Earnings Call Transcript - REXR Q4 2021

Operator, Operator

Greetings and welcome to Rexford Industrial Realty Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, David Lanzer, you may begin.

David Lanzer, Host

We thank you for joining us for Rexford Industrial's fourth quarter and fiscal year 2021 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. 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 reconciliation 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 us for Rexford Industrial's fourth quarter 2021 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 look back on 2021, we are struck by the unique strength of our Rexford platform as we increased consolidated NOI by 38%, which drove a 24% increase in FFO per share for the full year. Rexford continues to differentiate itself as the nation's fastest growing and strongest performing industrial REIT, with five-year average annual FFO per share growth of 14%, average consolidated NOI growth of 31% and five-year average dividend growth of 18%, all of which continue to lead the industrial sector. We thank every Rexford teammate for your industry-leading work and dedication. To put this performance into perspective, our acquisitions team closed $1.9 billion of investments that are positioned to drive substantial cash flow growth and value creation. On the leasing front, we completed nearly 7 million square feet of leasing volume and our leasing team drove average leasing spreads of 43% on a GAAP basis and 29% on a cash basis for the year. Our construction and development team completed over 1 million square feet of value-add projects generating an aggregate stabilized unlevered yield of 6.6% and creating over $165 million of incremental value creation. Rexford's operations and property management teams continue to drive superior customer satisfaction metrics with historically low downtime and end the year with our same property portfolio at over 99% occupancy. Our infill Southern California market fundamentals are as exceptional as our operating platform. And as demand continues at an unprecedented level of intensity driven by an exceptionally broad and diverse range of sectors. The highest demand and lowest vacancy in the nation. Our Southern California infill market is currently operating at over 99% occupancy. We continue to experience an incurable supply-demand imbalance due to an extremely limited ability to increase in net supply. Consequently, market rent and property values are growing at a substantially higher pace within infill Southern California as compared to all other major markets across the nation. It is also important to note that our infill Southern California industrial market represents the world's fourth largest market. Behind only the entire countries of the United States, China and Germany. Infill Southern California is not only the largest and most fragmented industrial market in the nation, but the value of our market is about the same as the next five largest U.S. markets combined. Consequently, as our proprietary research-driven origination methods enable our unique access to this vast market, we are capitalizing upon a substantial opportunity to grow well beyond our current 2% market share. As we look forward, we've never been better positioned to grow our cash flow and value. From an internal growth perspective, we currently project over $120 million of annualized NOI growth, representing a 30% increase embedded within our in-place portfolio over the next 24 months, which includes approximately $28 million of incremental NOI as our redevelopment and repositioning projects stabilize, approximately $38 million of incremental NOI from recent acquisitions and approximately $55 million incremental NOI contributed as we roll below-market rents to higher market rates. In fact, the market-to-market on rental rates for our entire portfolio is now estimated at 41% on a cash basis and 51% on a net effective basis. In addition, we have a substantial pipeline of new accretive investments with over $450 million of acquisitions under contract or accepted offer plus an extensive originations pipeline beyond this volume. To fuel our growth, we are favorably positioned with a low leverage, best-in-class balance sheet, closing the year at 9.1% debt to enterprise value. Finally, as a reflection of the company's strong performance, we are pleased to announce that we're increasing our dividend by over 31%. And with that, 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. Southern California rental rate growth continues to substantially exceed all other major markets. Based on Rexford's internal portfolio metrics, our market rents increased by 38% over the prior year. This significant acceleration from recent quarters underscores the strength of our Southern California markets. Market-wide according to CBRE, our target infill markets, which exclude the Inland Empire East, ended the quarter at 0.8% vacancy. The lack of availability within our supply-constrained infill markets is expected to continue and positions us well to capture strong rent spreads into the foreseeable future. The consolidated portfolio weighted average mark-to-market for our 4.9 million square feet of 2022 lease expirations is now estimated at 48% on a cash basis and 58% on a net effective basis. Our same-store portfolio achieved historical high average occupancy of 99% for the fourth quarter. And while we did not have much available space to lease, our strong leasing performance continued during the quarter with approximately 1 million square feet of leases signed realizing blended GAAP and cash spreads of about 34% and 22% respectively. Turning to external growth, in the fourth quarter, we completed 19 acquisitions totaling $551 million, which included 2 million square feet of buildings on 104 acres of land, including 12.8 acres of land for near-term redevelopment with approximately 80% of the acquisition's value add. These acquisitions generate an aggregate initial yield of 2.6% and an estimated 5.2% unlevered stabilized yield. For the full year, we completed 51 acquisitions for an aggregate purchase price of $1.9 billion, adding 5.7 million square feet of buildings on 426 acres of land. This includes 123 acres of low coverage, industrial outdoor storage sites and 53 acres of land for near-term redevelopment. In aggregate, these acquisitions generate an initial yield of 3.6% and an estimated 6.1% unlevered stabilized yield. For the full year 2021, 86% of our acquisitions were acquired through off-market or lightly marketed transactions sourced through our proprietary research-driven processes and deep market relationships. On the disposition front, for the year, we sold five properties totaling $59.3 million, which generated an aggregate 26.5% unlevered IRR on investment. As in the past, we expect to continue to sell assets opportunistically to unlock value and recycle capital. Subsequent to year-end, we completed $170 million of acquisitions, which were predominantly value-add opportunities, with an aggregate 3.1% initial yield that are projected to generate an aggregate 4.9% stabilized unlevered yield on total investments. Looking ahead, we currently have $450 million of new investments under LOI or contract. These transactions are subject to customary due diligence with no guarantee of closing. We will keep you apprised as transactions are consummated. Turning to repositioning and redevelopment activities. For the full year, we stabilized six properties representing over $200 million of total investment at an aggregate unlevered stabilized yield on total investment of 6.6%, substantially exceeding current market cap rates that are in the mid-3% range. We currently have over 3 million square feet of current and planned value-add and redevelopment projects across our portfolio with the projected total incremental investment of approximately $380 million and are estimated to deliver an aggregate return on total investment of about 6.6%, representing more than $1 billion in estimated value creation. And with that, I'm pleased to now turn the call over to Laura.

Laura Clark, CFO

Thank you, Howard. Fourth quarter results came in ahead of projections with same property NOI growth on a GAAP basis at 10% and 6.8% on a cash basis. Note that cash same property NOI growth was 13% when normalized for 2020 COVID-related impacts. Continued occupancy gains and exceptional leasing spreads contributed to our strong growth. Average same property occupancy in the quarter was 99%, up 40 basis points sequentially and 80 basis points over the prior year. Leasing spreads for the full year were 43% and 29% on a GAAP and cash basis respectively. Additionally, annual embedded rent steps on our new and renewal leases continued to increase with average steps at 3.9% on fourth quarter executed leases. For the full year, same-property NOI growth exceeded expectations at 9.1% on a GAAP basis and 12.3% on a cash basis. Cash NOI growth for the full year was an impressive 10.9% even when normalized for COVID-related impacts. Occupancy growth, robust leasing spreads, and a remarkably stable tenant base as measured by the fact that we have zero bad debt expense for the full year, collectively enabled us to grow fourth quarter core FFO per share by 32% to $0.45 per share and full year core FFO per share by 24% with $1.64 per share. Driven by the strong performance, the Board declared a dividend of $0.315 per share, representing an increase of over 31%, demonstrating Rexford's commitment to delivering superior total shareholder returns. Turning now to balance sheet and capital markets activities. We continue to execute on our strategy to maintain a low leverage investment-grade balance sheet that is proven through all phases of the capital cycle. And at year-end, net debt to EBITDA was 3.6 times. In the fourth quarter, S&P and Fitch recognized our favorable position revising the rating outlook for Rexford to positive from stable. Capital markets transactions executed in the quarter include the sale of 4.2 million shares of common stock through the ATM on a forward basis at an average price of $70.17 per share. In December, we settled forward equity agreements associated with our September public offering and fourth quarter ATM activity issuing approximately 8.8 million shares for net proceeds of $534 million and subsequent to quarter-end, we renewed our ATM program, which includes $715 million of capacity. At quarter-end, our liquidity was approximately $880 million, including $44 million of cash and $134 million of forward equity proceeds remaining for settlements from our fourth quarter ATM sales and full availability on our $700 million credit facility. Before we turn the call over for your questions, I'll provide an overview of our 2022 outlook. Our 2022 projected core FFO guidance range is $1.77 to $1.81 per share, representing 9% earnings growth at the midpoint. As a reminder, this guidance range does not include acquisitions, dispositions, or related balance sheet activities that have not yet closed. We have provided a roll forward detailing the drivers of our guidance and our supplemental package. A few highlights include same property NOI growth on a cash basis is projected to be 6% to 7%. Excluding the year-over-year impact of COVID-related repayments, cash same property NOI is projected to be 6.5% to 7.5%. Same property GAAP NOI growth is projected to be 3.25% to 4.25%. Assumptions driving same property growth include average occupancy of 98% to 98.5%, leasing spreads of approximately 40%, higher expenses net of recoveries are projected to offset same property growth by approximately 110 basis points and bad debt as a percent of revenue of 35 basis points compared to zero in 2021. Our 2021 acquisitions are projected to contribute incremental NOI in the range of $48 million to $51 million in 2022 when compared to their contribution in 2021. G&A expenses are projected to be $58 million to $59 million and includes $23 million of non-cash performance-based equity compensation, which is only realized to the extent the company achieves exceptional performance and superior shareholder returns. And finally, net interest expense is projected to be in the range of $38 million to $39 million. This completes our prepared remarks and we now welcome your questions.

Operator, Operator

And at this time, we'll be conducting a question-and-answer session. Our first question from the line of Jamie Feldman with Bank of America. Please proceed with your question.

Jamie Feldman, Analyst

Great. Thank you. So I guess just to start out. I appreciate all the moving pieces you gave on guidance. You had a really strong same-store year in '21, it's moderating in '22. Can you just help us understand kind of the biggest moving pieces of why it's going to be slower next year, given you have the 41% cash mark-to-market 51% gap?

Laura Clark, CFO

Hi, Jamie. I'll take that one. Thanks for your question. I think it'd be helpful to walk through the components on the same property and happy to dive into any of these a little bit further once I walk through the components. Our cash same property NOI growth is projected to be 6% to 7% and the components of that include about 810 basis points of growth related to base rent assumptions driving that include 2022 leasing spreads of 40% and then our occupancy guidance of 98% to 98.5%. It does imply a decline in occupancy we're currently sitting year-end occupancy in the same property pool at 99.1% and average occupancy in the full year was at 98.6% in 2021. Bad debt as a percent of revenue is projected to be 35 basis points and that's offsetting the same property growth by about 50 basis points. I'll note that our tenants are certainly performing really well, but we are assuming a more normalized level of bad debt, bad debt pre-COVID was in the 40 basis point to 50 basis point area. And then finally the last component of same property guidance is around expense growth and we're estimating an expense growth is about 12% and that offsets net expenses, net of recoveries offsets same property NOI by approximately 110 basis points. So a little bit of color there, insurance, taxes, and overhead allocation are the most significant component to that expense growth. And while the increases in insurance and taxes are passed through to tenants and are recoverable, our increases in overhead allocation are non-recoverable. And so those are your, the significant components that get you to the 6.5% at the midpoint of our cash same property guidance.

Jamie Feldman, Analyst

Thank you, that's very helpful. Regarding the expense increase you mentioned, is that something you expect, or do you believe it is already determined given the expenses have shifted even recently into the fourth quarter?

Laura Clark, CFO

Let's discuss the net expenses after accounting for recoveries. The main factor driving this is overhead allocation. Our portfolio has seen significant growth over the last two years, with our square footage increasing by 40% and consolidated NOI growing by 70%. We're also focused on future growth, having acquired $170 million so far, with an additional $450 million in contracts or accepted offers. This growth has contributed to an increase in our headcount. It's important to note that the timing of hiring can vary; sometimes we catch up on hiring, while other times we look ahead to future growth opportunities. The hires we made in 2021, especially in the latter half, are now fully impacting our operations. Additionally, our team has performed exceptionally well, resulting in promotions and some increases in compensation, along with the common challenge of rising labor costs. These are the key factors behind the growth in overhead allocation.

Jamie Feldman, Analyst

Okay. Thank you for that. And then just to confirm, so you said 6.5 to 7.5 is the cash growth number excluding COVID. So that's kind of a clean number of just how the portfolio getting?

Laura Clark, CFO

Yeah, that's correct. Just as a general reminder, COVID deferrals were granted in the second quarter, most of our COVID deferrals were granted in the second quarter of 2020 and represented less than 1.5% of our ADR. So, although, the bulk of those COVID deferrals were granted in 2020 and collected about 80% in 2020. We did collect the remainder of those deferrals in 2021, which was about $1 million. And so our 2022 collections of COVID impact is pretty insignificant. So when you look at the year-over-year cash same property growth, it's positively impacted by the decline in the COVID adjustments. So that's that additional 50 basis points at the midpoint in our 6.5 to 7.5 guidance on cash same property NOI.

Jamie Feldman, Analyst

Thank you for that. One last question from me: you completed $1.9 billion in acquisitions in 2021. What do you think is a realistic target for acquisition volume this year? Currently, you have $450 million under contract.

Howard Schwimmer, Co-CEO

Hi, Jamie. It's Howard. Hope you're well. Well, I think you've asked this question before and every time we told you, we just don't offer guidance on the acquisitions. But that said, we are starting out the year with a robust pipeline. I would say that January and February seem to be our slower months and we've already closed $170 million. So we're excited for the year, we see a strong pipeline of opportunities and it's hard to predict. Obviously, what closes and what else we put under contract that we're starting out with a lot of momentum and we hope to have another banner year.

Jamie Feldman, Analyst

Thanks for that. I guess maybe a better way to ask it is, has anything changed in your desirability or desire to put out capital this year versus maybe this time last year. Whether it's pricing or what's on the market or potential sellers?

Michael Frankel, Co-CEO

Hey, Jamie. It's Michael. Thanks for the question. Our focus remains unchanged. We're concentrated on acquiring transactions and buying opportunities that deliver cash flow growth capable of surpassing the effects of inflation and rising interest rates. You can see our team actively pursuing this strategy. At Rexford, we have reinforced our ability to identify and capitalize on value-add opportunities. Most of our acquisitions last year came from off-market and lightly marketed transactions, which primarily presented value-add prospects. The value-add projects we tackled yielded a 6.6% return last year across over a million square feet. Our near-term value-add projects also achieved just under 7%, which is approximately double the market yields attained by our competitors in Infill Southern California. When we examine the in-place mark-to-market of our purchases, it reflects our success in securing opportunities that are typically not accessible to our competitors, often featuring significantly below-market rents. This remains our focus. As we intensify our value creation efforts, we're delving deeper into the markets, and our team is stronger than ever. This is reflected in the quality of our investments. This approach helps us mitigate the challenges related to increasing costs and general inflationary pressures.

Jamie Feldman, Analyst

Okay. Thanks, Michael.

Operator, Operator

Our next question comes from the line of Manny Korchman with Citi. Please proceed with your question.

Manny Korchman, Analyst

Hey, everyone. Howard, just going back to your comments on how quickly rental rates are growing in the market. Do you think at some point, there's going to be a bigger impact on retention than we've seen thus far?

Howard Schwimmer, Co-CEO

Well, we're operating at less than 1% vacancy and as far as retention, there's nowhere for tenants to go. So the market is going to have to change dramatically in terms of the vacancy rate for there to be options for people. We've mentioned in the past, a lot of times we have repositioning projects that we are planning to do where we have a tenant that we want to exit, maybe it's a property that has some dysfunctionality to it. And they're just begging us to renew because there's nowhere to go in the marketplace. And some of those are even unexpected as I mentioned in terms of the retention side. So for the foreseeable future, I think we're going to expect to be operating in a similar manner and retain our retention, but keep in mind obtaining a lot of the retention in terms of what tenants move out are really at our option. So that we can get to these assets as Michael was describing, and go and create value above and beyond what we might even be able to get from a tenant, even if they do want to renew. But in some instances, tenants are so desperate for space, they're paying us rents that far exceed what we ever thought an existing building might be worth and we are retaining them and we'll just move forward on the value creation plan a little further down the road.

Manny Korchman, Analyst

In the past, we've talked about the off-market nature of your acquisitions and the less professionally managed assets you've been buying. Are you experiencing the same success with those tenants paying higher rents, or are they content to keep their tenancy despite the current market rates? Even though the leases may have just renewed, are cash flows not where they could potentially be when you're acquiring these assets?

Howard Schwimmer, Co-CEO

All right. Most of the assets we buy are recently leased and adjusted to market rents, which has a typically target assets that have below-market rents in place because they've been leased for a while. In fact, looking at our data from our fourth quarter acquisitions in aggregate in-place rents for about 38% below market on those assets we bought and they are typically owned in our market that the individuals or the smaller partnerships, they're shocked when somebody tells them what their property's worth and they're also surprised when they do a renewal and they get a bit more rent than they were thinking about, but a lot of times getting more rent also requires them to modernize and make larger capital investments in their buildings, which most of the time they're not willing to do, especially since the markets are tight and they don't have to spend a penny, they still retain occupancy and even get rent growth. And again that rent growth they're getting is still well below what that could be, if somebody like Rexford came in and invested a little bit of capital and really just unlock the value in those assets.

Manny Korchman, Analyst

Thank you.

Operator, Operator

And our next question comes from the line of Connor Siversky with Berenberg. Please proceed with your question.

Connor Siversky, Analyst

Hey, everybody and thanks for having me on the call. Appreciate the detail as always. A question on leasing spreads that we saw during Q4. So I think you had mentioned that the mark-to-market on the portfolio is about 41% and that is the number baked into guidance. So I'm wondering what could explain the delta between that 41% number and the 21.5% cash spread posted for Q4 '21. So just a little context, I'm operating under the assumption that some of the leases that would have expired during the quarter or of an older tenure and may have been even lower on the mark-to-market? So any color there would be appreciated.

Howard Schwimmer, Co-CEO

Sure. This is Howard. Connor, it's good to hear from you. Our lower spreads were mainly affected by a few larger renewals, which accounted for 30% of the square footage, or one million square feet of leasing in the quarter. We had a 182,000 square foot building in our Rancho Pacifica project in the South Bay, where we're working on longer-term blends and extensions with a couple of spaces occupied by a tenant. We renewed the 182,000 square feet on a short-term lease of seven months, which met the parameters for the calculations and resulted in a 3.5% cash spread. Additionally, we had a 112,000 square foot building in the San Diego market that had an in-place below-market option to extend at a fixed rate, which resulted in a 4.2% cash spread. These factors had a significant impact on our leasing spreads. However, looking at our new leasing, we didn't have much space available to lease this quarter, but our new leasing spreads were still very robust, with 46% GAAP spreads and a 31.5% cash spread. These figures are more in line with what we usually discuss, but with a 9.1% occupancy, there wasn't much space in our portfolio to lease last quarter.

Connor Siversky, Analyst

Okay. But just to clarify the 41% number that's sort of what's being baked into 2022 guidance?

Howard Schwimmer, Co-CEO

Do you want to take that, Laura.

Laura Clark, CFO

Hey, Conner. It's Laura. Yeah. I'll add a little color there and then talk about 2022 as well. I think it's important when you think about 2021 to look at the full year because certainly on a quarter-to-quarter basis, the next issue can certainly impact the results in an individual quarter. But when you look forward to 2022, the mark-to-market on our 2022 expirations is 48% on a cash basis. So we're looking forward to seeing some pretty significant mark-to-market and our guidance assumes around the 40% at the midpoint, 40% leasing spreads on our 2022 expirations.

Connor Siversky, Analyst

Okay. That's very helpful.

Michael Frankel, Co-CEO

It's Michael. I'll just add one thing, the spreads are one component of growth for the quarter and for the year. Q4 actually saw an acceleration in overall growth by key metrics, for instance, core FFO grew by 61.5% for the quarter, which was a much higher rate than the annualized growth of 44%. On a per-share basis, we grew core FFO per share of 32% to $2.45 per share, much higher rate than the 24.2% for the year. So I think overall, Q4 was actually an acceleration in terms of cash flow growth for the company.

Connor Siversky, Analyst

Okay. And then could you just remind us then what in-place escalators look like?

Howard Schwimmer, Co-CEO

Go ahead, Laura.

Laura Clark, CFO

Okay. Yeah. I'll take it. So overall, the portfolio rent steps are now in place at 3.1% for the total portfolio, but we've certainly seen the ability to increase those across leases that we've signed through 2021 and this rent escalation continues to actually accelerate. If you look at the average rent steps that we've signed in the fourth quarter, there were 3.9% and that's up from 3.6% in the third quarter. So if you look at the full year, the average rent steps that we sign on all of our leasing was 3.4%. So we're seeing that in-place portfolio number move up, it takes a little bit of time to move that number forward, but we're seeing in some markets and some cases, the ability to capture 4.5% to 5% rent bumps is becoming more common in the market.

Connor Siversky, Analyst

Okay. Thanks for that. And one more from me, looking at construction activity, I mean let's just focus on the Inland Empire specifically, so I'm seeing about 30 million square feet under construction, about 28 million of that is back. So I know you have some presence in the market, but I'm just thinking out loud, is it a possibility that some of the tenants in the LA Basin could provide the same service to LA proper from the Inland Empire? I mean, is there a situation where we could see some kind of diffusion from your tenants out of LA into the Inland Empire or does that seem unlikely?

Howard Schwimmer, Co-CEO

We've always seen that, Connor, the Inland Empire has been the relief for the lack of supply in the infill markets. That's changed though recently because there is very limited supply availability in the Inland Empire and a lot or most of that product you see coming out of the ground lately either is pre-leased or ones that become leased right at completion. So it's just been an amazing amount of absorption that we've seen in that market and frankly in all of our markets. And what's also very interesting is the Inland Empire used to have substantially lower rents than some of the more closer infill markets. And when we look at it today, the spread between the rents in Inland Empire and some of the more western markets is much more narrow. So it's really more a question of do you need a higher quality building or do you need a location. And then the other side of it also is that, while the Inland Empire is only about 45 minutes or an hour plus away from some of these other markets, tenants have to be strategically located in these infill markets to service their customers and they actually can't do it a lot of times if they're in the Inland Empire. So you find it people's needs a lot different that are able to locate in the Inland Empire than the tenants in the infill markets that really are there because their businesses have to be there.

Connor Siversky, Analyst

Got it. That's very helpful. I'll leave it there.

Michael Frankel, Co-CEO

And just to be clear, Connor, that type of volume in terms of construction in the Eastern Inland Empire and deliveries has been pretty consistent now for, I don't know, five to seven years, and we really haven't seen that impact demand for rental rate growth in our infill markets, just to be clear. And I think that's what Howard was referring to, when he said we've seen this in the past it's been recurring. But we don't see is the new construction deliveries in the Eastern Empire impacting demand in our infill markets, which is I think more to your question.

Connor Siversky, Analyst

Yeah. No, I was just really curious about whether or not that 28 million square feet of spec development would have been somewhat of a concern, but yeah, the color makes sense. Thanks.

Operator, Operator

And our next question comes from the line of Dave Rodgers with Baird. Please proceed with your question.

Dave Rodgers, Analyst

Yeah. Good morning out there. Just wanted to ask about the redevelopments. I think you had said $200 million completed in '21, $380 million either planned or current, but is that the plan to start this year here in 2022? And then I guess maybe can you talk a little bit about the scope and how that might be changing some of the projects, are you generally trying to open spaces up because you see more warehouse storage, are you cutting spaces up for more service orientation? I assume maybe the answer is a little bit everything, but just curious on your thoughts?

Howard Schwimmer, Co-CEO

Sure. Hi, Dave. It's Howard. So, in total, we have over 3 million square feet of projects, that's probably 28 different buildings we'll be building over the next couple of few years and that has an incremental spend of about $350 million with about $1 billion of value creation and stabilizing its strong yields about 6.5%. In terms of 2022, we will have 15 projects start with an incremental spend of about $200 million and those will stabilize anywhere from second quarter '23 to the second quarter of '24, also at a similar stabilized return projected at 6.7% on total cost. And then in terms of any changes to the product, I think what we've seen in the market today is that people want a bit more space on-site to store containers and want higher dock counts and we're delivering that. So in some instances, we could make that work with higher coverage on the site, meaning, typically around a norm of 50% and in some instances we'll deliver sites that have excess land some of our repositionings in fact were turning down pieces of buildings and creating what we call low coverage sites that have an extensive amount of loading and very large excess land areas for container storage and those are becoming in more demand as well as even just yard space that we're running, these industrial outdoor storage sites that have little to no improvement on the site and are just used for storage and containers. Maybe you can only do that in selected areas, most cities are very difficult in terms of allowing for those exterior yards, but we've had a lot of success buying sites that had the right ability to do container storage and we're achieving substantial returns on those sites as well.

Dave Rodgers, Analyst

Great. Appreciate that color. And then maybe Laura just one follow-up for you, and I realize maybe apple-to-oranges, your interest expense guidance is I think down in '22 versus '21 and I know the acquisitions aren't in there, but maybe imply for us anything with respect to the preferred I think maybe you have coming due as well as thoughts on kind of equity versus using debt in that mix to kind of change that interest expense outlook as the year progresses?

Laura Clark, CFO

Yeah. So the interest expense guidance is being driven. The decline is being driven by a couple of components, our guidance is $38 million to $39 million, we ended the year 2021 was a little bit over $40 million. So it's driven by really a couple of factors; one is higher capitalized interest, as Howard just mentioned, we expect to start pretty significant amount of projects. When we look at our projected spend in '22, it's about $180 million and that compares to about $65 million in 2021, so that's driving higher capitalized interest. And then the other, we had some one-time items in our '21 interest expense related to our termination of some interest rate swaps, and so those are burned off and are not impacting 2022. So it is a little bit of a comp issue. And then to answer your question in terms of how we think about funding in the balance sheet going forward, we certainly feel very well positioned from a liquidity standpoint, do have about $134 million of proceeds remaining from our forward issuance. And then we just renewed our $750 million ATM program, so we have full availability there. And no, as of the end of the year, no balance on our credit facility. So certainly a number of sources for liquidity from that standpoint. And as we look forward into 2022, I think our funding strategy is going to look really similar to 2021. We're going to take an opportunistic approach to our capital raises, our net debt to EBITDA is sitting at 3.6 times, our target levels in the 4 times to 4.5 times. So I think that in 2022 you'll see us tap into the debt and equity markets as you have in the past to fund future acquisition opportunities.

Dave Rodgers, Analyst

Great. Thank you.

Laura Clark, CFO

Welcome.

Operator, Operator

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

Mike Mueller, Analyst

Yeah. Hi. Laura, I was just wondering what's the big difference between the cash and GAAP same-store NOI growth, the difference between those two metrics because when I think of the GAAP number, my mind goes to, you've got mid-teens expirations, if you're assuming 40% cash spreads or GAAP spreads based on the prior comments, we're probably 50%, so 50%, 15% kind of get you in the high-single digits. So there, it seems like that's an offset?

Laura Clark, CFO

The difference between our GAAP and cash spread in our guidance is approximately 275 basis points. Historically, over the past four years, this gap has ranged from 175 to 200 basis points. In 2021, the gap was around 320 basis points, with COVID impacts accounting for about 140 basis points of that. Looking ahead to 2022, the 275 basis point spread is about 100 basis points higher than historical averages. This difference is primarily due to lower projected non-cash income, which can be attributed to a few factors. First, COVID impacts make up about a third of this excess spread, down from 140 basis points in 2021. Second, lower non-cash expenses related to above and below-market rents are another contributing factor. We're converting below-market rents to higher cash rents, and in 2021, we had some one-time impacts from proactive move-outs that allowed us to take back space and convert it to higher market rents. Lastly, there has been a decline in straight-line rent assumptions, influenced by lower average occupancy, timing of lease expirations, and the overall leasing activity we are projecting. These factors account for the lower non-cash expectations in 2022.

Mike Mueller, Analyst

Got it. Okay. That's helpful. That's all I had. Thank you.

Laura Clark, CFO

Thank you, Mike.

Operator, Operator

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

Chris Lucas, Analyst

Hi, everyone. Thanks for taking my questions. Howard, maybe I'll just start with you on a bigger-picture question which relates to lease expiration schedule. If I look at not just this coming year but the next five years after that, the expirations are around the same rent levels. Is there anything in the '22 mix that generates that 40% plus mark-to-market or is it or can I assume that if the environment stays the same over the next six years that 40%, 50% kind of mark-to-market is really kind of embedded throughout the entire rest of the lease expiration schedule?

Howard Schwimmer, Co-CEO

Hi Chris. Maybe I'll talk just a little quickly about this year's expirations and I'll let Laura add a little color on the latter years. In terms of this year, our top 20 leases is about 1.65 million feet, so that's a third of what's expiring. And what's interesting about that is that today we no assets are moving to repositioning or are expected to renew. So very little of it is going to be vacant. And then in terms of those lease spreads, the biggest driver is probably and the largest amount of expirations this year 26% is in our Inland Empire West portfolio where we have 67% mark-to-market followed by Mid County's at 52% and that's really the components of how we get to that 48% mark-to-market. In terms of a look forward, none of us know obviously what happens in the marketplace at least for now, but you've seen us adjust our mark-to-market pretty significantly just literally from the third quarter of last year to now through the fourth quarter. I think we had 27% up to that I guess 48% or I might be giving the wrong number.

Laura Clark, CFO

41%. Sorry.

Howard Schwimmer, Co-CEO

So the markets are moving incredibly fast and it's not really dictating what happens in the future. So hard to predict. I don't know Laura, do you have any other thoughts on the future spreads.

Laura Clark, CFO

Yeah. I mean, when you look at 2022 at that 48% and then the overall portfolio average mark-to-market 41%, so that implies what are the lower puts into mark-to-market in the upcoming years. If we look at 2023, it's about a little bit under 40%, it's about 38% in 2024 at this point, is about 35%. So that gives you a little bit more visibility into the cadence there from a mark-to-market perspective.

Chris Lucas, Analyst

Great, thank you. That's very helpful. Laura as well I got you just a couple of detailed follow-ups. On the non-cash comp, you mentioned, you've got that $23.1 million of guide. Is there any of that is sort of locked in based on prior brands that are vesting or is this a floating number? I'm just trying to understand how much is variable.

Laura Clark, CFO

Yes, Chris, the $23 million is based on performance and will be paid out over the next three years. The specific metrics that determine how this is paid out can be found in our proxy and 10-K. In general, it relates to absolute earnings growth and relative total shareholder return. These amounts will be realized when we reach the measurement points in each year.

Chris Lucas, Analyst

Okay. Regarding guidance, how do you handle the unexercised forward ATM when you're not factoring in acquisitions? I'm trying to understand how that impacts your projections.

Laura Clark, CFO

If you consider the year-to-date numbers, we have acquired $170 million, and I currently have $134 million outstanding on the forward. From a forward perspective, there is an assumption based on funding that could include that $170 million. These forward proceeds could definitely be used to support that funding.

Chris Lucas, Analyst

Okay. And last question for me, just you mentioned some of you mentioned earlier that there were a couple of fixed renewals or unique renewals that's sort of impacting that number. Just curious as to how much of the portfolio has fixed renewal options to it?

Howard Schwimmer, Co-CEO

Very little. Occasionally, we purchase an asset that may come with an existing lease, which can sometimes be a result of a prior poor decision, like the one I mentioned in the San Diego market. But overall, I would say it is very little. Rexford does not provide anyone with a fixed option; everything is upmarket.

Chris Lucas, Analyst

Okay. Thank you, Howard. Appreciate all the color.

Michael Frankel, Co-CEO

I was going to say in 20 years of doing this, I can't remember ever providing that good at least.

Chris Lucas, Analyst

Thanks.

Laura Clark, CFO

Thank you, Chris.

Operator, Operator

Great. Thanks. Laura just following up on the same-store expense growth, how should we think about this non-recoverable overhead allocation affecting same-store growth going forward past this year? I mean I think it's clear you guys are looking to keep growing, but after these new hires and raises, do you think you're at a point at which you think your scale can kind of minimize this as a headwind in future years or are there any other ways to kind of mitigate it as you grow into the future?

Laura Clark, CFO

Hey, Blaine. That's a good question. We won't be providing guidance for 2023 today, but I can give you some insights on how to think about the timing of hiring. The timing can vary from year to year, and sometimes there's a need to catch up. For example, at the end of 2020 and the start of 2021, we were operating in a COVID environment with significant uncertainty while still growing quickly, but hiring may have slowed. As a result, there might be years where we need to catch up. Looking at 2021, our overhead could have been somewhat understated because the hiring that took place was more back-end weighted, and you're seeing the effects of that catch-up in 2022. Moving forward, we want to ensure we are planning ahead, without getting too far ahead, to support our growth. From a general and administrative perspective, we are benefiting from our scale. In 2021, general and administrative expenses as a percentage of revenue were 10.8%, down from 11.2% in 2020, and this has continued to decline over the past four to five years. We expect to maintain this trend in 2022, recognizing the synergies within our platform. What we see regarding overhead allocation is influenced by timing factors.

Michael Frankel, Co-CEO

And Blaine just to add to that briefly, we talked a lot about operating leverage in the business, we've talked a lot about it since our IPO roadshow in 2013 and it's very important to us, we think it's the hallmark of a great company that we do have very strong embedded operating leverage built into the business, but we do believe will be accelerating into the next, call it, two to five years. And I think if you look at the performance of the company, it's kind of all reflected in your FFO per share growth right at the end of the day, and in our FFO growth and the level of FFO and FFO per share growth and AFFO growth that we're driving is increasing pretty dramatically. And another measure in my view of operating leverage is the amount of internally generated cash that we're generating that we can use towards driving our internal growth, which is very substantial and growing and that's very accretive for shareholders. So I think we look at across a range of metrics and I think we're really well positioned for the company to be increasing that level of margin and NOI margin and operating leverage that is embedded in the business model as we grow here.

Blaine Heck, Analyst

Thanks, Michael. That's helpful. And sticking with you or maybe even Howard, given the ramp-up we've seen in investment and into redevelopment and repositioning and it seems like you guys are going to continue there. I wanted to ask about the upward pressure that we've seen on construction costs and labor and how you guys are dealing with those increasing costs or maybe even mitigating that exposure somehow?

Howard Schwimmer, Co-CEO

Sure, I'll take that one. Well, yeah, there is no mystery obviously construction costs have been rising and doing so very rapidly. What we're doing is trying to buy out some of the commodity type materials early on, give you an example for instance, the roof systems, we're buying those literally 14 months prior to when we need them to lock in those prices and to avoid further price increases that are happening in those and then there is steel fire sprinkler systems, roofing materials. Those are all things that we can buy up early on in these projects and mitigate some of those cost increases. So we have a very thoughtful approach to it and I think it's going to show in terms of how you see the yields growing in our projected returns and you saw that quarter-over-quarter in all of our assets that could redevelopment or repositioning where we had expanding yields.

Blaine Heck, Analyst

Great. Thanks, Howard. Thanks everyone.

Operator, Operator

And we have reached the end of the question and answer session. I'll now turn the call over to management for closing remarks.

David Lanzer, Host

Well, on behalf of the entire Rexford Company and our Board of Directors, we want to thank everybody for joining us today. Stay well, stay healthy, and we look forward to reconnecting in a few months. Thank you, everyone.

Operator, Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.