Earnings Call Transcript - REXR Q1 2022

Operator, Operator

Greetings, and welcome to the Rexford Industrial Realty First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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.

David Lanzer, General Counsel

We thank you for joining us for Rexford Industrial's first quarter 2022 earnings conference call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and investor presentation in the Investor Relations section on our website at www.rexfordindustrial.com. On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future. 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-CEO

Thank you, David, and thank you, everyone, for joining our Rexford Industrial first quarter 2022 earnings call. We hope you and your families are well. I'll provide some brief remarks followed by Howard, who will discuss our transaction activity, and then Laura will provide an update on our financial metrics and guidance. As we start the new year, our exceptional first quarter performance demonstrates the extraordinary tenant demand that continues to strengthen even beyond last year's historic levels. Rexford continues to differentiate itself as the nation's fastest-growing and strongest performing industrial REIT. Our portfolio now comprises over 38 million square feet of industrial property, 100% located within Southern California infill markets, the strongest industrial market in the nation and the fourth largest industrial market in the world. Our portfolio is performing at essentially full occupancy, with our same property pool, ending the quarter at over 99% occupancy. We are seeing an exceptionally deep and diverse range of tenant demand across sectors. Demand substantially exceeds supply with overall market vacancy tracking at well below 1%. We expect to continue to experience an incurable supply-demand imbalance, due to an extreme lack of developable land. This inability to increase supply within infill Southern California is a key feature that we believe will differentiate our markets into the foreseeable future. In addition to this exceptional market backdrop, our entrepreneurial business model continues to position us to drive accretive cash flow growth and value creation well in excess of secular tailwinds. Our team is executing on a range of internal and external growth strategies that are unlocking tremendous value. Leasing spreads for the quarter were a full 71% on a GAAP basis and 57% on a cash basis. On the external growth front, year-to-date our team acquired $458 million of assets sourced predominantly through off-market or lightly marketed transactions. Compared to the prior-year quarter, we grew net operating income by 41% and grew Core FFO by a full 58%. As we look forward, we are very well positioned to continue to grow our cash flow and value. From an internal growth perspective, over the next 24-months, we project approximately $140 million, or 33% of annualized NOI growth embedded within our in-place portfolio assuming no further acquisitions, which includes $31 million of incremental NOI as our redevelopment and repositioning projects stabilized, $29 million of incremental NOI from recent acquisitions, and $82 million of incremental NOI contributed as we roll below market rents to higher market rates. In fact, the mark-to-market on rental rates for our entire portfolio is now estimated at 55% on a cash basis and 63% on a net effective basis. In addition, we have an extensive pipeline of additional investments currently comprising over $500 million of acquisitions under contract or accepted offer, and we have an extensive originations pipeline beyond these transactions. To fuel our growth, we are favorably positioned with a low leverage best-in-class balance sheet closing the quarter at 10.3% net debt to enterprise value. As a reflection of the company's strong performance, our first quarter dividend represented a 31% increase, compared to last year. And with that, we'd like to thank our entire Rexford team for your extraordinary dedication, passion and entrepreneurial approach to growing our great company. And now, I'm very pleased to turn the call over to Howard.

Howard Schwimmer, Co-CEO

Thank you, Michael, and thank you, everyone, for joining us today. Rexford began the year with outstanding results, reflecting the high quality of our portfolio and the incredibly strong fundamentals of the Southern California infill markets. Based on Rexford's internal portfolio metrics, market rents for comparable space continue to accelerate, increasing by 62% over the prior year. According to CBRE, quarter end vacancy decreased to 0.7% across our infill markets. Due to the ongoing lack of availability within our supply-constrained infill markets and ongoing strong tenant demand, we see our markets continuing to perform at below 1% vacancy, positioning us well to capture strong rent spreads in the coming quarters. The consolidated portfolio weighted average mark-to-market for our remaining 4.1 million square feet of 2022 lease expirations is now estimated at 67% on a net effective basis and 58% on a cash basis. Regarding external growth, in the first quarter, we completed 14 acquisitions totaling $458 million, representing 1.5 million square feet of buildings on 82 acres of land, including 13 acres for near-term redevelopment. Approximately 50% of acquisitions were value-add investments. In aggregate, our first quarter acquisitions generate an initial unlevered yield of 3.2%, growing to an estimated 4.7% unlevered stabilized yield on total cost. Year-to-date, over 85% of our acquisitions were acquired through off-market or lightly marketed transactions sourced through our proprietary research-driven processes and deep market relationships. Looking towards the future, we currently have over $500 million of new investments under LOI or contract, which are subject to customary closing conditions. During the first quarter, we stabilized a 111,000 square foot redevelopment property at a 6.6% unlevered stabilized yield on total cost, representing substantial value creation as this stabilized yield is about double the market yield for similar quality assets in today's market. Although an increase in construction costs are top of mind, we continue to see rent growth well in excess of inflationary impacts. The team is executing on a broad range of accretive internal growth initiatives. We have approximately $415 million of projected total incremental investment for value add and redevelopment projects underway expected to start over the next two years. These projects are projected to deliver an aggregate return on total investment of about 6.7%, representing over $1 billion in estimated incremental value creation. And with that, I'm pleased to now turn the call over to Laura.

Laura Clark, CFO

Thank you, Howard. First quarter results were exceptional with same property NOI growth at 8% on a GAAP basis and 11.7% on a cash basis, equal to 12.3% when normalized for COVID-related repayments. This strong performance was driven by continued occupancy gains and record leasing spreads. Average same property occupancy was 99.2% in the first quarter, up 150 basis points year-over-year, ending the quarter at 99.3%. And leasing spreads executed over the prior four quarters averaged 46% on a GAAP basis and 32% on a cash basis. Additionally, annual embedded rent steps on our executed new and renewal leases increased to 4.2% on average, compared to 3.9% in the prior quarter. This strong embedded internal growth combined with our accretive external growth enabled us to grow core FFO per share by 30% over the prior year to $0.48 per share. Moving to our balance sheet and capital markets activities. At the end of the first quarter, net debt-to-EBITDA was a sector low 3.7 times, below our 4 times to 4.5 times target. We continue to execute our strategy to maintain a low leverage investment-grade balance sheet that opportunistically positions us to execute on strategic capital markets transactions through all points in the cycle. During the first quarter, we sold 5.7 million shares of common stock through the ATM on a forward basis at an average price of $71.32 per share. At the end of the quarter, we settled the forward sale agreement associated with this quarter and last quarter's ATM sales, issuing 4.4 million shares of common stock for net proceeds of $306 million. At quarter end, our liquidity was approximately $856 million, including $49 million of cash, $232 million remaining for settlement from our first quarter ATM sales and $575 million of availability on our revolving credit facility. Now, turning to our full-year guidance. We are increasing our core FFO guidance range to $1.84 to $1.88 per share from our previous range of $1.77 to $1.81. Our revised guidance represents 13% year-over-year earnings growth at the midpoint. As a reminder, our guidance does not include acquisitions, dispositions or related balance sheet activities that have not closed. We have provided a roll forward detailing the drivers of our revised guidance range on our supplemental package. A few highlights include same property NOI growth on a cash basis has been increased to 6.75% to 7.75%, up 75 basis points at the midpoint. When normalized for COVID-related repayments, cash same property NOI growth is projected to be 7.25% to 8.25%. Same property NOI growth on a GAAP basis is now projected to be 4% to 5%, also increased 75 basis points at the midpoint. Assumptions driving same property growth include average occupancy of 98.25% to 98.75%, an increase of 25 basis points at the midpoint. Cash leasing spreads of approximately 50%, and GAAP leasing spreads of approximately 60%. Our projection for bad debt as a percent of revenue is now 25 basis points for the full-year, as compared to 35 basis points in the prior guidance, driven by the strength of our tenant base. Finally, I'll note that our overall same property expense growth is in line with our prior projections. The incremental NOI from the $288 million of acquisitions closed after we initiated guidance is projected to be approximately $11 million in 2022. Our revised guidance also includes approximately $5 million of incremental NOI from our repositioning and redevelopment properties and prior year acquisitions driven by higher occupancy levels and increasing rental rates. Lastly, G&A expenses are now projected to be $59 million to $60 million and net interest expense is projected to be in the range of $39 million to $40 million. This completes our prepared remarks, and we now welcome your questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Manny Korchman with Citi. Please proceed with your questions.

Manny Korchman, Analyst

Hey, everyone. Just given the massive amount of rental rate growth, how are the tenants in the market dealing with sort of that inflationary pressure? And specifically, maybe the tenants that have locations in your sub-markets that are national and so maybe they can't push pricing as much as they can? Is it just that real estate becomes a bigger piece of the cost puzzle?

Michael Frankel, Co-CEO

Hey, Manny, it's Michael. Thank you so much for joining us today. I'd like to remind you that the vast majority of our tenants, demand from those tenants is driven by regional consumption, and we have the largest zone of consumption in the country here. So even your larger national tenants have an increasing need to push their warehousing capability closer to the end points of distribution. Just take an example of Target, they fundamentally changed their business model over the last five to ten years by opening small footprint stores in and among the population centers, very diametrically opposed to their previous big box business strategy. To deliver on that and support that network of small footprint stores, as well as their e-commerce activity, they are really forced to establish a greater presence of smaller warehouses throughout infill Southern California. So whether it's a smaller business, a legacy business, or a large national business operating in infill Southern California, the key driver is that in order to execute on their business model, they need to have these spaces. We can walk through a range of industry sectors, new and emerging businesses and industries, that are all experiencing the same set of circumstances. They can't execute on their business without the necessary space in infill Southern California. Companies that could afford to move out of the region did so many years ago because this has been the most expensive operating environment for decades. In regard to your question about what tenants are doing regarding these increasing rental rates, they are absorbing them. There just aren't many options, and we're seeing a level of tenant demand and intensity that we've never seen before, even beyond last year's historic levels. The diversity of demand is significant, and California now has a mandate to increase housing stock by over 20%, which is going to take over 20 years to achieve. We're already seeing the impacts. It's a unique time for us. Remember, we have a market that cannot increase supply, and we will actually continue to lose supply on average year-over-year.

Howard Schwimmer, Co-CEO

So, Manny, one more comment on that. This is Howard, and it's nice to hear your voice. The tenants are the ones setting the rents right now in the market. All of our space is generally unpriced. We had a multitude of offers, and the tenants are literally competing with each other and driving up the pricing. So, it's really to Michael's point, these spaces are essential to their businesses and they are determining how badly they want them.

Manny Korchman, Analyst

Thank you for all the detail. And then Howard, while I have you on, in terms of the acquisition pipeline, is there any change in mix or asset type or the value-add component versus what you've been buying over the last few quarters?

Howard Schwimmer, Co-CEO

Well, it's going to vary quarter-to-quarter. This past quarter, about half of what we purchased was value-add type transactions. We had 13 acres for near-term redevelopment, but quarter-to-quarter, it varies. We're pleased with the quality and volume of opportunity that we're still seeing in the marketplace.

Michael Frankel, Co-CEO

Manny, it's Michael again. I'd like to come back to your original question, because we have some interesting data regarding how national tenants are responding to the dramatic increase in rental rates in infill Southern California. It's intriguing to note that if you compare our larger tenants, which align more closely with industrial REITs that own national portfolios, their tenant base tends to be larger than Rexford's average in terms of their space sizes. If we look at our leasing spreads, which are more comparable to national REITs, for spaces over 25,000 square feet in size, our leasing spreads for the quarter were a full 91%. This indicates that our larger tenants are adjusting, as they have no choice. The reason that larger spaces are experiencing a higher leasing spread in our portfolio is simply because they don't roll as often. Larger spaces tend to have longer-term leases, providing more time to build up that mark-to-market and it's reflected in our higher leasing spread.

Manny Korchman, Analyst

Thanks all.

Operator, Operator

Thank you. Our next question comes from the line of Jamie Feldman with Bank of America. Please proceed with your questions.

Jamie Feldman, Analyst

Great. Thank you. We hear talk about buyers rethinking pricing in the debt markets, with the cost of capital certainly back up with higher rates. How are you thinking about the change in your required returns? I know you had mentioned your unlevered yields going in and your stabilized yield, but how is your firm thinking about what's changed there? And what kind of returns do you want on your investments?

Laura Clark, CFO

Jamie, it's Laura. Great to hear you today. In terms of how we're thinking about capital raises and our cost of capital moving forward, we will continue to take a very opportunistic approach to capital raises and capital deployment. Our balance sheet certainly allows us to take advantage of all attractive capital sources, including debt and equity, to fund our investment activities. It's important to note that we don't focus on a cost of capital at a point in time. We take a longer-term approach, as we have built a business that enables us to do so. We can execute across all points in the capital cycle, because of the value creation opportunities that we've embedded into our portfolio through repositioning, redevelopment, and below-market rent opportunities. When thinking about how we invest, we invest in a range of yields that overall increase our earnings growth and FFO. For example, the projected yield for our recent acquisitions and our pipeline is, the projected stabilized yield is around 5.8%. Looking ahead, we expect stabilization occurring over the next five years to yield about 5.9%. Even in the face of increasing interest rates and inflation, we're positioned well given these above-market yields, which drive substantial NAV and FFO accretion over time.

Howard Schwimmer, Co-CEO

And Jamie, I just want to add to that. Your question implies an interest in what's happening with interest rates affecting cap rates. The rent growth we've seen in our portfolio and in the market itself means there's less sensitivity to cap rates and interest rates for investments with shorter duration lease expirations. However, we do hear about long-term leased products potentially seeing less buyer interest due to being interest rate sensitive. So any changes in the market will start to manifest in those longer-term lease properties without the opportunity to reset to market rates.

Michael Frankel, Co-CEO

Well, I think, frankly, it's Michael. Thanks again for joining us today. We've seen this before in past cycles. During the expansion phase, people chase the risk curve down to secondary and tertiary markets, driving down cap rates disproportionately low. When there’s a shift due to inflationary pressures or interest rates, those markets start to see cap rates increase significantly. However, in infill Southern California, during prior cycles where the market stabilizes, we haven't seen the same cap rate impacts, because supply and demand here overpower these pressures over time. Today, supply and demand vastly outweigh other factors, even more than in prior cycles.

Jamie Feldman, Analyst

Thank you for that color. We've noticed a meaningful decline in the number of ships waiting outside the Port of LA. What has changed regarding the demand profile or what tenants are saying or needing as supply chains seem to be improving? I know there are risks, but what can we expect if supply chains do really improve?

Michael Frankel, Co-CEO

I think if we start to see improvements in supply chains, it will enable our tenants to operate their businesses more efficiently. In short, we’ve seen no impact other than increasing demand consistent with the decrease in backlog at the ports. The number of vessels waiting to dock has declined from about 60 to 48 in March, but they're still above 2021 levels. Import volumes are up 17% versus February and up 29% year-to-date. The first quarter was the best on record for the Southern California port system. So, it's really about fundamental underlying demand. People are discussing increasing safety stock, but keep in mind that we already operate at full occupancy. Our markets are well below 1% vacancy. Even if we consider those vacant buildings, less than half actually competes with Rexford on a locational or functional basis. What reduced congestion at the ports means for us is that our tenants can operate more efficiently, replenish their inventories, and service their backlogs of orders, but we see no reduction in demand from tenants. In fact, they're increasing demand because they can run their businesses as planned.

Jamie Feldman, Analyst

Okay. Thank you.

Operator, Operator

Thank you. Our next questions come from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Blaine Heck, Analyst

Great. Thanks. Good morning. Laura, you guys are off to a great start on same-store NOI this year with cash at 11.7% this quarter. However, to hit your midpoint on guidance for the year, there's a significant slowdown implied in the remainder of the year. Can you just talk about the cadence of same-store NOI that we should expect? Is there a big drop-off in any specific quarter? And is the deceleration all due to expense growth as we've talked about earlier? Or are there other drivers behind that slowdown?

Laura Clark, CFO

Yes, Blaine, thanks for your questions today. The actual deceleration in same property growth projected through the remainder of the year is almost entirely tied to our occupancy assumptions. As you mentioned, our cash same property growth in the first quarter was 11.7%, with guidance for cash property growth at the midpoint set at 7.25%, implying some deceleration. The key aspect to consider is the timing of our expirations. Our average occupancy increased 130 basis points from Q1 to Q4 in 2021, moving from 97.7% in the first quarter to over 99% by the fourth quarter. In contrast, our average occupancy for 2022 began at 99.2% but assumes a decline of roughly 120 basis points from Q1 to Q4. This is impacting the year-over-year comparisons and is the primary factor behind the deceleration.

Blaine Heck, Analyst

Great. That's helpful. Just to follow up, are there any specific large move-outs anticipated to drive that occupancy lower? Or is there lower retention as you push on rates? Anything specific?

Laura Clark, CFO

Yes, Blaine, that's a great question. We're currently at 99.2% occupancy. The midpoint of our average occupancy for the year is 98.5%, which has increased by 25 basis points over our prior guidance. The drivers of our assumptions are two-fold: first, given our current high occupancy levels, and although market fundamentals continue to be strong, we feel our forecast is prudent, driven by the timing of our expirations. Our expirations are heavily back-end weighted, with 70% occurring in the second half of the year, and 40% of those are in the fourth quarter. As we start to get more visibility, we will update our assumptions, but it's still early in the year for those back-end weighted expirations. The second factor is visibility related to capitalizing on some expiring leases, which allows us to direct significant value creation by rolling those to higher market rents. About 300,000 square feet of space is projected to generate leasing spreads of about 90%, driving substantial value creation, but results in some short-term impacts to occupancy due to downtime.

Blaine Heck, Analyst

Great. That's helpful. Moving to Michael or Howard, can you discuss your expectations for the trajectory of the mark-to-market as we progress through the year? You've mentioned older, lower rents expiring and coming out of the in-place bucket each quarter, but market rent growth has been strong. How do you see those dynamics balancing each other?

Howard Schwimmer, Co-CEO

We will continue to mark the portfolio of the market every quarter. We saw a tremendous increase in the mark-to-market just from Q4 to Q1. The reality is, there's very little space on the market, as Michael previously mentioned. Our current vacancy is only around 340,000 square feet. Most of what we are dealing with is renewals, and tenants are very conscious of retaining their space. They are regularly reaching out to us to renew early, so we can hold them off a bit if they have late expirations this year or next. There's still tremendous pressure out there, so we believe we're well-positioned to see strong market rent growth in our portfolio and probably in the overall market as well.

Michael Frankel, Co-CEO

Blaine, it's Michael again. Thank you for joining us. A great leading indicator is the rent bumps that we're structuring into almost all of our leases, which have also accelerated. For example, Q1 rent spreads averaged 4.2% for the quarter, and we achieved our first 6% contractual rent spread during this quarter. These annual rent spreads occur every year throughout the lease terms, serving as a promising predictor for potential trends moving forward.

Blaine Heck, Analyst

Very helpful. Thanks, everyone.

Operator, Operator

Thank you. Our next question comes from Connor Siversky with Berenberg. Please proceed with your questions.

Connor Siversky, Analyst

Hi, everybody. Thanks for having me on the call. I'm curious about the Inland Empire, which was noted in the last call as somewhat of an overflow valve for LA proper. Noticing that the vacancy rate is exceedingly low at the moment, are we at a point where virtually any development project in that market is pre-leased before completion? If so, have you identified what the next overflow valve looks like and whether or not you'd be willing to enter a new county?

Howard Schwimmer, Co-CEO

Hi, Connor, it's Howard. We're focused in the Inland Empire West. We really don't buy or operate in Inland Empire East, which, as you said, is that overflow valve since there's almost unlimited land just continuing to head East. But in the Inland Empire West, yes, the vacancy is astounding there. According to CBRE stats, the vacancy rate in that market is at 0.1%, so essentially, the market is beyond full capacity. Coincidentally, it also has the highest year-over-year rent growth on record at almost 82%. The Inland Empire has become a real infill market in terms of the Western Inland Empire. Yes, whenever we have a space vacating, tenants and brokers approach us ahead of time. We're able to pre-lease properties during the escrow process. It’s the tightest market currently, but people are always moving east for relief.

Connor Siversky, Analyst

Got it. Thanks for that. And just for clarification, given the rising rate backdrop, does the $500 million under LOI or contracted change your calculus on how you fund these acquisitions? Specifically, are you considering using more equity in the debt-to-equity weighting?

Laura Clark, CFO

Hey, Connor, no, it doesn't change our approach. As I mentioned before, we're focused on longer-term views instead of looking at cost of capital at a point in time. Given the stabilized yields we are investing on, our recent acquisitions yield about 5.8% to 5.9%. Even with increasing rates and inflation, we're very well positioned with these above-market yields.

Connor Siversky, Analyst

Noted, I'll leave it there. Thank you.

Laura Clark, CFO

Thank you.

Operator, Operator

Thank you. Our next question comes from Mike Mueller with JPMorgan. Please proceed with your questions.

Mike Mueller, Analyst

Yes, hi. For the $450 million of acquisitions in the first quarter, about half were value-add. Does that mean that about half of that pipeline is eventually going to show up in your repositioning or redevelopment pages? Or is it more of a strategic play for rolling mark to market? How should we think about that? And to get to that incremental stabilized 4.7% yield, is there significant incremental capital commitment involved, and what’s the overall ballpark timing to achieve that?

Howard Schwimmer, Co-CEO

Hi, Mike, it's Howard. I'll respond to a few of those points, and then maybe Laura can address the capital. Value-add doesn't necessarily mean that we're going to have vacant products immediately listed on the repositioning page. There were two to three sites for 13 acres designated for near-term redevelopment, but those had some income in place. They'll show up on the repositioning page in the next year, but it may take 18 months or two years. The nice part is, we achieve great cash flow in the interim. Three of our recent transactions were covered land sites that may take time to redevelop, but they came with inbound yields in the low to mid 4 cap range, producing strong cash flows while we plan developments.

Michael Frankel, Co-CEO

And Mike, it's Michael. We often confuse ourselves here, but I think it's fascinating to pinpoint that you're witnessing the Rexford business model executing on all cylinders. While we discuss the yields for our acquisitions, it’s equally significant to note our repositioning projects beginning this year, with a total spend of nearly $700 million representing the 2022 starts, solving to a 6.7% unlevered weighted average stabilized yield. That’s considerably more than double the market cap rates we could sell those assets for today. There's tremendous value creation involved with these activities across the portfolio.

Laura Clark, CFO

In response to your question, on average, the stabilization process for these acquisitions tends to be in the 4- to 5-year range.

Mike Mueller, Analyst

Got it.

Operator, Operator

Thank you. Our next question comes from the line of Dave Rodgers with Baird. Please proceed with your questions.

Dave Rodgers, Analyst

Yes, good morning. Michael, Howard, I wanted to ask two questions, one on the acquisition pipeline and recent closings. In the last couple of quarters, we discussed UPREIT units versus cash. Could you talk about the seller mix? It seems that a bulk of acquisitions have been in cash, but you did do one unique transaction this quarter. Is this purely a function of seller mix and desire to take cash versus UPREIT?

Howard Schwimmer, Co-CEO

Sure. Hi, David, it's Howard. The UPREIT is integral to our acquisition program. We engage with sellers who have owned assets in our market for many years and are comfortable to invest in Rexford by contributing assets through UPREIT. Most of our concluded conversations align with UPREITs and many start as UPREITs but ultimately turn into cash acquisitions. These vary from quarter to quarter; last quarter saw a smaller amount in this department. A lot of conversations are happening with sellers showing interest in UPREITs. Given the federal focus on eliminating the 1031 exchange, this is favoring more UPREIT activity. Many sellers are looking to retire from property management, recognizing that the market is tight for finding exchange properties. They often turn to us for flexibility in considering UPREIT as a final option.

Michael Frankel, Co-CEO

Dave, it's Michael. I’d add that the market is seeing a rise in our direct addressable market opportunity, both in volume and quality for Rexford. This doesn't indicate linear growth in our acquisition volume annually, but rather an increase in the overall quality of the addressable market. The critical driver here is the aging of long-time private owners who accumulated properties during the post-WWII era. We're witnessing a historic shift of these assets from one generation to the next. The core driver of our transaction activity is this historical transition of assets between generations. Sellers today can monetize their asset values and redeploy cash flow beneficially, choosing to enter into an UPREIT with Rexford. We’re in a fortunate position to capitalize on these factors of a deep market in our area and a strong track record.

Dave Rodgers, Analyst

I appreciate the color on that. My second question may be slightly more nuanced, but regarding real estate taxes in California, you've bought a lot recently. Does it take time before those tax bills are passed onto tenants? Are there slippages where you're facing more taxes until you can reinstate lease terms? Is that a concern?

Howard Schwimmer, Co-CEO

Most leases on properties we acquire are very standardized. In Southern California, many follow the AIR standard industrial lease, developed over decades. Most of these unsophisticated landlords use that lease. Whether a net or gross lease, most provide for property tax increases to be passed onto tenants. Occasionally, a tenant may have a tax stopping arrangement, but these are rare. We build that into our underwriting, so we're not overly concerned.

Laura Clark, CFO

Additionally, Dave, we haven't encountered any negative impacts from recovery rates or collections regarding increased taxes.

Dave Rodgers, Analyst

Got you. That's helpful. Lastly, Laura, on the same-store expenses, you mentioned last quarter that they would be elevated this year. Should we expect sequentially for that to continue to increase, or was that loaded more in the first quarter?

Laura Clark, CFO

Yes, that's a good question, Dave. Our full-year guidance, which we mentioned last quarter, includes a negative 110 basis point impact due to expenses net of recoveries, with no changes to that expense guidance. This impact relates to our assumptions around occupancy and the increase in non-recoverable expenses due to operational overhead costs. For Q1, the impact from expenses net of recoveries was only 150 basis points, which was lower than what we had anticipated for the full year. This suggests higher expenses for the remainder of the year in line with our expectations. The occupancy decline directly impacts recoveries, which is a big factor this year. Last year, we saw increases in occupancy and consequently higher recoveries. This year, the opposite is taking place with comparisons skewed early. Nonetheless, we’re still forecasting solid same-property growth at 7.25% at the midpoint alongside FFO growth of 13% at the midpoint.

Dave Rodgers, Analyst

Very helpful. Thank you.

Operator, Operator

Thank you. Our next question comes from Chris Lucas with Capital One Securities. Please proceed with your questions.

Chris Lucas, Analyst

Hey, good morning, everybody. Just a couple of quick ones, if I could. On the renewal lease term length, it appears to be shorter than in previous quarters. Is this due to a mix change, or is there a more fundamental reason as to why it's a bit shorter?

Michael Frankel, Co-CEO

It's really circumstantial. There were two leases that were short-term renewals, but they're netted out to return to our norm of just over four years.

Chris Lucas, Analyst

Thanks for that, Michael. As market rents have increased and really accelerated, how has that impacted your opportunity set regarding the existing portfolio and potential redevelopment opportunities? Have dynamics changed based on the significant rise in market rent?

Michael Frankel, Co-CEO

There are two aspects: external and internal growth. Externally, it's indeed expanding our opportunity set. Internally, we're continually reviewing our portfolio in real-time and on a formal basis every month and quarter. We reassess based on market realities like rental rates, construction costs, and tenant demand to identify additional opportunities for repositioning a property that may not have penciled as well one or two years ago. The growth in market value and rental rates continues to unlock exciting internal growth opportunities.

Howard Schwimmer, Co-CEO

I’d just like to add that many of the sellers that Michael mentioned historically tend to focus on occupancy over pushing rents. The spread between in-place rents and market rates is substantial, so there are many opportunities for us to purchase assets with a significant mark-to-market.

Chris Lucas, Analyst

Thank you for that. Finally, regarding the scale of redevelopment, do you have a percentage of enterprise value or metrics for managing risk in this area? Is there a maximum limit for redevelopment that you’re willing to undertake?

Michael Frankel, Co-CEO

Yes, we are well aware of managing risk in that respect. Our business model is built around industrial value creation and property assets. The incremental capital required is nominal compared to constructing an office building, multifamily structure, or retail space. Our structures comprise simple concrete tilt-ups with low office build-out costs and generic finishes, resulting in minimum incremental capital spending to drive the repositioning activities. We’ll continue to keep that capital nominal relative to the enterprise value as we grow.

Chris Lucas, Analyst

Thank you. I appreciate the time.

Operator, Operator

Thank you. There are no further questions at this time. I would now like to turn the call back over to Michael Frankel for any closing comments.

Michael Frankel, Co-CEO

I just want to thank everybody for joining us today and for your interest and support of the company. We look forward to reconnecting in about three months. We hope everyone stays well and healthy, and we're certainly hoping for peace across the world. Thank you so much.

Operator, Operator

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