The accounting for converts has also been substantially simplified. On the income statement, the coupon, which averages 4.25% for our issuance is reflected as interest expense. In regard to the share count, only the net shares equivalent to the excess conversion value are added to the share count if and when the stock is trading above the conversion price. Importantly, the par value of the convert has no impact on share count as it is always settled in cash. Under this structure and with the accounting rule changes, there is no immediate dilution upon issuance, and any potential future dilution is mitigated through the net share settlement mechanics as well as the flexibility for Rexford to settle any excess share value above the 30% conversion premium in cash or shares in the future. Continuing with our first quarter activities and concurrent with the exchangeable note offerings, we completed a public offering of 17.1 million shares of common stock to an existing long-only investor based on the West Coast subject to forward equity sale agreements for a gross offering value of $841 million. And during the quarter, we settled the remaining forward equity sale agreements related to prior offerings for net proceeds of $290 million. We currently maintained substantial liquidity of $2 billion comprised of $837 million of net forward equity remaining for settlement, $185 million of cash-on-hand, full availability under our $1 billion revolver, as well as expected proceeds from our capital recycling program as we harvest value through dispositions. Finally, we have no material debt maturities until 2026, inclusive of extension options. Moving to full-year guidance. As a result of the positive contribution from our first quarter investment activity, we are increasing full-year 2024 core FFO per share guidance to a range of $2.31 to $2.34, up $0.04 at the midpoint when compared to our prior guidance. Please note that our 2024 guidance range does not include acquisitions, dispositions, or related balance sheet activities that have not yet closed. In regard to our same-property guidance, our forecast assumes a range of expectations and is based upon the market dynamics we are observing today, including leasing activity and demand, current supply, and the overall health of our tenant base. To the extent circumstances our markets deteriorate beyond the current levels we are experiencing today, we will update guidance accordingly. Our 2024 cash same-property NOI guidance remains unchanged and is projected to be in the range of 7% to 8%. Net effective 2024 same-property NOI guidance has been increased to 4.25% to 5.25%, up from 4% to 5%, driven by the strong level of early renewal activity in the quarter that generates higher straight-line rental revenue. Components of our projected same-property guidance remain unchanged and includes full-year average same-property occupancy in the range of 96.5% to 97%, which is primarily driven by lease timing and average downtime. Cash leasing spreads of approximately 50% and net effective spreads of approximately 60%, excluding the impact of the aforementioned Tireco lease extension. Note that leasing spread guidance incorporates current market rents and leasing spreads quarter-to-quarter are impacted by the mix of leases we expect to execute. Bad debt as a percentage of revenue is expected to be in the 40 basis point to 50 basis point range and in line with pre-pandemic levels and average concessions in the 1.5 month area. Thanks again to the Rexford team for your outstanding work that differentiates our business and enables our ongoing success. We now welcome your questions.

Operator, Operator

Thank you. The floor is now open for questions. Your first question comes from the line of Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck, Analyst

Great. Thanks. Good morning. So one of your peers gave an incrementally negative view on the timing of a rebound in activity in Southern California, but it seems as though your outlook is pretty consistent with your initial views. Michael, you gave some color earlier, which was really helpful. But can you just talk a little bit more about what might be driving that disparity, whether it'd be more conservatism in your initial view, just different size segments and/or different submarket exposure?

Michael Frankel, Co-Chief Executive Officer

Thank you for your question, Blaine. It's an important one because it goes beyond just any perceived differences in how Rexford sets expectations. The fundamentals of our market play a larger role here. Specifically, the infill market, where the average tenant size in our portfolio is under 30,000 square feet, operates under different fundamental conditions compared to larger space markets, which typically involve properties of 200,000 square feet or more, often found in non-infill areas like the Inland Empire. This distinction is crucial. We've structured our business to focus exclusively on infill Southern California, a market characterized by unique drivers. Our tenants in these infill areas primarily cater to regional consumption, marking the largest segment of distribution and representing the most significant regional economy in the country. This is a fundamental contrast to the big-box market, which is influenced by global trade flows and demand drivers. A clear example of this difference was seen during the great financial crisis when there was a significant drop in global demand. During this period, the big-box market's performance declined sharply, while our smaller tenants maintained relative stability, even as vacancy rates in the East Inland Empire increased significantly. This stability in our infill markets during such challenging times illustrates the key differentiating factor in performance. Furthermore, Rexford's objective is to offer the highest functional, best-location properties with top-quality features within our submarket. Even amidst a submarket that outperforms over time, we expect our properties to show a superior performance compared to the big-box segment. Our observations over multiple economic cycles support this perspective, and our historical data has been consistent since we went public nearly 11 years ago. Additionally, we approach future projections conservatively and do not incorporate expectations for market rent growth in our guidance.

Blaine Heck, Analyst

Great. Very helpful, Michael. Second question, last quarter, I believe you talked about an expectation for 40% cash rent spreads in 2024. Your spreads this quarter were 33.6%, excluding Tireco. And I think you just mentioned, Laura, that the goal is now 50%, but correct me if I misheard that. So just wondering if you guys can comment on what might be giving you confidence in higher spreads in the second through fourth quarters.

Laura Clark, Chief Financial Officer

Yes, Blaine. Just to clarify, our cash same-property guidance for the full year is 50%, and that's in line with our expectations that we set last quarter. Our net effective guidance for the full year is 60%, and also in line with expectations that we set last quarter, excluding Tireco. So all that being said, as you know, spreads in any given quarter can vary depending upon the leases that are rolling and the leases that are executed in that quarter. This quarter's spreads came in right in line with our expectations for the leases that we expected to sign. As we look forward, we're trading paper on a number of new and renewals that give us comfort that we will be able to achieve our expectations around leasing spreads for the full year.

Blaine Heck, Analyst

Great. Thank you all.

Camille Bonnel, Analyst

Good morning. I have a few questions about your investment strategy. While the cost of capital you raised allows you to transact accretively, how do you balance deploying this capital in a market when rents continue to decline and there's risk to underwriting?

Michael Frankel, Co-Chief Executive Officer

Thank you for joining us today and for your question. Our investment strategy primarily focuses on creating value and navigating the challenges posed by the cost of capital. We maintain a consistent view of our cost of capital, considering it in our strategy even when capital is inexpensive. The core of our strategy lies in identifying opportunities that generate value, which allows us to surpass the cost of capital and create value over the medium to long term. This is a key differentiator for our business. Even in situations where market rents may be stagnant or declining, our focus on value creation through enhancing the cash flow potential of our assets remains unique and effective. As markets stabilize or decline, Rexford will continue to stand out because we are committed to increasing the cash flow potential of properties through renovations and modernizations, regardless of the current market rent trends.

Camille Bonnel, Analyst

Got it. And I understand at different points of your ownership, you'll update the business plan. So if we look through to the Tireco lease extension and option you've created in 2027, are there levers you can pull? Or how confident are you in being able to position this asset so it performs in line or better than your initial underwriting?

Howard Schwimmer, Co-Chief Executive Officer

Yes, hi Camille, it's Howard. First, the Tireco extension was completed just after we raised the rent by 4% under the existing lease. The option they had included a fixed increase, so we only gave up a 4% initial raise, which we will recover in another year under the lease. We are quite pleased with that result. The lease also features a five-year option that allows us to reset to fair market value at expiration in 2020. Given the current market trends, it appears there will be significantly fewer deliveries of competing products, even when considering future expirations and new market entrants. From our perspective, this is an opportune time to renegotiate the lease, and we've intentionally left the option open to reset and maintain the asset’s performance.

Camille Bonnel, Analyst

I appreciate the added color there. And you've built a lot of excess capital and closed the quarter with quite an elevated level of cash. So, can you shed a bit more light on how you're thinking about the cash balance this year and what's been assumed in guidance?

Laura Clark, Chief Financial Officer

Thank you for your question, Camille. Currently, we have approximately $2.1 billion in liquidity, which includes our $1 billion revolver. This figure also encompasses $837 million in forward equity available for settlement and $185 million in cash on hand. Looking at how we plan to use this capital, we have around $275 million in acquisitions that are either in the pipeline or under contract. Additionally, we have about $250 million allocated for our repositioning and redevelopment efforts this year. This means we maintain a strong liquidity position of about $600 million beyond the revolver. As we consider other uses of capital, we aim to remain very selective in our investment strategy, focusing on opportunities that will enhance value creation both now and in the future.

Camille Bonnel, Analyst

Thank you.

Greg McGinniss, Analyst

Hey, good afternoon. I guess based on the data that you guys have showed us market rents held steady quarter-over-quarter, down a little bit year-over-year. But what about on net effective rents? Have you guys been seeing any increase in free rent or other concessions? And also, how are you determining market rent for the Rexford comparable portfolio?

Laura Clark, Chief Financial Officer

Yes, I'll jump in here. Thanks, Greg, for joining us today. Our concessions this quarter were 1.4 months, excluding the Tireco lease base, and our guidance for the full year is 1.5 months, consistent with last quarter. We estimated concessions to increase from an average of one month in 2023, aligning with the normalized market conditions. In comparison to pre-pandemic years, 2018 and 2019, we expect concessions to be more similar to those figures. Our average concessions guidance encompasses both new and renewal leases, with 75% of our activity this quarter being renewals that carry lower concessions. The concessions on renewals were 1.2 months versus 2.1 months for new leases, which is affecting the average concessions for our entire portfolio. Concessions can vary significantly by submarket, size, and between new and renewal leases. Regarding how we assess market rents and market rent growth in our portfolio, our team performs a thorough analysis each quarter. We have over 1,600 spaces, and we assess market rent quarterly for each space, determining the rent we believe we could lease it for today. We then compare this rent to the previous quarter to measure market rent growth for our portfolio.

Greg McGinniss, Analyst

Okay. And then, I guess, at the end of last year, it seemed like there was a greater openness to utilizing dispositions to fund investment activities. Did you end up taking any steps to test the market? And what were you seeing on cap rates? And did that maybe kind of push you to sticking with equity funding and the converts instead of asset sales?

Michael Frankel, Co-Chief Executive Officer

Yes, we have seen increased activity in dispositions this year. We recently announced a $10 million sale and have $50 million in dispositions either under contract or with accepted offers. We are providing more transparency this year regarding this activity. This may also reflect the perception earlier this year that we are in a more stable interest rate environment.

Howard Schwimmer, Co-Chief Executive Officer

And I'll just add to Michael's comment, the disposition we completed for $10 million, the in-place cap rate was 4.2%.

Greg McGinniss, Analyst

Okay. But it's not clear that there is any expectation for dispositions to play a significant role in the capital structure regarding how funds are raised for acquisitions or for the repositioning and redevelopment portfolio spend.

Michael Frankel, Co-Chief Executive Officer

It all depends on how you define meaningful. However, we believe it plays a crucial role in our strategy and is an important source of accretive capital. Therefore, it truly depends on your definition, and yes, it is meaningful. This is also why we provide additional information about the immediate pipeline to give everyone a clearer understanding of our activity.

John Kim, Analyst

Thank you. Wanted to ask you about the pricing of your off-market transaction with Blackstone. The 4.7 initial cap rate seems a little tight just given the limited mark-to-market. It was accretive to you. I realize based on your cost of capital, but a lot of your competitors don't have that cost of capital. So I was wondering how you came up with that pricing and where you think this would go out in the open market?

Howard Schwimmer, Co-Chief Executive Officer

Yes, hi John, it’s Howard. We’re observing transactions in the current market, including one that recently closed at a cap rate of 3.7, which I believe started at 2.7 and is projected to reach 5 in the second year, although there is some lease-up risk associated with it. Additionally, there are several other transactions under contract that I think will show some cap-rate compression compared to recent trends. In curating our portfolio, we aimed to balance high-quality assets with excellent functionality and location, along with growth potential. The initial yield of 4.7, growing to 5.6, provided the upside we were seeking. Interestingly, our portfolio is currently outperforming our conservative underwriting assumptions. We’ve had renewals and new rents that are already exceeding our expectations.

John Kim, Analyst

Did you get a sense that if it didn't go to Rexford, then a similar pool of assets was gone to one of your public peers?

Howard Schwimmer, Co-Chief Executive Officer

Not necessarily because we really curated the portfolio with Blackstone. There wasn't a broker involved. And this was really building upon 10 years of relationship that we have with Blackstone Principles where we've been seeking to be able to transact with them. And it was a unique opportunity that came up. And it wasn't a scenario where they said, hey, we're bringing something to-market, you want an early shot out of it. It was really a collaboration here. So no, it really wasn't something that would have just gone to somebody else. And frankly, if Blackstone had, in fact, decided to market this particular portfolio of the marketplace right now in terms of capital coming back to the market, we think would have transacted possibly a little tighter even.

Michael Frankel, Co-Chief Executive Officer

Yes. And John, just to provide an additional perspective these are assets that we are very familiar with. We've been underwriting them, offering on them and many of them long before Blackstone even owned them. So that gave us an inherent informational advantage in terms of crafting the portfolio together with the Blackstone.

John Kim, Analyst

Okay. I wanted to ask about your redevelopment and repositioning portfolio and the leasing interest that you have on projects under redevelopment and particularly some of the larger assets, including 500 Dupont Avenue, if there's strong demand or weaker demand for larger readouts?

Howard Schwimmer, Co-Chief Executive Officer

Yes. So, well, first of all, I just want to frame how the market here functions. Most all of the assets in Southern California come to market generally on a speculative basis. Typically, there's not a lot of pre-leasing, but it does happen here and there. We have many instances where we've pre-leased some of the assets. So we're on the right path. There's nothing unusual about our Repo redevelopment pipeline right now and any of the activity on it. But that said, we just completed the asset you were speaking to the 275,000 feet in the Inland Empire West, and we do have very good activity on it. We actually have two parties we're trading paper with and we're encouraged that we might exceed the lease-up time frames with something in the very near future.

Craig Mailman, Analyst

Hey, guys. To go back to the rent question, I understand the methodology. I guess if you guys kind of just brought it out to a submarket level in aggregate versus maybe what CBRE kind of is reporting for the quarter. What sort of the outperformance of your specific pool versus what some of the brokerage firms have put out there? Could you give us a sense of if that spread between where you guys are estimating your market rents are versus where kind of the market view of rents are? If that's held pretty steady in terms of your hit rate on accuracy versus the bigger picture kind of view of the markets that we all kind of focus on here from the headlines?

Michael Frankel, Co-Chief Executive Officer

Yes. That's a great question, and I appreciate you joining us today. There are a couple of key points to mention. First, the main difference in our rent reporting compared to the market overall is that the market addresses a different set of assets. Historically, we've noticed that about 80% of the negative net absorption affecting market numbers is primarily due to lower quality, less functional, or even obsolete products. This market encompasses nearly two billion square feet, with over one billion square feet built before 1980, which represents a significant portion of the marketplace. Our performance largely stems from superior quality, functionality, and better locations. Each quarter, we share our perspective on market rents, informed by our leasing activities. Interestingly, we've found that our actual leasing results have often surpassed our expectations for our portfolio rents. To answer your question, we've been quite accurate and consistent in our assessments. If anything, and somewhat counterintuitively, we might have been slightly underestimating the potential for our portfolio.

Craig Mailman, Analyst

Okay. That's helpful. And then as we think about the Blackstone portfolio you guys just purchased, could you just go through a little bit on kind of the characteristics of it from a submarket perspective, how much of it is kind of traditional industrial versus maybe R&D? Just any kind of deeper dive into kind of what it consists of?

Howard Schwimmer, Co-Chief Executive Officer

Sure. Hi, Craig, it's Howard. As I mentioned earlier, we carefully selected this portfolio with Blackstone. It aligns perfectly with the type of products Rexford owns and operates in the market, specifically low-finish, highly functional industrial spaces. About 70% of the portfolio is located in the LA markets, 30% in Orange County, and one smaller building of 33,000 square feet is in Chino, part of the Inland Empire West. This is exactly the type of real estate we aim to acquire, situated in the best-performing markets we've observed over various cycles. The average size of the properties in this portfolio is 43,000 square feet. Extensive research on market deliveries reveals that delivering spaces of this size has been unfeasible for decades due to the economics of land values, construction costs, and rent prices. This creates significant barriers for potential competitors, especially concerning the quality of the assets. Additionally, the leases in place are approximately 10% below market rates, with average rent increases of 3.9% and a weighted-average lease term of 3.2 years. This suggests a near-term stabilization that will bring us to a 5.6% return, as we secure 4% increases in these leases, creating a strong compounding effect. There is also some minor value-add work planned, such as light modernization and functional improvements, which could enhance value in future periods and potentially lead to further value creation down the line.

Craig Mailman, Analyst

Michael, I understand that your cost of capital influences your strategy for acquiring assets. At the current levels, would you consider purchasing assets at similar cap rates to your recent acquisitions or in the event of cap-rate compression? Or will Rexford likely take a step back until your cost of equity improves?

Michael Frankel, Co-Chief Executive Officer

Yes, we do not provide guidance on deals that have not been finalized yet. However, I can share that we will concentrate on investment opportunities that we believe will significantly enhance our stock price, surpassing the cost of capital at the time of purchase.

Nikita Bely, Analyst

Hey, guys. Are you aware of any other fixed renewal situations that are similar to Tireco that you had in your portfolio maybe over the next 12 months to 18 months?

Laura Clark, Chief Financial Officer

No material at this point.

Nikita Bely, Analyst

Can you provide insights on the current demand, specifically regarding which tenant categories are most active and what factors are driving this activity?

Michael Frankel, Co-Chief Executive Officer

The strength of our markets and tenant base lies in their diversity. There isn’t a single dominant trend across sectors, which is advantageous for us. This is one reason we focus on infill industrial properties in Southern California and generic space, as it allows us to reach a broad and varied tenant base, likely one of the largest in the country, if not the world. Demand sources are varied, including aerospace, the electric vehicle sector, consumer products, and building trades, which are showing positive momentum. This is expected, considering California's mandate to increase housing by at least 20%, amounting to over 1.5 million units. We anticipate that this will provide significant demand for the next 20-plus years, resulting in a diverse range of drivers. Additionally, we've noted increased leasing activity from e-commerce tenants in the last quarter compared to previous ones, which is expected as we are still seeing the early effects of e-commerce on our distribution market.

Nikita Bely, Analyst

Got it. That's great. Laura, can I ask you one other question? I think at some point, correct me if I'm wrong, did you talk about maybe the mark-to-market on the portfolio for the future like year-end 2024, year-end 2025? Is that something that you guys are willing or can provide at this point the recalculation of what you think your mark-to-market on the entire portfolio will be over the next several quarters?

Laura Clark, Chief Financial Officer

Yes, as we mentioned last quarter, we will be providing the mark-to-market information each quarter since it changes daily. When we sign leases, we update the mark-to-market, which will vary on a quarterly and annual basis based on the leases we enter into. We believe it is most beneficial to give you visibility into the mark-to-market each quarter at a specific time.

Anthony Hau, Analyst

Hey, guys. Thanks for taking my question. I noticed that you guys added four million square feet of assets into the 2024 same-store pool, mostly in the Inland Empire West and Elliot County. And these assets appear to be under lease compared to the 2023 pool. I was curious if you can provide any color on these assets and maybe what do you think that the occupancy is going to be at year-end.

Laura Clark, Chief Financial Officer

Yes. Thanks, Anthony, for your question. In terms of the same-store pool, yes, we did add a number of assets into the same-store pool. There were a few assets in that pool that have lease-up opportunity. We've actually signed a number of leases this quarter that will contribute to occupancy of about 50 basis points actually as we move through the year. So we're excited about the prospects there and the prospects for opportunity for growth.

Vince Tibone, Analyst

Hi, thanks for taking my question. Are you starting to see any distressed acquisition opportunities from spec developers in the Inland Empire West? And would you be willing to actually grow your footprint in IE West and take on some leasing risk if the price was right?

Howard Schwimmer, Co-Chief Executive Officer

Hi, Vince. It's Howard. Nice to hear your voice. I've heard a little bit, but I haven't seen anything in mass in terms of any type of trend like that. As far as our appetite, we expect to take on large vacancy in a market that has that product supply. The answer would be simple no. It's not an area that we're putting any focus. We're more interested if we're going to buy anything in that market. And the product hasn't been delivered to market and is not really easily replicable in terms of the underwriting side of it.

Vince Tibone, Analyst

Got it. Makes sense. And then kind of as a follow-up to that. What do you think the stabilized cap-rate spread is today between IE West and Infill LA adjusted for a similar lease mark-to-market?

Howard Schwimmer, Co-Chief Executive Officer

It's hard to say, but from some of the transactions that I think we're starting to see our product that we know is under contract, it's probably somewhere in the plus or minus 50-basis-point range.

Laura Clark, Chief Financial Officer

Thanks, Vince.

Operator, Operator

That concludes our Q&A session. I will now turn the conference back over to the management team for closing remarks.

Michael Frankel, Co-Chief Executive Officer

Thank you very much for joining Rexford Industrial on today's call. We look forward to reconnecting with you and wish you well for the next three months.

Operator, Operator

This concludes today's conference call. You may now disconnect.