Q3 2023 Rexford Industrial Realty Inc Earnings Call

Participants

David E. Lanzer; General Counsel & Secretary; Rexford Industrial Realty, Inc.

Howard Schwimmer; Co-CEO & Director; Rexford Industrial Realty, Inc.

Laura Elizabeth Clark; CFO; Rexford Industrial Realty, Inc.

Michael S. Frankel; Co-CEO & Director; Rexford Industrial Realty, Inc.

Blaine Matthew Heck; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division

Camille Bonnel

Craig Allen Mailman; Research Analyst; Citigroup Inc., Research Division

Greg Michael McGinniss; Analyst; Scotiabank Global Banking and Markets, Research Division

John P. Kim; MD & Senior U.S. Real Estate Analyst; BMO Capital Markets Equity Research

Michael William Mueller; Senior Analyst; JPMorgan Chase & Co, Research Division

Nathan Daniel Crossett; Analyst; BNP Paribas Exane, Research Division

Nicholas Gregory Joseph; Director & Senior Analyst; Citigroup Inc., Research Division

Nicholas Patrick Thillman; Research Associate; Robert W. Baird & Co. Incorporated, Research Division

Vikram L. Malhotra; MD; Mizuho Securities USA LLC, Research Division

Vince James Tibone; MD of Retail & Industrial; Green Street Advisors, LLC, Research Division

Presentation

Operator

Greetings, and welcome to Rexford Industrial Realty Inc. Third Quarter 2023 Earnings Call. (Operator Instructions). 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 E. Lanzer

We thank you for joining Rexford Industrial's Third Quarter 2023 Earnings Conference Call. In addition to the press release distributed yesterday after market closed, we posted a supplemental package and investor presentation in the Investor Relations section on our website at rexfordindustrial.com.
On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined by Federal Securities Laws. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information about these risk factors, please review our 10-K and other SEC filings.
Rexford Industrial assumes no obligation to update any forward-looking statements in the future. 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 S. Frankel

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 and 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 and 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 2 years, assuming today's rents. Our largest driver of NOI growth derives from our repositioning and redevelopment work, which we continue to grow as we mine our in-place portfolio for incremental value creation opportunities, and as we layer in new investments, that 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

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.
A 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 dock workers 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 and quality 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%, representing 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 Elizabeth Clark

Thank you, Howard, and thank you to our incredible Rexford team. Your exceptional performance and value creation focus continues 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 2 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 today 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 2 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 ESGi 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?

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Camille Bonnel with Bank of America.

Camille Bonnel

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 feel very different than it was 3 months ago? Do you expect this trend to continue?

Howard Schwimmer

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, neatly responsible for a large amount of absorption.

Laura Elizabeth Clark

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, i.e. Orange County and San Diego.

Camille Bonnel

And it looks like some of the stabilization date in your redevelopment program were pushed out. What were the factors influencing this? And how is your leasing pipeline tracking?

Laura Elizabeth Clark

I'll take that, Camille. So in terms of timing pushes in terms of 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 friendly levels of demand. But as we look forward, currently sub timing, we believe, will be more consistent with pre-COVID levels, which is around that 6-month area.

Camille Bonnel

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 FFO contribution. It's driven by changes in the overall portfolio proposition. One hasn't the lease expiration schedule remain relatively stable?

Laura Elizabeth Clark

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 FFO and cash flow. 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 has grown 80%. So as we convert market, the convert -- the mark-to-market in the cash flow and FFO unless market rent growth continued at those same levels. 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 on an impressive leasing spreads, 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, [3, 3] quarters.
The last real component that moves around the mark-to-market has not impacted it 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 an accretive stabilized yields.
Today, our repositions and redevelopments are generating 6.4% stabilized yields. And 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 are also part of that move in and out of pool for mark to market and can certainly have an impact.

Operator

Our next question comes from the line of John Kim with BMO.

John P. Kim

Thank you. On the net absorption, your stats are positive, but it does (inaudible) I think from some of your spaces 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 S. Frankel

Hi. Thanks so much for joining us today. And 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 Elizabeth Clark

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, is what we would deem to be kind of higher quality, higher functional type buildings.
So said another way, 80% of the product that's hitting the market in terms of the negative net absorption throughout a year, doesn't directly compete with Rexford. And so this, like I mentioned, this trend has really helped throughout each quarter of the year and certainly speaks to the metrics that, and to the results of our portfolio and that differentiation is certainly driving our results.

John P. Kim

Okay. I noticed the lease term that you signed this quarter. First of all, are your leasing stats signed or commenced? That's Part A, but on the lease...

Laura Elizabeth Clark

It's signed.

John P. Kim

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 Elizabeth Clark

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 repositioning and redevelopments, giving us the ability to capture revenue while we're positioning those for construction start.

John P. Kim

So would you characterize that aberration or going forward or at least term is going to be shorter nature?

Laura Elizabeth Clark

Yes, I think it was really driven by -- there were about 3 to 4 deals that had a larger impact on the weighted average lease during this quarter.

John P. Kim

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 outer 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 Elizabeth Clark

I think it's important as you think about the -- first of all, the calculation there and you can certainly have various rounding impacts. But I think it's important to look the disclosure are a few comments there on the disclosure that we provide by year from a mark-to-market perspective. Because you'll see that the change in mark-to-market has varied across years. And so that's really driven by the pool of leases that's included in any given year that's constantly changing.
That's driven by the leasing activity that we're doing, the acquisitions, the properties we're moving to repositioning and redevelopment. So just by way of example, if you have a lease that expired in the third quarter of '23, and we executed a new lease, I'd say we executed a new lease at 100% leasing spread we captured that mark-to-market, and that NOI is now reflected in our cash flow.
Let's say that, that lease had a 3-year lease term. That expiration is now reflected in our 2026 mark-to-market at the market rent and that resets the market -- mark-to-market to zero. So because of these constant changes within the pool across various years that are driven by a number of factors, you will see different impacts from a mark-to-market perspective.

John P. Kim

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 Elizabeth Clark

Yes. I mean this -- if you look at this quarter, the mark-to-market change for 24 and 26 were actually closer to 1,200 basis points. And the factors that I just mentioned drove those changes.

Operator

Our next question comes from the line of Blaine Heck with Wells Fargo.

Blaine Matthew Heck

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 Elizabeth Clark

Hi, Blaine, thanks for joining us today. I'll jump in here as well. As we've mentioned and it continues to be a significant focus is going to 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, 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're going to continue to assess debt and equity and dispositions and sources of capital in relation to the hurdle rates in which we're solving to today as well as the embedded growth of those investments are going to contribute over the long-term [Director].
In terms of dispositions, specifically, there will be another potential source of capital. We believe that there is a great opportunity to realize the value-creation efforts that 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 Matthew Heck

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 that?

Michael S. Frankel

Hi, Blaine, it's Michael. No, I was just going to say that, 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 kind of tough just to speculate.

Blaine Matthew Heck

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 S. Frankel

Sure. It's pretty interesting in terms of what we're seeing in the market. Demand is pretty broad-based. And despite economic concerns generally in the overall economy, we see demand from consumer products, food industry, the beverage industry, a lot of incremental demand reflected in the leasing activity during the quarter from those sectors. We continue to see the electric vehicle market as a very strong contributor towards demand. We continue to see distribution companies, whether they're e-commerce driven or 3PLs.
Obviously, all the change in shipping in the 3PL market, given the incredible growth in demand they saw during the pandemic. But nonetheless, we continue to see very healthy demand from the 3PL market and e-commerce players in general. And omnichannel distribution for your traditional retailers is here to stay. It's a path to survival for retailers.
And so we continue to see demand from traditional all-time retailers who are building out -- continue to build out their omnichannel distribution capability, requiring warehouses closer to their end points of distribution. So pretty broad-based demand drivers, actually, which is great to see.

Operator

Our next question comes from the line of Craig Mailman from Citigroup.

Nicholas Gregory Joseph

It is 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 S. Frankel

Hi, Nick. Thanks so much for joining us today. And it's similar to our acquisition activity. There are so 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. That we don't give acquisition guidance.
Similarly, on the disposition front, although we have a lower [mansional] range of properties as with the potential disposition candidates that are actively in process, there's so many factors that play into when and whether they close and in what time frame. So we just are ready to give that kind of guidance, but we hope that you'll be pleased when we actually announce closings.

Nicholas Gregory Joseph

Yes. No, I appreciate that. I guess not necessarily looking for guidance, but I think you obviously talked on the acquisition pipeline. So hoping 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 S. Frankel

Again, with regard the reason we give a visibility on the pipeline for acquisitions is arguably, there are more things in our control because we're the buyer and on the disposition front, there are fewer things in our control because we just can't predict how a prospective buyer may behave or may close. So we just don't give that kind of guidance, and I apologize. But just not -- we just don't find a big benefit in giving that kind of guidance.

Nicholas Gregory Joseph

All right. And then just one other question on the dispositions. You mentioned maybe 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 S. Frankel

Well, consistent with the notion that we're harvesting our value creation, we wouldn't expect the impact to be terribly material.

Craig Allen Mailman

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 kind of color would be helpful.

Howard Schwimmer

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, frankly, much of any other competition. We're going to wait until we close, and then we'll be happy to provide full details.

Craig Allen Mailman

Okay. And just one last one. You guys bought the Tireco building in the sale leaseback with them back in 1Q, 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 Elizabeth Clark

Hi, Craig. In terms of Tireco specifically, we are in constant communication with our tenants and Tireco specifically. And at this time, and based on those conversations, they currently have no intentions of vacating in 2025.

Craig Allen Mailman

Okay. And they have options to stay?

Laura Elizabeth Clark

They do, they have options.

Craig Allen Mailman

Okay. Perfect.

Laura Elizabeth Clark

And those options are -- that they have fixed options to stay.

Craig Allen Mailman

And they led to 4% annually, just in perpetuity?

Laura Elizabeth Clark

3%.

Craig Allen Mailman

3%? Okay. Great. Thank you.

Operator

Our next question comes from the line of Greg McGinniss with Scotiabank.

Greg Michael McGinniss

Hi, there. 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 or redevelop anyways?

Laura Elizabeth Clark

Well, it's that -- those can be 2 separate things. So to your point, yes, on the vacate side to a comparable, there's not obviously a comparable rent. But on the repositioning, redevelopment, this can be a different set of properties. So as we are able to get properties back and execute on the repositioning and redevelopment plan, then they move out of the mark to market.

Greg Michael McGinniss

Right. But I'm saying so, is the rent growth, the mark-to-market assumed on those properties. Is that contingent on repositioning?

Laura Elizabeth Clark

For those properties that are moving into the repositioning? The repo and repositioning pipeline, is that your question specifically?

Greg Michael McGinniss

Yes. I'm just trying to like basically CapEx requirement on achieving the 56% mark-to-market.

Laura Elizabeth Clark

No, that is not -- they are not.

Greg Michael McGinniss

Okay. And then is there beyond like typical second-generation TIs, is there any additional spend that we should be thinking about for achieving the mark-to-market?

Laura Elizabeth Clark

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, capital -- recurring capital spend.

Greg Michael McGinniss

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 Elizabeth Clark

In terms of the overall portfolio or the same property pool? What specifically....

Greg Michael McGinniss

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 Elizabeth Clark

Yes, I can. Greg, maybe it'd be better offline. I can take that with you and walk you through the components of that.

Operator

Our next question comes from the line of Nick Thillman with Robert W. Baird.

Nicholas Patrick Thillman

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 Elizabeth Clark

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 1 month. That's in line with our guidance and in line with our prior 4 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. Yes, your question around TI is no, we haven't seen any material change in terms of TI.

Nicholas Patrick Thillman

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 Elizabeth Clark

Yes, that would be included in the acquired leases.

Operator

Our next question comes from the line of Vince Tibone with Green Street.

Vince James Tibone

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 Elizabeth Clark

Hi, Vince. Thanks for joining us today. In terms of our same property occupancy guidance, yes, as you mentioned, our guidance for the full year is 97.75%. So we did tighten our guidance range to the midpoint. That occupancy -- the occupancy guidance implies a decline in the fourth quarter, about 60 basis points. Just as a reminder, our prior guidance also implied a decline of about 30 basis points in the second half of the year, largely driven by down -- a bit more downtime in some spaces where we are performing some light and moderate repo, and that factored into our prior guidance.
New into our updated guidance, about is that we have a 30 basis point impact from a space that we got back from a tenant that was on our pre-watchlist, and that moved the guidance range to our midpoint. That was a tenant, just a little color there, who went through an acquisition of their business earlier this year. We've had them on the pre-watchlist for several quarters now. They had some challenges in the integration of that merger. And so we did get that space back at the end of the quarter.

Vince James Tibone

Great. And then since the port labor agreement has been finalized and some of the backups, the Panama Canal have gotten worse. Have you seen any pickup in tenant interest or porting activity or other side that -- so industrial could benefit from some of these factors?

Howard Schwimmer

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. So through cycles, we haven't really seen impact from port slowdown or shutdowns, et cetera, in terms of that tenant base that we focus on and is in the portfolio. But the ports are really more connected a super-regional global trade.
So some of the larger buildings that typically you'll see out in the Eastern and even the Western Inland Empire absolutely, certainly, that's a benefit. There's a lot of revenue generated from ancillary services and so forth throughout Southern California through port volumes. So it's really nice to see those volumes increase and hopefully, that it's a go-forward trend in terms of some further recovery.

Vince James Tibone

Great. And if I could maybe 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 Elizabeth Clark

Hi, Vince, I'll take that around the transaction market. We continue to see capital flowing into the Southern California market. And interestingly, we're seeing new market entrants into industrial. And that has been, I'd say, an incremental change over the past quarter or 2. So although, yes, you've certainly seen an increase in interest rates and certainly availability of that capital can be challenging. There continues to be transactions occurring in the market and cap rates really haven't moved that materially, maybe up about only about 25 basis points.
Buyers are still accepting lower cap rates for properties that have mark-to-market and are even taking on -- waiting some time to get to stabilization. So there's a property that traded just recently in the North Orange County, Mid County market above $50 million transaction, going an initial cap rate of 3.4%, stabilizing about 5 years from now, a little over 5%. And that was and that was a new entrant to the market from a buyer perspective. So there continues to be even with the increase in interest rates, there continues to be capital flowing into the market.

Operator

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

Michael William Mueller

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

Hi, Mike, it's Howard. Those yields vary. Some of them are legacy acquisition that we might have bought at the peak of the market, that might have a bit of a lower stabilized yield, while there's others that have substantially higher, above that 6.4% rate stabilized yield that we're moving.
So 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 have to do with when we're actually going to get to the asset that we can stabilize. We've got quite a few examples of assets we've bought recently that had very strong in-place rents in place where we're able to entitle properties and then start construction maybe 2, 3 years down the road and get to even higher stabilized rates on top of that. So we're really selective. And as far as bringing in some of these assets, that strategy definitely is different than it would have been looking back a year or 2 years ago.

Laura Elizabeth Clark

Hi, Mike, and just Michael, a little bit more color there. We added 7 new projects to reposition redevelopment pipeline or current in process, representing about 600,000 square feet of properties.
On those investments, the yield -- the aggregate stabilized yield is 6.5%. So actually coming in a bit above the aggregate yield for everything and the repositioning, redevelopment pipeline.

Operator

Our next question comes from the line of Vikram Malhotra with Mizuho.

Vikram L. Malhotra

Just 2 quick ones. So first of all, on the mark-to-market, the changes if I just run the math sort of 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, 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 25% to 30% by the year-end '24? Is it fair?

Laura Elizabeth Clark

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. So that by the end of 2023, so I think next quarter, it's 52% by the end of 2024, it's 42%.
Now as a reminder, there's -- as they talked about earlier, there's a lot of different components, right, that can impact that. The leases that we're executing, repositioning and redevelopment opportunities. So acquisitions that we're acquiring but based on the current portfolio and where it sits today, the end of 2024, we would be at a 42% projected portfolio net effective mark-to-market.

Vikram L. Malhotra

Okay. But just to clarify that 1% market rent growth, if I just flow that through the forward projections that you have made, I'm just still -- it's still hard to get to such like the 600-point change in, say, '25. So I'm wondering the sort of variability in that negative 1% to market rent growth.

Laura Elizabeth Clark

There's some variability. And that's obviously driven by -- because the change in market rents is not straight line across the portfolio. So there's durability in terms of submarkets, there's durability in terms of the size of basis. But as I mentioned before, there's many other factors that are driving the mark-to-market besides the change in end market run.

Vikram L. Malhotra

Okay. Fair enough. And then just a follow-up on your largest tenant, the Tireco acquisition or exploration. Can you just clarify, I think you said the automatic renewals? Or is it just highly likely they're going to renew? I only ask because it seems like in '25, there is a step down. And I'm wondering what you have sort of embedded on renewal for that lease?

Laura Elizabeth Clark

Yes. Yes, they have an option to extend their option to renew the lease, and that's a fixed option at 3%. So that is impacting our mark-to-market in 2025 because we're capturing that option at 3% and not what would be the embedded mark-to-market if we were to get that space back.

Vikram L. Malhotra

And -- sorry, just as it stands today, is that a roll up or a roll down if nothing changes?

Laura Elizabeth Clark

In terms of if we were to get the space back, would that roll up or down? Is that your question?

Vikram L. Malhotra

Yes. I guess you're saying you're not getting the full mark-to-market because of the 3%.

Laura Elizabeth Clark

That's correct. It would roll up.

Vikram L. Malhotra

It would roll up. Okay.

Laura Elizabeth Clark

It would roll up that base is below market today.

Operator

(Operator Instructions). Our next question comes from the line of Nate Crossett with BNP.

Nathan Daniel Crossett

A quick one on just recurring CapEx. It's up quite a bit 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 Elizabeth Clark

Hi, Nate, thanks so much for your questions today. So in terms of recurring CapEx, it's really largely driven by seasonality especially related to exterior work within the third quarter and some into the second quarter, we do take advantage of some of the hotter dryer weather conditions for that exterior work such as roof and exterior painting. So that really drove our third quarter capital expenditures higher. As we look forward, we would expect fourth quarter to be more in line with prior quarters.
And to your question around G&A, I'll note this is the first increase in G&A in 2023. We do continue to realize really significant operating synergies. Our G&A as a percentage of revenue for the full year is expected to be 9.6%, and that compares to 10.2% in the prior year.
In terms of the fourth quarter, the driver is really primarily related to noncash equity true-up, and that's related to performance-based equity compensation. So that noncash equity compensation is not realized unless Rexford is continuing to perform at elevated levels. So that's the primary driver in the fourth quarter.

Nathan Daniel Crossett

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 Elizabeth Clark

Yes. This quarter, our embedded rent steps on our executed leases was 4.3%. And then compared to the prior quarters, this is actually the highest rent steps that we've signed [3] of the past 3 year-to-date and the second quarter embedded rent (inaudible) 4.1%. And in the first quarter, they were 4%.

Operator

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Michael S. Frankel

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

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.