Q3 2024 Rexford Industrial Realty Inc Earnings Call
Participants
David Lanzer; General Counsel, Secretary; Rexford Industrial Realty Inc
Michael Frankel; Co-Chief Executive Officer, Director; Rexford Industrial Realty Inc
Howard Schwimmer; Co-Chief Executive Officer, Director; Rexford Industrial Realty Inc
Laura Clark; Chief Financial Officer; Rexford Industrial Realty Inc
John Kim; Analyst; BMO Capital Markets
Jeff Spector; Analyst; BofA Global Research
Craig Mailman; Analyst; Citi
Nicholas Yulico; Analyst; Scotiabank GBM
Nick Thillman; Analyst; Robert W. Baird & Co., Inc.
Mike Mueller; Analyst; JPMorgan
Blaine Heck; Analyst; Wells Fargo Securities, LLC
Vikram Malhotra; Analyst; Mizuho Securities USA
Samir Khanal; Analyst; Evercore ISI
Richard Anderson; Analyst; Wedbush Securities Inc.
Brendan Lynch; Analyst; Barclays
Presentation
Operator
Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rexford Industrial Realty Incorporated third-quarter 2024 earnings conference call. (Operator Instructions)
Thank you. And I would now like to turn the conference over to David Lanzer, General Counsel. You may begin.
David Lanzer
We thank you for joining Rexford Industrial's third-quarter 2024 earnings conference call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and an 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 an explanation of why such non-GAAP financial measures are useful to investors.
Today's conference call is hosted by Rexford Investor's Co-Chief Executive Officers, Michael Frankel and Howard Schwimmer; together with Chief Financial Officer, Laura Clark. They will make some prepared remarks, and then we will open the call for your questions.
Now, I turn the call over to Michael.
Michael Frankel
Thank you, David, and thank you, everyone, for joining Rexford Industrial's third quarter earnings call. I'll begin with a few remarks, followed by Howard and Laura.
To begin with, I'd like to thank our Rexford team for your outstanding work delivering another strong quarter. Our team generated a 5.4% increase in FFO per share compared to the prior year quarter, which brings our FFO per share growth to 9.3% for the first nine months of the year compared to the prior year period.
With our consolidated stabilized portfolio occupancy of 97.6% at quarter end, our infill Southern California tenant base continues to demonstrate resiliency, driven by the mission-critical nature of our infill locations, fueled by regional consumption that remains stable and has continued to grow each year since 2021, driven by the nation's largest regional population and most diverse economy.
With regard to general market conditions, increased levels of global unrest, uncertainty related to the presidential election, and an uncertain economic outlook, continue to weigh on markets and business decision-making. Although our infill Southern California industrial market continues to demonstrate superior long-term tenant demand fundamentals, current leasing activity reflects some tenants taking longer to make decisions. Looking forward, as the economic and political environment stabilize, we believe our infill Southern California industrial markets, favorable supply demand drop inherently positions our market for future rent growth.
Most importantly, our Rexford portfolio remains well positioned for favorable FFO per share and net asset value growth driven by the high quality of our properties and the substantial volume of value-add property repositioning and functional enhancements driving the accretive internal growth embedded within our in-place portfolio. By way of indication, assuming zero market rent growth, we currently project about 34% cash NOI growth embedded within our portfolio realizable over the next three years.
And with this, I'm very pleased to turn the call over to Howard.
Howard Schwimmer
Thank you, Michael, and thank you all for joining us today. Rexford ended the third quarter with solid operating results, a testament to our value creation business model. The Rexford portfolio continues to be favorably positioned relative to the overall infill market. We executed 1.6 million square feet of leases, driving 394,000 square feet of positive net absorption, equal to positive 80 basis points, outperforming the overall market's negative 25 basis points of net absorption according to CBRE.
Leasing spreads in the quarter showed continued strength at 39% and 27% on a net effective and cash basis, respectively, in line with our prior quarter projections. Additionally, annual embedded rent steps in our executed leases averaged 3.9%. Excluding the lease up of the 275,000 square foot DuPont repositioning project, rent steps averaged 4%, in line with prior quarters year-to-date.
With regard to market rents, we have seen taking rents for highly functional product comparable to the Rexford portfolio down approximately 2.5% sequentially and 7.5% year-over-year, reflecting continued normalization following the extreme market rent growth during the pandemic of over 80% in aggregate within our infill markets.
Turning to Rexford's investment activity. During the quarter, we completed $60 million of investments and subsequent to quarter end, we closed an additional $70 million investment through an off-market transaction. In aggregate, these investments comprising 550,000 square feet are generating an initial yield of 5.8% and a projected unlevered stabilized yield of 5.9% on total cost. Looking forward, we currently have approximately $200 million of investments under contract or accepted offer, which are subject to customary closing conditions.
Moving to our capital recycling program. During the quarter, we disposed of one property, bringing year-to-date disposition activity of $44 million, generating a 12.8% weighted average unlevered IRR. In addition, we are negotiating on over $90 million of dispositions, which will be subject to customary closing conditions.
During the third quarter, we rent commenced and stabilized three repositioning and redevelopment projects totaling approximately 325,000 square feet, representing a total investment of $99 million. These projects achieved a weighted average unlevered stabilized yield on total investment of 7.6%. Year-to-date, we have stabilized seven projects across 450,000 square feet, which achieved an 8.4% weighted average unlevered stabilized yield on total investment of $165 million.
In the quarter, we also leased our 275,000 square foot DuPont property in the Inland Empire West, which stabilized subsequent to quarter end at a 5.5% yield. Importantly, I'd like to thank our Rexford team for your entrepreneurial efforts that continue to drive Rexford's success.
And with that, I'm pleased to turn the call over to Laura.
Laura Clark
Thank you, Howard. Third quarter results were in line with expectations. FFO per share was $0.59, representing 5.4% growth over the prior year quarter. Same-property NOI growth on a net effective and cash basis was also in line with projections at 2.6% and 5.3%, respectively, bringing year-to-date same property NOI growth to 4.7% on a net effective basis and 7.7% on a cash basis.
Third quarter net effective same-property NOI growth was driven by a positive 750-basis-point contribution from base rent growth, primarily offset by a few items, including 320 basis points related primarily to lower straight-line rent associated with an elevated level of early renewals last year, an 80-basis-point impact from the timing of recoveries associated with higher seasonal utility expenses and property taxes, and a 70-basis-point impact related to bad debt. While bad debt in the quarter was a healthy 30 basis points in revenue, the third quarter of 2023 included the positive reversal of a prior reserve impacting the current quarter comp.
In regard to the balance sheet, net debt to EBITDA was 4.7 times, near our long-term target leverage range of 4 times to 4.5 times. During the quarter and subsequent to quarter end, we settled $220 million of outstanding forward equity related to our March equity offering and currently have $614 million of net forward proceeds remaining for settlement. In total, we have liquidity of approximately $1.7 billion, including $62 million in cash on hand and $995 million available under our revolving credit facility. We have no near-term debt maturities until mid-2026, assuming extension options.
Turning to guidance. 2024 FFO per share guidance has been increased by $0.01 at the high and low end of the range to $2.33 to $2.35, representing 7% year-over-year earnings growth per share at the midpoint. Note that our guidance does not include future acquisitions, dispositions, or related funding that has not yet closed.
2024 same-property NOI growth guidance is now 4.25% to 4.75% and 7% to 7.5% on a net effective and cash basis, respectively, both within the range of our previous expectations, reduced 25 basis points at the midpoint. Drivers of our same-property NOI growth range includes the following expectations. First, 2024 average occupancy of 96.5% to 96.75% compared to our prior range of 96.5% to 97%. We expect fourth quarter occupancy to be impacted by a few known move-outs included in our prior guidance, combined with the timing of lease commencement on vacant units that are now projected to commence in early 2025. Second, full year leasing spreads in line with the prior quarter's forecast at 55% on a net effective basis and 40% on a cash basis. Third, concessions for the full year of approximately 1.75 months up from 1.5 months, largely driven by three leases with longer duration signed in the third quarter. Finally, bad debt as a percentage of revenue in the 50-basis-point area, in line with year-to-date and historical averages.
Our updated same property NOI growth guidance also includes the projected move out of LL Flooring, occupying 504,000 square feet at our Mission Boulevard property, who sold their business after recently filing for bankruptcy. We anticipate the tenant will vacate the building at the end of November. However, for our original redevelopment plan, we are currently in the entitlement process.
While the vacate of this large space has an outsized impact on portfolio occupancy, the impact to NOI is relatively nominal due to the current estimated rental rate being approximately 250% below market.
Other components of our increased FFO per share guidance range include a positive $0.01 per share contribution from $131 million of acquisition activity, plus an incremental $0.01 per share contribution related to higher-than-expected occupancy in our nonsame-property pool, which represents approximately 27% of our total portfolio. The incremental NOI contribution from repositioning and redevelopments is in line with our prior projections, and full year G&A of $83 million is also unchanged.
Looking forward, over the next three years, we have an estimated $222 million of internal cash NOI growth embedded within the current portfolio, assuming no further acquisitions in today's market rents and includes $91 million of incremental NOI from repositionings and redevelopments, $72 million from the portfolio cash mark-to-market of 19% as we roll in place rents to current market rates, $51 million from portfolio annual embedded rent steps averaging 3.7% and $8 million from acquisitions closed in the quarter and subsequent to quarter end. Together, this represents 34% growth in cash NOI over the next three years. Note that in the third quarter, we captured approximately 350 basis points of mark-to-market, realizing $13 million of incremental annualized NOI.
Finally, I would like to quickly touch on the three-year FFO per share outlook we spoke about at the beginning of the year. Based on the dynamic market environment and current conditions, as well as the inherent challenges of forecasting the timing of market inflections, we will be focusing on our annual guidance going forward, which we will provide when we report fourth quarter earnings in early February.
Before I turn the call over for your questions, I want to recognize and thank our Rexford team. We are inspired daily by your passion and pursuit of excellence. Thank you for all you do to drive the success of Record. Operator?
Question and Answer Session
Operator
(Operator Instructions) John Kim, BMO Capital Markets.
John Kim
Thank you and good morning. I wanted to ask about the slow decision making that a lot of your tenants you're talking to you are having today. It seems like it's a common theme. What would you attribute this to in terms of are tenants pushing back on the higher rent levels versus uncertainty in the economy and the upcoming election? Or is it something else like the cost of holding inventory or automation or another reason?
Michael Frankel
Hi, John. It's Michael. Thank you so much for joining us today. No, I think it's predominantly driven by factors that are not necessarily specific to the company, the tenant or their industry or sector, really more driven by some of the macro concerns and general decision-making around the economy.
And I think we're seeing really short-term impacts by elevated levels of economic uncertainty really driven in part by geopolitical and unrest globally, uncertainty around the election. Interest rates still remain sort of an uncertainty as well. I think a lot of folks had hoped there'd be more certainty around interest rates at this point in time. And we're really seeing tenants make decisions or slow their decision making, maybe it's kind of staying put.
And -- but we're also seeing, and I think it's important to note this, underlying strength in the businesses of our typical tenants. Regional consumption remained stable, strong and growing in Southern California. And frankly, our third Q leasing activity, I'm sure the team will get into this later, reflects performance that is essentially in line with our guidance set at the beginning of the year.
So again, we're not really seeing any big surprises in the tenant base in terms of decision-making in that respect. So I think really predominantly driven by macro factors. And in that sense, as those macro factors stabilize, we continue to see a favorable backdrop with regard to demand.
John Kim
Okay. And then on your rents that you signed this quarter, it was at [$17.88] on a GAAP basis. So I think it's kind of bounced around up and down this year. How indicative of the current rents or the rent you kind of the third quarter, how indicative of that is it versus rents that you will be signing for the remainder of the year and into 2025? It would suggest market rents declining more than 7.5% that you presented? And also, we're trying to figure out what the true mark-to-market is on 2025 expirations?
Michael Frankel
Yes. I'll start. The differential in rents is really more about the mix of leases. And I'll pass it to Laura with a little more detail on that for the rest of your question.
Laura Clark
Hey, John, thanks for your question. In terms of the -- in terms of Michael said it's true. It is about the mix of leasing. When we look at our full year guidance for net effective spreads as an example of 55% on a net effective basis and 40% on a cash basis is unchanged from our expectations last quarter. That does imply a 40% net effective spreads and 25% cash spreads into the third and fourth quarter. You can see that our third quarter spreads came in right in line with our expectations at 39% and 27%.
So as we look into -- as we look into the fourth quarter, we are expecting to generate similar spreads that we did this quarter. And really, what's driving that is the smaller spaces, our mark-to-market more near term. So I think on average, the average size is 9,000 square feet, an average term was 3.5 years.
John Kim
And do you have the expiring rent in 2025 expirations. It's presumably lower than the [$15.10] in your supplement.
Laura Clark
Yeah. We can follow up with you after the call.
John Kim
Okay. Great. Thank you.
Operator
Jeff Spector, Bank of America.
Jeff Spector
Great. Thank you. One follow-up from John's first question on the reason why tenants are making slower decisions. There is a key difference, Michael, from what you said what we heard at our conference from some of your peers in our broker call. And maybe there is a key difference, whether it's your tenant size, your markets. I mean, we were hearing the main reason is a result of excess space. Tenants took too much space. I don't think you mentioned that. So are you making a clear difference here? Or is that just -- is that another reason and you accidently left that off?
Michael Frankel
Hi, Jeff. Thanks so much for joining us. I think that we do see that as a driver. It's probably less of a driver than for the big box product. And so it's probably why you don't hear us emphasizing as much. We continue to see very high utility at our properties by our tenants, and we continue to hear of interest for more space, we're just seeing a delay in decision-making. So I do think the dynamics are a bit different for our smaller tenant base within our infill markets as compared to the big box market, and that's probably why you hear us not emphasizing in the way that you do for the big box market.
Jeff Spector
And then, Michael, you also said the mark-to-market is 34%. That would assume market rent stays flat from here. I think you're not providing market forecast now, but I guess, can you provide a little bit more color on that comment, the 34%. Are you saying you do feel that at least market rents are stabilizing?
Michael Frankel
I think the 34% is a reference to our embedded NOI growth. I'm not sure. Can you clarify the question a little bit?
Jeff Spector
Sorry, I thought at the beginning, you said the mark-to-market is 34%. It's on one of your slides. And that's -- I assume that's based on today's market rent. And so I didn't know if you were implying like you think market rents are finally stabilizing for your product?
Laura Clark
Hey, Jeff. This is Laura. The 34% that you're referencing is the embedded NOI growth within our portfolio over the next three years. We have about $222 million of embedded NOI growth from repositionings and redevelopments, mark-to-market, our embedded rent steps as well as the acquisitions we closed in the quarter.
Jeff Spector
Okay. Thank you. I appreciate that. And then my last, I just want to confirm, on the current redevs and lease-up redevs, I see some of that is coming online in the coming quarters. Any expectations on the lease on leases signed? Any comments you could make?
Howard Schwimmer
Hi, Jeff. It's Howard. Well, obviously, we've already commented on the time line for decision making being a little slower than we've seen in the past. That said, we are seeing reasonable amounts of activity on space, and we've made adjustments in terms of some of the lease-up time frames in the redevelopment and repositions. Just some things were pushed out, and on average, we pushed those out about two months and half of it is related to construction delays and half of it really being related to leasing.
But overall, there is activity out there, and really, I'd echo a lot of the comments Michael made in terms of some of the reasons why the decisions are slower. But we're fairly optimistic in terms of turning some of that activity into some signed transactions into the latter part of the year and into early 2025.
Jeff Spector
Great. Thank you.
Operator
Craig Mailman, Citi.
Craig Mailman
Hey, good morning. Just want to circle back to the redevelopment pipeline here. I know you guys are saying that you've been kind of stabilizing projects in the kind of high 7% range, but then DuPont was sort of a 5.5% stabilized. How should we think about where yields or returns are coming on the redevelopments that you guys have underway or going to start soon relative to that 7%? I mean, was the 5.5% a one-off? Or is that more of where returns are going to trend given kind of higher construction costs and moderating rents and maybe elongated lease-up time frames?
Howard Schwimmer
Hi, Craig. It's Howard. You can certainly refer to the supplemental that has all the data property by property in terms of projected yields. But in terms of that specific property, as you recall from some of our prior comments, 275,000 feet in the Inland Empire West had been one of the softest segments of that market because of the oversupply of the product. And so rents -- even when you just look around all the markets, rents declined probably, let say, the most for that kind of product because of the amount of vacancy that there isn't it. So that's really more of a one-off in terms of the stabilized yields you see there on that particular asset.
Craig Mailman
Right. Yes. No, I see the 6% unlevered yield in the deck. I just -- I was asked this question because I know the three-year roll forward that you guys told this quarter was really predicated primarily on the redevelopment. I think it was 11% to 13% that you had talked about. And I was just trying to get at the reason for pulling that if you guys are continuing to start redevs, and it feels like you feel pretty good about your return expectations. Could you just talk a little bit more about the decision to pull that guidance here so quickly after you gave it?
Laura Clark
Yeah, Craig. I think it's purely a function of timing because we are really excited about the embedded growth within the portfolio, and we're very, very well positioned to generate substantial growth over the near and long term. When we're looking at the forecast, and when you look back to the initial outlook that we set at the beginning of the year, it was based on the market dynamics at that time. Since then, there has been continued economic uncertainty.
So we believe it's prudent to push aside the forecast at this time. We're really focused on our 2025 growth. When we have better visibility, and we'll provide that -- those expectations when we report 4Q earnings. And the focus for us is executing on that significant and better growth within the portfolio.
Craig Mailman
Okay. That's fair. Just a clarification on LL Flooring, I know that it didn't last as long as you had hoped to get you through the planning stage or entitlement stage on that redevelopment. Do you anticipate doing a short-term lease there? Or should we just assume that, that's going to be down until you guys start to redev at [1601]?
Laura Clark
Yeah, Craig. I mean, we'll certainly put it on the market and see if we were able to get some short-term income in that space. It's not anticipated at this point in our guidance.
Craig Mailman
Okay. And then just maybe one last one. You guys are still seeing on a good amount of cash to deploy. And what we're hearing is stabilized yields are coming down on acquisitions, particularly in good gateway markets. How do you guys kind of -- what's in the acquisition pipeline? I know you guys don't always buy stabilize, you're buying some value add, how do you feel the return opportunities are relative to maybe the cost of capital you raised the equity at earlier this year?
Michael Frankel
Hey, Craig. Thanks again. It's Michael here. Thanks again so much for joining us today. And now, we're excited about any opportunities that you -- that we might have in our pipeline. The only reason that they are in our pipeline is because we believe they're going to deliver substantial accretion relative to our steady-state cost of capital and -- which would mean accretive to, on average, to the near term impacts to the company as well as long term.
It doesn't mean from time to time, we might not buy a vacant asset, but we're going to expect that we're going to get paid for that with much substantially higher stabilized yield. But in general, you're going to see us continue buying, on average, cash flowing assets with, in general, opportunities to create value that we believe are going to be accretive to the portfolio and to shareholders, both in the near and long term on average.
Craig Mailman
Great. Thank you.
Operator
Nicholas Yulico, Scotiabank.
Nicholas Yulico
Thanks. Hi, everyone. I just wanted to go back to the same-store occupancy change in guidance. So in terms of the tenant move out that you talked about, can you just quantify how big of an impact that was on the same-store occupancy guidance?
Laura Clark
Yeah. In terms of our same-store occupancy guidance, we did reduce the midpoint by about 25 basis points. So -- and we reduced [a high volume of] about 25 basis points. In terms of the drivers, the two drivers, rent commencement timing on vacant units, we pushed out projected commencement into early '25. That's about half of the drivers. Just given the overall leasing dynamics, where tenants are delaying leasing decisions and overall leasing negotiations are taking a little bit more time, we pushed out that projected timing.
I'll note that on really the 10 largest units that account for the majority of the change, we do have activity on about six of those units. So it's more of a function of expecting that commencement to be in 1Q and not 4Q. And then, LL Flooring is about 10 basis points.
Nicholas Yulico
Okay. Yeah. Thanks, Laura. So yes, just following up on that. So it sounds like the piece that's being delayed to 2025, there's not anything specifically leased for that space, and there's a lease and there's -- leasing places just not going to commence until next year. It's all sort of speculative leasing that is being delayed into the occupancy for next year?
Laura Clark
Yeah. It's just based on our expectations in terms of commencements and the activity we have in place and the paper that we're trading today.
Nicholas Yulico
Okay. Thanks.
Operator
Nick Thillman, Baird.
Nick Thillman
Hey. Good morning out there. Laura, I wanted to kind of touch on some of the leasing mix dynamics you kind of laid out on the smaller tenants having shorter lease terms, so you've kind of already converted that mark-to-market on that term. But maybe just looking at your schedule, like should we kind of view that as 2026 is kind of more larger leases that, that would be greater spreads? Or like how should we think about that dynamic?
Laura Clark
Yeah. I'm certainly not going to speak to spreads for next year or 2026 at this point in time and look forward to providing more -- yes, more guidance around our spread expectations when we report fourth quarter earnings and put out 2025 guidance. I think it's important to look at, we have provided the portfolio net effective mark-to-market at 31% and our cash mark-to-market today is a strong 19% as well.
Nick Thillman
And then going -- pivoting back to kind of the repositioning redevelopment sort of bucket, like how much of that NOI flow through are we kind of expecting like? Is this we could capture half of it loaded into '25? Or is this more of a back half sort of weighted forecast?
Howard Schwimmer
Are we -- are you asking specifically about the product that we've delivered or the entirety of the pipeline?
Nick Thillman
I'm kind of asking on particularly like what's laid out for the 2027 roll forward, like what percentage of that -- I know you guys kind of give stabilization dates, but those kind of flow through, I guess, sounds like your internal modeling, like is it logical to see some of that upside in '25? Or are we thinking this is still going to continue to be pushed more '26, '27?
Laura Clark
Yeah. I mean, look, we provide our stabilization timing for every property within the pipeline. So you'll -- we're going to see some impacts into '25, '26, and '27.
Nick Thillman
So just you're pretty confident on those stabilization dates or anything in market dynamics have shifted in the last 90 days to make you sway one way or the other?
Laura Clark
Yeah. I mean, look, that's why we made the update that we did to some of the timing. And so that's our view and what we're seeing in the market today, that's incorporated in our current projections around stabilization dates.
Nick Thillman
That's it for me. Thanks.
Operator
Mike Mueller, JPMorgan.
Mike Mueller
Yeah. Hi. I guess what are the attributes of the $90 million of dispositions that you're finalizing? And to the extent that you find acquisitions, how are you thinking today about, I guess, incremental dispositions versus pulling down the forward that you have in place?
Howard Schwimmer
Well -- hi, Mike. It's Howard. I'll speak to the dispositions. We're not because usually, we are really more comfortable reporting as these happen. But we do -- this is I think of a larger amount of product that we are looking at and circling at the moment. So we're excited to be $44 million year-to-date and having the other $90 million plus that we're working on. But I think we'd be more comfortable giving you more information about that as we close the various transactions.
Mike Mueller
Yeah. Okay. And sorry, Laura.
Laura Clark
Yes. Mike, I'll answer the second part of your question around how we're thinking about funding. I mean we have a variety -- we've got a pipeline of uses in which to fund. We have a pipeline of acquisitions of about $200 million. We also have about $75 million of additional repositioning and redevelopment to spend through the remainder of this year and about $200 million next year as well.
Mike Mueller
Got it. Okay. And maybe a last quick one. I think during the quarter, you had sequential occupancy decline of about 200 basis points, San Diego and Ventura. And any color there in terms of some of the moving parts?
Laura Clark
Yeah. It's really a number of properties in San Diego in particular, average about 15,000 square feet. There were two larger property move-outs, roughly about 30,000 to 40,000 square feet. One of those actually in San Diego has already released at a 50% cash spread. And the other one, we expect to release at about a 50% cash spread.
In Ventura, we had -- it was made up of about seven properties, averaging 26,000 square feet, driven by about two large move-outs, still around 40,000 square feet, expect to re-lease those at about a 30% cash spread.
Mike Mueller
Got it. Okay. Thank you.
Laura Clark
Yeah.
Operator
Blaine Heck, Wells Fargo.
Blaine Heck
Great. Thanks. Good morning. Can you talk about AB 98 and the impact on your portfolio? I guess, are there any planned redevelopments or repositioning projects that may not be possible to build out given the increased restrictions? And then on the other side, you expect this to result in better long-term rent growth? Could it actually push tenants into other markets? Just how are you thinking about the net effect of all of the aspects of that build?
Howard Schwimmer
Hi, Blaine. It's Howard. Maybe just high level to start for the benefit of others, less saying, AB 98 is really viewed more as state-level zoning changes and primarily dealing with setback requirements near sensitive uses such as home, schools, parks, et cetera. And it's really addressing this by buffer zones. Really most impactful to buildings that -- logistics projects that are 250,000 feet and larger, nominal impact to product below that, but certainly some.
As far as impacts for Rexford, really no material risk to us for any of the projects right now we have in our pipeline. There's no impact at all for repositioning and renovating buildings unless you're going to add more than 20% to the size of the building. And that's a rare occurrence in terms of our repositioning. And really -- to the latter part of your question or the initial part of your question, I should say, just possibly does create more value in our 50 million square foot portfolio because of the challenges it does present. But mostly these impacts are going to be seen throughout the larger big-box markets out East.
Blaine Heck
Great. Thanks, Howard. Just following up on same-store and the decrease that seems to have been driven mainly by occupancy headwinds. I guess when you look at the timing of occupancy commencements on vacant space, which I think you mentioned earlier on in the call as being a little bit more delayed than expected, and then also movement of properties into and out of the same-store pool, I guess, how do you see same-store occupancy comps as we move into 2025? And how that could influence same-store NOI as we look forward?
Laura Clark
Blaine, that's a great question, and we look forward to providing same-property NOI growth and guidance when we report fourth quarter earnings.
Blaine Heck
Fair enough. (laughter) I guess, is the LL Flooring asset going to remain in the same-store pool? That's the big one.
Laura Clark
Okay. That's a good -- yeah, that's a good question. In terms of LL Flooring, we -- this is a property, and I'll just give a little bit more color here. And this is a -- we had executed a short-term lease with LL Flooring at a rent that was 250% below market. We've been in the process of this redevelopment. We're actually currently in entitlements. We're very excited to deliver buildings to the market that really can't be replicated given the regulation that's in place in this particular municipality. So it's a great opportunity to create long-term value.
And importantly, because of the lower rent, the 250% below market rent, it's going to have an outpace impact on occupancy, but not necessarily on NOI because, obviously, the below-market rent. So all that being said, it is a redevelopment. And so we will most likely be moving it into the same property pool next year. I'm sorry, out.
Blaine Heck
Okay. Great. That's --
Laura Clark
Yeah, that not in. It's out.
Blaine Heck
Yeah. That's helpful. And then just a follow-up on some of the questions on your acquisition appetite. You guys talk about the steady-state cost of capital. Can you give us any color on where that steady-state cost-of-capital is? I guess just -- what's that input when you're evaluating value creation or accretion from deals?
Michael Frankel
Well, hey, Blaine, great to hear from you today. Thanks again for joining us. Michael here. We don't disclose how we perceive our cost of capital. I'll tell you that our expectations are that our acquisition activity on average is accretive to today's cost of capital.
Blaine Heck
Great. Thanks, Michael.
Operator
Vikram Malhotra, Mizuho.
Vikram Malhotra
Thanks for taking the question. I guess maybe a [lost nearly] the same time, you sort of mentioned that this is sort of maybe the best time to acquire and it's going to -- you'll see why. And I'm just wondering, could you sort of maybe size the TAM for us today? Like what's the theoretical, whether it's pipeline or the full opportunity set for you to acquire at a stabilized yield of X, redevelop it and then get whatever 100, 200 basis points higher. I'm just wondering like has that opportunity set just reduced given market conditions?
Michael Frankel
Hey, Vikram, thank you so much for joining us today. Appreciate it. We don't really see the opportunity set having shifted Rexford's business model is predicated on a pretty unique market opportunity. almost 2 billion square feet of product within infill Southern California, over 1 billion square feet of it built prior to 1980 replete with opportunities to create value by buying a lot of these legacy assets, mostly with in-place cash flow and ability to take them with nominal investment to a substantially higher level of cash flow per share.
And that market opportunity continues. In fact, I think our access to that, our direct addressable market opportunity with respect to improving over time. That having been said, we're going to be exceedingly judicious, careful, and conservative in terms of how we acquire and when we acquire. And I think this is certainly a market environment where we're going to have heightened caution and scrutinize our investment opportunities that much more, as we always do, frankly.
So I think the key driver is Rexford in that respect and in terms of governing the pace at which we acquire. And I think it's the same posture we take it all phases of the cycle, but we're only going to focus on the very best opportunities for shareholders.
Vikram Malhotra
That's fair. I was hoping you could give a bit more color on the decision to kind of take away the three-year guide. I know you mentioned market dynamic, but I guess SoCal or the West Coast has been challenged for a while. So what -- could you give some more color like what specifically changed in the last three months for you to pull the guide?
Michael Frankel
Yeah. I'll just add to Laura's comments briefly earlier. And it's just that we're really good at industrial real estate in Southern California, creating value in our asset class. We're less good about prognosticating about two, three years out where the economy goes, where overall external factors may go that impact, at the end of the day, decision-making for our tenants.
And so I think for us, we found it's just more prudent to focus on the business at hand, to provide the annual guidance that we have a history of providing where we have more visibility and transparency into the tenant base. And it does not really reflect any long-term concerns about our infill Southern California market. In fact, I think the backdrop is very favorable for our business in our markets.
And frankly, the health of our portfolio is -- continues to be very healthy, but all the metrics that you see, predominantly high occupancy levels, exceedingly low bad debt, et cetera. So it doesn't really reflect concerns about our market or the tenant base. It's really more about focusing on what we do best, which is creating value in the real estate.
Vikram Malhotra
Okay. And then just last one, two numbers questions. Just given sort of the high sublet volumes across the West Coast or parts of SoCal, I should say, do you mind giving us like what percent of your portfolio is sublet, number one? And number two, just given all the leasing that you may have already done for the fourth quarter or probably even the first quarter, just can you give us a sense of where you think the near-term rent spreads are trending? Thank you.
Howard Schwimmer
Yeah, sure. Vikram, it's Howard. In terms of subleasing, this past quarter actually, the amount of subleasing incurring our portfolio came down. It was equivalent to about 30 basis points of our occupied square feet, which was comparable to 60 basis points last quarter, and which is really more, I'd say, overall in line with where our projection -- in terms of one quarter of '24?
But to put some numbers around that, the amount of product in our portfolio that was actively on the market for sublease at the end of the second quarter was 1.5 million square feet, and that's also declined. That's now down to 1.3 million square feet. So subleasing is always a good indication of what's happening and changes in the market. And so I think that's, at the moment, a bright spot in the market when you see those numbers start coming in.
Laura Clark
And then in regards to leasing spreads that we're seeing quarter-to-date really coming in, at this point, in line with our expectations. Our guidance implies spreads in the 40% net effective area and 25% cash area for 4Q.
Operator
Samir Khanal, Evercore ISI.
Samir Khanal
Good morning, everyone. Hey, Howard, I guess my question around is around Inland Empire. The West was still down about 3%. But certainly, you saw a bit of an improvement from the prior quarter when you look at sequentially. I mean are you seeing some improvements there? Are you getting sort of less bad as we think about the market bottoming or even stabilizing here?
Howard Schwimmer
Well, our average product size in the market, the space size is 30,000 feet. So it's performing much differently than the broader market. And rent decline in terms of that product size in the Inland Empire, 50,000 feet and under, which is a lot of the space we have there and throughout the portfolio, is actually, I'd say, slowed down in terms of where you're seeing any of the rent decline. And today, it looks like it's happening more in some of the larger spaces above 50, about well above 100,000 square feet. So it's boding well, I'd say, in terms of how we see the market and really where the average size of 25,000-ish square feet in our portfolio lies.
Samir Khanal
And if you sort of step away from that Inland Empire, but just kind of look at the broader market in Southern Cal, I mean, are you seeing any sort of green shoots at this point where you start to say maybe the market rent growth or market rents start to bottom? I mean sequentially, you've seen them come down. As we think about 2025, is there any sort of green shoots you're seeing in the horizon to make us kind of feel like that market is starting to stabilize or at least starting to get less bad?
Laura Clark
Hey, Samir. Yeah, I can maybe provide a little bit more detail around what we saw in the quarter from a submarket and size performance because it really is dependent on some market in size. In terms of the third quarter, we saw the smallest declines in rent in the San Fernando Valley, Orange County, and San Diego markets. We saw accelerated declines in mid-counties in the St. Gabriel Valley.
When you look at the market in terms of the size segments, our smaller spaces exhibited relative strength. Base is under 50,000 square feet, so less decline in market rents compared to those over 50,000 square feet.
Samir Khanal
Okay. Thank you.
Michael Frankel
And Samir, I would just add one thing in terms of green shoots. Tenant behaviors, we look at overall tenant behaviors, and we don't see tenants really shedding space in our portfolio in any material way. And in fact, they continue to lock in very high annualized contractual rent bumps and the leasing activity that we're executing. And I think that the lease bumps that we're signing today and through the last quarter are very good leading indicators in terms of tenant expectations and tenant health.
And when we see them continue to lock in 3.9% to 4% on average annual rent escalators in the leasing activity, they're locking in for the next two, three, four, five years, I think the tenants are telling us that they expect to stay in the space, they expect to pay more rent. They value the space. They need the space, it's essential for their business. And so I think there are green shoots, but you probably have to look at some of it holistically look at the tenant behaviors.
Samir Khanal
Thank you.
Operator
Richard Anderson, Wedbush.
Richard Anderson
Thanks, team. Good morning. So just a comment on perhaps the linearity or lack there of, of market rent changes. You mentioned 7.5% down year-over-year this quarter. The number was down 2% in the first quarter. What happens if next quarter, it's like 7.5% again? Like I mean I just wondered, in your mind, is this a linear exercise where when we see something stop declining, then that's a pretty good sign that we're getting some place? Or could this sort of be all over the map based again on tenant behaviors and the psychological exercise of trying to figure out where they're headed?
Michael Frankel
Hi, Richard. It's Michael. I think as much as we have tried to describe it, frankly, for the last 1.5 years or so, which was, following the incredible acceleration and increase in rents we saw during the pandemic that we expect to see some normalization. And that the normalization should -- based on tenant behaviors we're observing that the normalization should be some moderate rent declines, plus/minus 1%, 2%, 3% sequentially quarter-over-quarter. You might even see some gains in certain submarkets quarter-over-quarter, but not to expect anything really dramatic based on the tenant behaviors we continue to see.
And when that ends and we finally see rent growth kick in more strongly, it's just hard to say. It's very difficult to predict that sort of inflection point. But that having been said, we're really comfortable with the backdrop. Tenant health in our portfolio continues to be extremely strong, and we do think it's a very favorable backdrop that portends well for market rent growth. Just hard to predict exactly when you start to see that inflection.
Richard Anderson
Okay. Fair enough. And so when you think about that dynamic, minus 2% to minus 7.5% and wherever it may go from here, how is it that you underwrite the next redevelopment and repositioning project relative to where you expect market rents to be? Are you haircutting that even more to make a pencil? I'm just curious how you get comfortable redeveloping projects with the movement down in market rents.
Michael Frankel
Yeah. And by the way, just to clarify that minus 2% plus or minus and then minus 7.5%, those aren't apples-to-apples. Minus 7.5% will be a year-over-year comparison, whereas the minus 1% to 2% would be a sequential change. So we do --
Richard Anderson
No, I think that's -- unless I'm reading it wrong, it was minus 2% down in the first quarter of this year on an apples-to-apples basis. I believe I see that, right, but perhaps I'm wrong. But at any rate, the question still applies on how you under redevelopments in this current environment?
Michael Frankel
So we take a granular bottoms-up approach on redevelopments and we take a close look at where we think rents are for the given opportunity and space, and we really do take a bottoms-up approach. And we take into consideration where rents are today and where they're trending.
Richard Anderson
Okay. And apologies if I have that number wrong. I very might well have it wrong. What about space utilization irrespective of occupancy? Do you have a read on that, and what -- how that's competing with a need for more space from your tenants?
Michael Frankel
I think as I mentioned earlier, we continue to see very high utilization among our tenants in their spaces within our portfolio. And again, that we think contributes favorably to the backdrop that we see that it's more about decision-making and less about fundamentals. And so again, we continue to see very favorable levels of utilization within the portfolio.
Richard Anderson
Okay. Last question, status of the CFO hire?
Michael Frankel
That's a great question. We're making great progress, and we're going to let you all know as soon as we have a definitive answer, but we're super excited with the progress and super excited for the company and shareholders in that respect.
Richard Anderson
Okay, wonderful. Thanks very much.
Operator
Brendan Lynch, Barclays.
Brendan Lynch
Great. Thanks for taking my question. On LL Flooring, where are they on the watch list? And more broadly, how many tenants are currently on the watch list?
Laura Clark
Were they on the watchlist? It was a bankruptcy, so it did hit our watchlist. In terms of the overall watch list, it continues to be very consistent with what we've seen throughout the year. We have less than 10 tenants on the watch list and really no changes in trends in terms of industry concentration. I mean I'll note that our bad debt levels continue to be very low, very healthy. Year-to-date, we're up 50 basis points and then projecting 50 basis points for the full year.
Brendan Lynch
Great. Thanks. That's helpful. And then on the dispositions, I know you don't want to speak too much about the $90 million that could be coming, but can you discuss the characteristics of the assets you have sold year-to-date and how we think -- how we should think about what you're prioritizing when disposing of assets?
Howard Schwimmer
Hi, Brendan. It's Howard. Yeah, for the most part, there've been some multi-tenant type projects, very management-intensive on our -- for our team and not much growth that we were projecting going forward. The small building that we just transacted on was 25,000, I think 25,000 and change that we did a light renovation. And the equivalent cap rate to the projected rent on that versus the sale was very attractive. I believe it was in the low 4s on a market rental rate.
So, yeah, there are typically assets where really there's no more value creation opportunity or sometimes it can have to do with the margin that we're achieving on an asset, just there's some of the more intensive management or capital needs that we might be seeing coming up that we'd like to avoid because they're not going to produce any incremental value.
Brendan Lynch
Great. Thank you for the color.
Operator
And that concludes our question-and-answer session. I will now turn the call back to management for closing remarks.
Michael Frankel
Well, we'd like to -- on behalf of the company and our Board of Directors, we'd like to thank everybody for joining us today. We wish you a great rest of the quarter, happy holidays, and we look forward to reconnecting next quarter.
Operator
And ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.