Earnings Call Transcript
Rexford Industrial Realty, Inc. (REXR)
Earnings Call Transcript - REXR Q3 2023
Operator, Operator
Greetings and welcome to Rexford Industrial Realty, Inc. Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce David Lanzer, General Counsel. Thank you. You may begin.
David Lanzer, General Counsel
We thank you for joining Rexford Industrial's third quarter 2023 earnings conference call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and investor presentation in the Investor Relations section on our website at rexfordindustrial.com. On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined by federal securities laws. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information about these risk factors, please review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future. Additionally, certain financial information presented on this call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP reconciliations and explanations of why such non-GAAP financial measures are useful to investors. Today's conference call is hosted by Rexford Industrial's Co-Chief Executive Officers, Michael Frankel and Howard Schwimmer; together with Chief Financial Officer, Laura Clark. They will make some prepared remarks, and then we will open the call for your questions. Now I turn the call over to Michael.
Michael Frankel, Co-CEO
Thank you, David, and welcome, everyone, to Rexford Industrial's third quarter earnings call. I'll begin with a few remarks, followed by Howard, who will provide some additional market operational color, then Laura will provide more detail related to our performance and financial results. To begin with, I'd like to thank our Rexford team for delivering a strong quarter across all of our value creation initiatives. Compared to the prior year quarter, our team grew FFO by 33% and grew FFO per share by 12%, driven by strong same property pool average occupancy of 97.8%, exceptional leasing spreads of 65% on a GAAP basis and 51% on a cash basis as well as the substantial cash flow per share growth generated from our investments completed over the prior year. Tenant demand within our infill Southern California industrial markets continues to demonstrate resilience with market occupancy hovering around 98%, roughly equating to the 2019 market occupancy levels immediately preceding the pandemic. As expected, we continue to see market rent growth normalizing from the unprecedented growth we experienced during the pandemic. With regard to our Rexford portfolio, providing high-quality prime locations within our submarkets, we continue to experience healthy diverse tenant demand as reflected in our strong operating metrics. Although general economic conditions remain uncertain, Rexford remains well positioned. The company is currently situated with an estimated 33% embedded cash NOI growth within our existing portfolio, realizable over the next two years, assuming today's rents. Our largest source of NOI growth derives from our repositioning and redevelopment work, which we continue to enhance as we mine our in-place portfolio for incremental value creation opportunities. And as we layer in new investments, they are delivering strong levels of FFO per share accretion. Looking forward, as markets nationwide normalize towards their post-pandemic levels of equilibrium and supply, we believe Rexford's entrepreneurial asset management, repositioning and value-add investing programs will enable the company to further differentiate our performance and FFO per share growth. We also believe over the near term, that the favorable supply-demand dynamics associated with our infill Southern California industrial markets will continue to drive the strongest tenant demand fundamentals of any major market in the nation. Further supporting Rexford's favorable outlook, we remain focused on maintaining our investment-grade, low-leverage balance sheet ending the quarter at 16.7% net debt to total enterprise value, which provides the ability to both protect the company during uncertain times while also positioning Rexford to capitalize upon accretive investment opportunities as they may arise. With that, I'd like to acknowledge our Rexford team once again for your market-leading efforts that continue to differentiate Rexford's performance. And now it's my pleasure to hand the call over to Howard.
Howard Schwimmer, Co-CEO
Thank you, Michael, and thank you, everyone, for joining us today. Rexford concluded the third quarter with strong results, driven by a high-quality portfolio and execution of value creation initiatives. With regard to market conditions, infill Southern California continues to demonstrate superior long-term demand fundamentals with a virtually incurable supply-demand imbalance. According to CBRE, in the third quarter, infill Southern California markets experienced 2.6 million square feet of positive net absorption. The infill Southern California market continues to outperform with vacancy at 2.2%, the lowest vacancy in the nation. The sequential 30 basis point vacancy increase compares favorably to an average increase of 70 basis points for the other major U.S. markets. Also, supply risk continues to be substantially lower for infill Southern California compared to the nation's other major markets. Core traffic may also be on track towards normalization following the resolution of the dockworkers' contract with the most recent L.A./Long Beach port activity, reflecting a 20% increase month-over-month and the second highest volumes in the past 12 months. While in contrast, the East and Gulf Coast ports experienced a decrease in activity. Turning to the Rexford portfolio. Third quarter performance continues to demonstrate our favorable position within the infill Southern California market. Our team executed 1.5 million square feet of lease activity, driving 100 basis points of positive net absorption and highlighting the sustained demand for our highly functional portfolio. Annual embedded rent steps in our executed leases increased to 4.3%, demonstrating our tenants' ability to pay increasing rent for their mission-critical locations. In regard to market rents, we observed 3% year-over-year market rent growth for highly functional product comparable to the Rexford portfolio impacted by a 1% sequential decline quarter-over-quarter. Interestingly, the 1% decline was principally driven by larger buildings. Turning to our investment activity in the quarter. We closed 6 transactions for a total of $315 million bringing year-to-date investment activity to approximately $1.2 billion. Our third quarter investment collectively generates an initial yield of 5.2%, a projected unlevered stabilized yield of 6% on total cost. In addition, we currently have a pipeline of approximately $400 million of highly accretive investments under contract or accepted offer. This includes the imminent closing of $245 million of investments in the San Gabriel Valley submarket that has an aggregate 6.8% initial yield. This pipeline, including the imminent transaction, is subject to customer closing conditions. With regard to our robust internal growth initiatives, we have approximately 4 million square feet of value-add repositioning and redevelopments in process or projected to start within the next 24 months. These projects are expected to deliver an aggregate unlevered yield on total cost of 6.4% and represent an estimated $500 million of value creation. Lastly, I'd like to thank our entrepreneurial Rexford team for their dedication and for delivering on another strong quarter. I will now turn the call over to Laura to discuss our financial results.
Laura Clark, CFO
Thank you, Howard, and thank you to our incredible Rexford team. Your exceptional performance and value creation focus continue to differentiate Rexford. In the third quarter, core FFO per share grew 12% over the prior year quarter, driven by same-property NOI growth of 9.5% on a cash basis and 8.9% on a GAAP basis. Third quarter leasing spreads outperformed projections and year-to-date leasing spreads are 62% and 82% on a cash and GAAP basis, respectively. The portfolio is positioned for significant internal cash NOI growth into the foreseeable future. Just considering the next two years, value-add repositioning and redevelopment representing our largest driver of growth, are projected to contribute $71 million of incremental NOI. Annual embedded rent steps of 3.5% for the total portfolio are projected to contribute another $26 million. And acquisitions closed in the third quarter and fourth quarter to date contribute an incremental $28 million. In addition, the net effective portfolio mark-to-market is estimated at 56% representing $77 million of incremental NOI over the next two years. As we look further out, the conversion of the total portfolio net effect of mark-to-market equates to $350 million of incremental NOI growth equal to $1.70 per share of FFO contribution or 79% FFO per share growth. Now to our funding strategy and balance sheet. Our focus remains on internal and external investments that drive near- and long-term accretion and NAV growth. We continue to demonstrate a highly selective rigorous approach to capital allocation as reflected in our investments to date that are driving substantially higher accretion than our prior year investments, inclusive of today's higher cost of capital. We will continue to assess accretive capital sources to fund internal and external growth opportunities, including dispositions. Our sustained focus on maintaining a fortress balance sheet positions us to capitalize on our value-driven business strategy in the current environment. At quarter end, net debt-to-EBITDA is 3.7x and we have liquidity of $1.5 billion. This includes $83 million of cash on hand, full availability on our $1 billion revolver and approximately $450 million of forward equity remaining for settlement. Turning to guidance. We are increasing our 2023 core FFO per share guidance range to $2.16 to $2.18 per share, up from our previous guidance range of $2.13 to $2.16 per share. Our revised guidance range represents 11% year-over-year earnings growth at the midpoint. Please note that our guidance range includes the imminent closing of the San Gabriel Valley transaction, Howard mentioned. No additional acquisitions, dispositions or related balance sheet activities that have not yet closed are included in our updated guidance range. Our projected 2023 cash and GAAP same property NOI growth remains unchanged at the midpoint compared to our prior guidance, and we have tightened our ranges to 9.75% to 10% on a cash basis and 8% to 8.25% on a GAAP basis. Average same-property occupancy for the full year is projected to be approximately 97.75%, unchanged at the midpoint compared to our prior guidance. Other assumptions in our same property guidance include full year cash and GAAP leasing spreads are now projected to be 60% to 65% and 75% to 80%, respectively, an increase of 500 basis points at the midpoint, driven by higher-than-expected third quarter executed leasing spreads. And lastly, bad debt as a percent of revenue is expected to be approximately 35 basis points, in line with our prior guidance and below the historical average of 30 basis points, reflecting the continued health of our tenant base. Further guidance updates including a roll forward of our revised FFO per share guidance range can be found in our supplemental package. Finally, as part of Rexford's continued commitment to creating value through a comprehensive ESG approach, we are excited to announce our target to reach net zero greenhouse gas emissions by 2045, as well as near-term reduction targets. Our emission targets were validated by SBTi and are a testament to our focus on driving substantial internal value through our differentiated business model. Thank you all for joining us today, and we now welcome your questions. Operator?
Operator, Operator
Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session.
Camille Bonnel, Analyst
Can you talk to the change in market net absorption, which turned positive this quarter? What is driven by any particular submarket? And given today's economic outlook feels very different than it was 3 months ago? Do you expect this trend to continue?
Howard Schwimmer, Co-CEO
Hi, Camille. It's Howard. Nice to hear your voice. There was an uptick in absorption in the Inland Empire West submarket that was, I think, largely responsible for a large amount of absorption.
Laura Clark, CFO
Hi, Camille. It's Laura. I'll talk a little bit about our portfolio as well. Howard mentioned the market change but our portfolio did experience an increase in absorption of about 434,000 square feet. That represents about 100 basis points. Importantly, we've experienced positive absorption within our portfolio every quarter this year, certainly outpacing the market and really demonstrating the differentiation of our portfolio in the market, which we've been discussing. In terms of select markets, we actually, if you dive into the absorption, we saw positive absorption in every one of our markets from Greater LA, including West Orange County and San Diego.
Camille Bonnel, Analyst
And it looks like some of the stabilization dates in your redevelopment program were pushed out. What were the factors influencing this and how is your leasing pipeline tracking?
Laura Clark, CFO
I'll take that, Camille. So in terms of timing pushes regarding repositioning and redevelopment, there's a couple of drivers there. One is around the permitting and approval process, which has continued to impact construction timing. The other is around timing of our lease-up. It's certainly returning to more normalized levels. If you look back historically pre-COVID, lease-up timing upon completion of redevelopment was about 6 months. During the last few years, we saw that timing compressed pretty significantly given the strong levels of demand. But as we look forward, we believe current timing will be more consistent with pre-COVID levels, which is around that 6-month area.
Camille Bonnel, Analyst
And finally, can you please walk through the drivers behind the mark-to-market changes in your lease expiration schedule as well as the changes in cumulative FSR contribution?
Laura Clark, CFO
Hi, Camille. Great question. And I think it's important to walk through the various components that contribute to mark-to-market. First, we're certainly excited to be able to capture the mark-to-market and convert that into cash flow and FFO. But as we've communicated in the past, the mark-to-market is going to decline, and that's going to be driven by a number of factors. The first and really most significant is that the substantial embedded mark-to-market that we're able to recognize today was driven by the incredible market rent growth that we saw since 2019. If you look back to the fourth quarter, market rents have grown 80%. So as we convert the mark-to-market into cash flow and FFO unless market rent growth continues at those same levels, the mark-to-market is going to decline. Second, mark-to-market is impacted by the leases that we're signing and that conversion of the mark-to-market into FFO. And so if you look year-to-date, we've executed an impressive leasing spread, with 5.4 million square feet of leasing, 82% GAAP spread, 62% cash spread. The conversion of mark-to-market represents an incremental $50 million of annualized NOI just this year alone through three quarters. The last real component that moves around the mark-to-market is certainly the properties that move in and out of the pool. For example, when we move a property into repositioning or redevelopment, that property gets removed from the mark-to-market pool, and that value creation is now represented in accretive stabilized yields. Today, our repositions and redevelopments are generating 6.4% stabilized yields. In this quarter, the impact was about 200 basis points for our mark-to-market as we moved 7 properties into repositioning and redevelopment. Acquisitions can also impact that.
Operator, Operator
Our next question comes from the line of John Kim with BMO.
John Kim, Analyst
Thank you. On the net absorption, your stats are positive, but it does start, I think, from some of your space that you put into redevelopment. I was wondering if you could comment on overall net absorption in the market or demand that you're seeing in your portfolio or in the market overall over the last few weeks, just given the rising interest rate environment and uncertainty in the financial markets?
Michael Frankel, Co-CEO
Hi. Thanks so much for joining us today. This is Michael, and I'm pleased to answer the call. I think with regard to the last few weeks, we really haven't seen much change relative to what we're reporting for the quarter. So really no trend line there that's incrementally different.
Laura Clark, CFO
And then I'll add to that just around that absorption and the overall market. We've usually taken a pretty deep dive and analyzed every building in the market that's contributed to negative net absorption throughout the year. We've been communicating those metrics. And it's been really consistent. Only about 20% of the buildings that contributed to negative absorption in the overall market are what we would deem to be higher quality, higher functional type buildings. So to put it another way, 80% of the product that's hitting the market in terms of the negative net absorption throughout the year doesn't directly compete with Rexford. This trend has helped throughout each quarter of the year and it certainly speaks to the results of our portfolio and that differentiation driving our results.
John Kim, Analyst
Okay. I noticed the lease term that you signed this quarter. First of all, are your leasing statistics signed or commenced?
Laura Clark, CFO
It's signed.
John Kim, Analyst
Okay. The lease terms were 3.4 years and on renewals, 2.1, which seems low compared to where it has been historically. Just wanted to get some commentary on that.
Laura Clark, CFO
Yes, John, I can take that. Our weighted average lease term this year was a little bit shorter. It was driven by several shorter-term deals that were 12 months or less in term. And those were signed in advance of repositionings and redevelopments, giving us the ability to capture revenue while we're positioning those for construction starts.
John Kim, Analyst
So would you characterize that as aberration or going forward or at least term is going to be shorter in nature?
Laura Clark, CFO
Yes, I believe the impact was largely due to about three to four deals that significantly affected the weighted average lease during this quarter.
John Kim, Analyst
Okay. And just one final one on the mark-to-market disclosure on Page 15. The 7% reduction from 63% to 56%, which you clarified. Going forward, the out years, the projections that you have are down 6% from last quarter. And I'm wondering why it's not the full 7%, including the market rental change?
Laura Clark, CFO
I think it's important to consider that the calculations can have various rounding effects. It's essential to analyze the disclosure and to comment on it by year from a mark-to-market perspective. The change in mark-to-market has varied across years, driven by the pool of leases included each year, which is continuously changing due to our leasing activities, acquisitions, and property repositioning and redevelopment. For instance, if a lease expired in the third quarter of '23 and we signed a new lease with a 100% leasing spread, we captured that mark-to-market and it is now included in our cash flow. If that lease had a 3-year term, its expiration will now be reflected in our 2026 mark-to-market at market rent, resetting the market mark-to-market to zero. Thus, due to the constant changes within the pool across different years and influenced by numerous factors, you will see varying impacts from a mark-to-market perspective.
John Kim, Analyst
Got it. Okay. So this quarter, it just happened to be a 6% change per year. But going forward, that could change year by year.
Laura Clark, CFO
Yes. If you look at this quarter, the mark-to-market change for '24 and '26 was actually closer to 1,200 basis points. The factors I mentioned earlier drove those changes.
Operator, Operator
Our next question comes from the line of Blaine Heck with Wells Fargo.
Blaine Heck, Analyst
So you touched on this a little bit in prepared remarks, but you all continue to be active on the acquisition market with $400 million under contract. But you're getting a little lower on forward equity at $450 million, you have capacity on the line, but the rate is much higher than it has been and your cost of equity has increased. So can you just talk a little bit more about how you're thinking about the pace of additional acquisitions? And how much of that funding for future acquisitions could be driven by disposition proceeds?
Laura Clark, CFO
Hi, Blaine, thanks for joining us today. I'll jump in here as well. As we've mentioned, our significant focus will be on driving accretion and NAV growth through how we deploy capital. So when you think about capital deployment for Rexford, that includes our internal investments, so our repositioning and redevelopments that today are yielding very accretive yields at 6.4%. Our external investments today, if you include the pipeline that you mentioned, the $400 million in stabilized deals are 6.4%. So our investments today are accretive. They're driving more accretion today than they did last year even at our higher cost of capital, and that's driven by our higher initial and stabilized yields. As we think about sources of capital going forward, we will continue to assess debt and equity and dispositions alongside sources of capital in relation to the hurdle rates we are addressing today, as well as the embedded growth of those investments which will contribute to Rexford's long-term strategy. In terms of dispositions specifically, there is another potential source of capital. We believe there is a great opportunity to realize the value-creation efforts we've executed on, and we can redeploy that in the higher-yielding assets and grow our overall net asset value. So today, we're currently actively pursuing a number of dispositions in the market, and we'll provide updates on those properties as they close.
Blaine Heck, Analyst
Okay. Great. Just a follow-up on that. Can you talk about kind of the spread between the stabilized cap rates at which you think you can dispose of assets and the stabilized cap rates? Do you think you can use those funds to invest?
Michael Frankel, Co-CEO
Hi, Blaine, it's Michael. Suffice to say that the reason we're disposing of such assets is because we believe they'd be highly accretive in our recycling capital. And so we'll disclose those spreads when we close those disposition transactions. Otherwise, it's tough just to speculate.
Blaine Heck, Analyst
Okay. Fair enough. And then lastly, I was hoping you could talk a little bit about the tenants that are creating the most demand across your portfolio today. And maybe you can touch on tenant size and industry?
Michael Frankel, Co-CEO
It's interesting to observe the current market trends. Demand is quite widespread. Despite overall economic concerns, we are witnessing strong demand from the consumer products, food, and beverage industries, as evidenced by increased leasing activity in those sectors during the quarter. The electric vehicle market remains a significant driver of this demand. Additionally, distribution companies, whether in e-commerce or third-party logistics, continue to show healthy demand, particularly as they adapt to the substantial growth witnessed during the pandemic. Omni-channel distribution is becoming essential for traditional retailers to thrive, leading them to enhance their distribution capabilities and develop warehouses closer to their distribution points. Overall, we are seeing a variety of strong demand drivers, which is encouraging.
Operator, Operator
Our next question comes from the line of Craig Mailman from Citigroup.
Nicholas Joseph, Analyst
It’s actually Nick Joseph here with Craig. Just following up on the disposition comments. I was hoping you could quantify maybe how much you have out-to-market and where they stand in terms of the process?
Michael Frankel, Co-CEO
Hi, Nick. Thanks so much for joining us today. Similar to our acquisition activity, there are many factors that contribute to whether or not we close a certain volume of transactions on the acquisition side in any given quarter or year, and we don't provide guidance there. Similarly on the disposition front, although we have, as Laura mentioned, a range of properties as potential disposition candidates that are actively in process, there are so many factors that play into when they close and in what timeframe. So we just are not ready to give that kind of guidance, but we hope that you'll be pleased when we announce closings.
Nicholas Joseph, Analyst
Yes. No, I appreciate that. I guess not necessarily looking for guidance, but I think you obviously talked on the acquisition pipeline. So hoping for kind of a similar comment on, at least, just a broad range of where the dispositions could be? Are we talking $100 million? Are we talking $500 million? Just recognize things can fall in or out of that pipeline.
Michael Frankel, Co-CEO
Again, with regards to the reason we provide visibility on the pipeline for acquisitions is arguable, since there are more factors within our control, because we're the buyer. On the disposition front, there are fewer factors in our control, because we cannot predict how a prospective buyer may behave or may close. Therefore, we just don't provide that kind of guidance, and I apologize. But we just don't find a benefit in doing so.
Nicholas Joseph, Analyst
All right. And then just one other question on the dispositions. You mentioned harvesting some of that value; would it have an impact on the mark-to-market for the existing portfolio? Or are these assets that have maybe been leased more recently? Or should we not expect any impact on that number?
Michael Frankel, Co-CEO
Well, consistent with the notion that we're harvesting our value creation, we wouldn't expect the impact to be material.
Craig Mailman, Analyst
It's Craig here with Nick. Just wanted to follow up on the San Gabriel acquisition. The yield there is almost close to 7. Can you just talk about the nature of that asset and what the upside of that could be? Is this more of a sale leaseback and future redevelopment? Is this just any color would be helpful.
Howard Schwimmer, Co-CEO
Hi, Craig. It's Howard. While I'd love to tell you all about it because it's really an amazing transaction that our team was able to negotiate off-market and without much other competition, I think we're going to wait until we close, and then we'll be happy to provide full details.
Craig Mailman, Analyst
Okay. And just one last one. You guys bought the Tireco building in the sale leaseback with them back in Q1; it's your largest tenant now in the 2025 expiration. Could you guys just talk about the prospects of that tenant staying? Are they definitely out? And where the mark-to-market expectation is today on that versus maybe when you bought it closer to the beginning of the year?
Laura Clark, CFO
Hi, Craig. In terms of Tireco specifically, we are in communication with our tenants and Tireco specifically. At this time, based on those conversations, they currently have no intentions of vacating in 2025.
Craig Mailman, Analyst
Okay. And they have options to stay?
Laura Clark, CFO
They do have options. Those options have fixed terms to stay.
Craig Mailman, Analyst
And they led to 4% annually, just in perpetuity?
Laura Clark, CFO
3%.
Operator, Operator
Our next question comes from the line of Greg McGinniss with Scotiabank.
Greg McGinniss, Analyst
Laura, I have another question on clarifying that mark-to-market disclosure. We're hoping to dig into that 2% quarter-to-quarter impact from portfolio vacates or moving to repositioning/redevelopment. Is that just a lack of comparable rent on a new vacant asset, so you can't provide the upside? And if thinking about that potential mark-to-market was previously greater than 56%, which is why it came down before, why would those properties need to be repositioned to redevelop anyways?
Laura Clark, CFO
Well, those can be two separate things. To your point, yes, on the vacate side to a comparable, there's not obviously a comparable rent. But on the repositioning and redevelopment, this can be a different set of properties. As we are able to get properties back and execute on the repositioning and redevelopment plans, then they move out of the mark to market.
Greg McGinniss, Analyst
Right. But I'm saying so is the rent growth, the mark-to-market assumed on those properties. Is that contingent on repositioning?
Laura Clark, CFO
No, they are not.
Greg McGinniss, Analyst
Okay. And then is there beyond typical second-generation TIs, is there any additional spend that we should be thinking about for achieving the mark-to-market?
Laura Clark, CFO
No. If a property is in the mark-to-market pool in that calculation in the 56%, it's not in our repositioning. It probably is in that pool. It would just be your typical TI leasing commission and recurring capital spend.
Greg McGinniss, Analyst
Okay. Great. And then my apologies for what might be an ignorant question here, but we are new to the coverage. How does the 100 basis points of positive net absorption impact reported occupancy?
Laura Clark, CFO
In terms of the overall portfolio or the same property pool? What specifically...
Greg McGinniss, Analyst
The overall portfolio. So if you have occupancy changing 10 basis points quarter-over-quarter, but it's 100 basis points of positive net absorption. Just trying to figure out where the delta is there and how it's actually impacting occupancy to have the positive absorption.
Laura Clark, CFO
Yes. Greg, maybe it'd be better offline. I can take that with you and walk you through the components of that.
Operator, Operator
Our next question comes from the line of Nick Thillman with Robert W. Baird.
Nick Thillman, Analyst
I just wanted to touch a little bit on economics. It does seem like shorter lease duration. Just curious if you're seeing any more like free rent being given or is this more TI associated with your leasing?
Laura Clark, CFO
Thanks so much for joining us. In terms of concessions, our free rent this quarter, free rent was actually 0.7 months, so lower than what we've experienced in the prior quarter. Year-to-date concessions are one month. That's in line with our guidance and in line with our prior four-quarter average. So as we look back year-to-date, we haven't really seen a material increase overall in terms of concessions, looking back to prior years, concessions have averaged about 1.25 months, so we continue to be inside of that. Your question around TI, no, we haven't seen any material change in terms of TI.
Nick Thillman, Analyst
That's helpful, Laura. And then maybe just another question related to just GAAP leasing spreads. You guys have been big acquirers over the last 2 to 3 years. So when we're looking at when you're quoting GAAP leasing spreads, are you guys including the adjustment made to GAAP fair value of those leases when you're quoting the spreads quarter-by-quarter? Just kind of seeing which is going to actually be flowing through to FFO going forward?
Laura Clark, CFO
Yes, that would be included in the acquired leases.
Operator, Operator
Our next question comes from the line of Vince Tibone with Green Street.
Vince Tibone, Analyst
Occupancy guidance implies about a 75 basis point drop in the fourth quarter compared to third quarter levels. Can you just discuss the drivers there, whether it's a known move out or just some conservatism in forecasting?
Laura Clark, CFO
Hi, Vince. Thank you for being here today. Regarding our same-property occupancy guidance, our forecast for the entire year is 97.75%. We have narrowed our guidance range to the midpoint. This occupancy forecast indicates a decrease of around 60 basis points in the fourth quarter. As a reminder, our earlier guidance suggested a decrease of approximately 30 basis points in the second half of the year, primarily due to some additional downtime in areas where we are conducting light to moderate repossession, which was accounted for in our previous guidance. In our updated guidance, we are factoring in a 30 basis point impact from a space returned to us by a tenant on our pre-watchlist, which adjusted the guidance range to the midpoint. This tenant experienced some challenges during their business acquisition earlier this year, and we had them on our pre-watchlist for several quarters. We received the space back at the end of the quarter.
Vince Tibone, Analyst
Great. And then since the port labor agreement has been finalized and some of the backups in the Panama Canal have gotten worse, have you seen any pickup in tenant interest or flooring activity or other signs that SoCal industrial could benefit from some of these factors?
Howard Schwimmer, Co-CEO
Hi, Vince. It's Howard. Yes, we're really pleased to see the increase in port activity. Keep in mind that our tenant base is really mainly serving the consumption occurring here in Southern California. Through cycles, we haven't really seen much impact from port slowdowns or shutdowns in terms of that tenant base that we focus on in the portfolio. The ports are really more connected to super-regional global trade. Some of the larger buildings that typically you'll see out in the Eastern and Western Inland Empire absolutely benefit. There's a lot of revenue generated from ancillary services and so forth throughout Southern California due to port volumes. Therefore, it is nice to see those volumes increase, and we hope that it's a go-forward trend toward further recovery.
Vince Tibone, Analyst
Great. And if I could squeeze in one more, I'd be curious to get your view on how the transaction and secured debt market have changed over the past few months since the treasury rates moved up pretty substantially here.
Laura Clark, CFO
Hi, Vince, I’ll address that regarding the transaction market. We’re still observing capital being invested in the Southern California area. Interestingly, there are new entrants in the industrial sector, which reflects a gradual change over the past couple of quarters. While interest rates have certainly increased and accessing that capital may pose some challenges, transactions are still happening in the market, and cap rates have not shifted significantly, rising only about 25 basis points. Buyers continue to accept lower cap rates for properties that have the potential for appreciation and are even willing to wait some time for stabilization. A recent transaction in the North Orange County Mid-Counties market was above $50 million, with an initial cap rate of 0.4%, expected to stabilize in a little over five years at slightly above 5%. This buyer was a new participant in the market. Thus, despite the rise in interest rates, there continues to be capital flowing into the market.
Operator, Operator
Our next question comes from the line of Mike Mueller with JPMorgan.
Michael Mueller, Analyst
Just a quick one. I was wondering, can you talk about the yields that you're expecting on new repositioning starts compared to the overall in-place yield on that pipeline and what you're achieving on acquisitions today?
Howard Schwimmer, Co-CEO
Hi, Mike, it's Howard. Those yields vary. Some of them are legacy acquisitions that we might have bought at the peak of the market that might have a bit of a lower stabilized yield, while there are others that have substantially higher, above that 6.4% stabilized yield. In terms of anything we'd look to buy, we've absolutely reset the targets in terms of those stabilized yields we're seeking. But again, those also depend on when we're going to get to the asset that we can stabilize. We have several examples of assets we've bought recently that had very strong in-place rents, allowing us to entitle properties and then start construction maybe 2 to 3 years down the road, achieving even higher stabilized rates. We are really selective in bringing in some of these assets, and our strategy is different compared to it was a year or two ago.
Laura Clark, CFO
Hi, Mike, and just Michael, a little bit more color there. We added 7 new projects to our repositioning and redevelopment pipeline or are currently in process, representing about 600,000 square feet of properties on those investments. The yield for those aggregate stabilized yields is 6.5%, so actually coming in a bit above the aggregate yield for everything in the repositioning and redevelopment pipeline.
Operator, Operator
Our next question comes from the line of Vikram Malhotra with Mizuho.
Vikram Malhotra, Analyst
Just two quick ones. So first of all, on the mark-to-market, the changes, if I just run the math forward, I would assume that your negative 1% rent growth had a lot of variability by market and by size for there to be like a 600 basis point, 700 basis point impact. So given that you said it was larger boxes, can you just also kind of give us a sense of what the ranges were to impact? And if I'm correct, if I roll all that forward, assuming current conditions, I sort of get to your mark-to-market being by 25% to 30% by the year-end '24? Is it fair?
Laura Clark, CFO
In terms of the mark-to-market over the next several years, we actually provided a disclosure around the projected portfolio net effective market by year, assuming current rents and no further rent growth. By the end of 2023, it's projected at 52%, and by the end of 2024, it's projected at 42%. As a reminder, there are many different components that can impact that, such as leases being executed, repositioning and redevelopment opportunities, and acquisitions being made. But based on the current portfolio and where it sits today, my projection is that at the end of 2024, we would reach a 42% projected portfolio net effective mark-to-market.
Vikram Malhotra, Analyst
Okay, just to clarify the negative 1% market rent growth, if I apply that to the forward projections you've made, it's still difficult to reach something like the 600-point change in 2025. So I'm curious about the variability in that negative 1% market rent growth.
Laura Clark, CFO
There is variability, and that's driven by the change in market rents not being a straightforward line across the portfolio. There are durable characteristics in terms of submarkets and sizes. But as I mentioned earlier, there are many other factors driving the mark-to-market aside from changes in end-market rent.
Vikram Malhotra, Analyst
Okay, fair enough. And then just a follow-up on your largest tenant, the Tireco acquisition or expiration. Can you clarify whether you mentioned automatic renewals or if it’s just highly likely that they will renew? I ask because it seems like there is a step down in '25, and I'm curious about what you have accounted for in terms of renewal for that lease.
Laura Clark, CFO
Yes. Yes, they have an option to extend their lease; that's a fixed option at 3%. That is impacting our mark-to-market in 2025 because we are capturing that option at 3% instead of what would have been the embedded mark-to-market if we were to get that space back.
Vikram Malhotra, Analyst
And sorry, just to clarify, is it a rollout or a roll down if nothing changes?
Laura Clark, CFO
In terms of if we were to get the space back, would that roll up or down? Is that your question?
Vikram Malhotra, Analyst
Yes. I guess you're saying you're not getting the full mark-to-market because of the 3%.
Laura Clark, CFO
It would roll up. That base is below market today.
Operator, Operator
Our next question comes from Nate Crossett with BNP.
Nathan Crossett, Analyst
A quick one on just recurring CapEx. It's up quite a bit over the last couple of quarters. Just wanted to know if you can maybe unpack that. Is there anything we should know going forward for maybe recurring CapEx expenditures? And then also G&A, I think the guidance for the year implies a significant ramp into 4Q. And maybe you can just kind of unpack what that is?
Laura Clark, CFO
Hi, Nate, thanks so much for your questions today. In terms of recurring CapEx, it's largely driven by seasonality, especially related to exterior work within the third quarter and some into the second quarter. We take advantage of some of the hotter, dryer weather for exterior work such as roofing and exterior painting. That activity significantly drove our third quarter capital expenditures higher. As we look forward, we would expect fourth quarter to be more in line with prior quarters. To your question around G&A, I'll note this is the first increase in G&A in 2023. We continue to realize significant operating synergies. Our G&A as a percentage of revenue for the full year is expected to be 9.6%, compared to 10.2% in the prior year. In terms of the fourth quarter, the driver is primarily related to noncash equity true-up, tied to performance-based equity compensation. This noncash equity compensation is not realized unless Rexford continues performing at elevated levels. So that is the primary driver in the fourth quarter.
Nathan Crossett, Analyst
Okay. That's helpful. And then sorry if I missed it, I can't remember if you disclosed it or not, but at lease escalation on new contracts, what was it this quarter versus, say, last quarter?
Laura Clark, CFO
Yes, this quarter, our embedded rent steps on our executed leases were 4.3%. Compared to the prior quarters, this is actually the highest rent steps that we've signed in 3 of the past 3 year-to-date and the second quarter embedded rent steps were 4.1%. In the first quarter, they were 4%.
Operator, Operator
There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
Michael Frankel, Co-CEO
On behalf of the entire company, we'd like to thank everybody for joining us today, and we look forward to reconnecting next quarter. Thank you so much.
Operator, Operator
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.