Rexford Industrial Realty, Inc. (REXR) Earnings Call Transcript & Summary

Great. Good morning, everyone, and welcome to Barclays' Global Financial Services Conference. My name is Brendan Lynch. I cover REITs here at Barclays. Very pleased to be joined by Rexford. We have CFO and COO, Laura Clark, with me; Co-CEO, Michael Frankel; and John Nahas, Managing Director of Asset Management. Welcome.

Thank you.

Thank you.

Well, Laura, if I can turn it over to you to give us some opening remarks about Rexford.

Sounds great. Well, thank you so much for having us, again, today. So the Rexford Industrial is the nation's largest pure play U.S. industrial REIT. We have an entity value of over $15 billion. We are exclusively focused on infill Southern California. And so Southern California is the largest -- the third largest industrial market in the world, behind only the entire national markets of the U.S., China and Japan. We have an irreplaceable portfolio of 50 million square feet of highly functional generic use industrial products that's occupied by very stable and diverse tenant base. We are positioned with an unparalleled ability to create value, and that's enabled by three key factors. First is our highly accretive internal growth that's driven by a vertically integrated and highly entrepreneurial teams. Design, construction, asset management, that's focus on renovating and repositioning assets to higher quality and higher functional assets within our markets. Two, we have an extensive and highly accretive excellent growth opportunity that's created through our proprietary access to the 1.8 billion square foot market. This is a highly fragmented market in infill Southern California, and our team enables off-market acquisition opportunities through outsourcing and deep domain expertise. And then lastly, we maintain an investment grade low leverage balance sheet with net debt to EBITDA today at 4.6x, and that positions us to capitalize upon accretive growth opportunities as they may arise. We take a very rigorous approach to capital allocation, and we're focused on driving shareholder value, as demonstrated by our earnings per share growth, which has averaged 16% annually over the past 5 years, outperforming our peer group by 75%. With that, I turn it back over to you.

Great. Thank you. And we'll dig in a lot of that through our Q&A. Maybe I just want to start with, in mid-June, Rexford announced that you were going to be taking on the new role of COO. Can you talk a little bit about your transition to that position? And what you aim to accomplish in the new role?

Well, I'm very excited about transitioning when we hire a new CFO. And so Rexford has been significantly over the years, and so the new COO position really arisen from the need to be able to create even greater collaboration than we already have across the operations of the team. Due to number of things number one, to drive greater efficiencies that are even better decision-making and really to be able to bring greater collaboration. I'm excited to step into that role and we are really excited about the future growth opportunity for Rexford.

Maybe a question for you, Michael, a lot on these lines. You've worked with Laura for a long time now. Is it reasonable to interpret the change in Laura's responsibility in the context of succession planning?

Well, I think there are a range of factors. Succession planning is a factor. I'll come to that in a second. But just a little broader context, I mean today, we operate about 50 million square feet within infill Southern California, a market that is just under 2 billion square foot strong in terms of total inventory. And we are at about 2.7% in terms of market share. So the opportunity to grow this business by orders of magnitude is really driving the opportunity set to elevate Laura to the COO role, really to drive our presence in the market deeper and continue to grow the company and improve the quality of our earnings over time. And so we see a long runway for Rexford ahead. And that really does lead to the succession opportunity. Howard, my -- the co-CEO, might has been doing this for over 20 years as a business, about 11 years as a public company. We love doing what we do. On the other hand, we're not getting any younger. So I thought there weren't any hurry to stopping CEOs. So we think that one of the most important measures for our success, Howard and myself as CEOs, is the degree to which we put a management team in place that can continue to run and grow Rexford far better than Howard and I have, even though I think we've done an okay job for the last 20 years. But we see an opportunity to cement a management team in place that's going to continue to run this company in an exceptional manner. And we think Laura is somebody who can run the company. So yes, it is a piece to that succession planning.

Great. And maybe a comment or two on the CFO search and where that stands currently?

Yes. I would say we have a lot of influence, a lot of great candidates. So we're having many conversations. And we're very focused on, obviously, bringing in someone to that role as soon as we can, but mostly focused on bringing in the right partner that's going to help grow Rexford partner with us over time to grow Rexford. So we're excited to make an announcement when we find that right candidate, and we're having many conversations today.

Great. It's -- we're in the peak political season, as you well know, and trade policies are certainly part of the narrative that's out there. Trump is proposing a 10% to 20% tariff on most imports and greater than 60% on Chinese products. But Kamala Harris has suggested that she will also be implementing some tariffs if she will elect, although she's been a little bit less clear about the specifics. Is the potential for these tariffs already impacting your portfolio?

I think what we're seeing across the board is that our tenants in the business is located in our portfolio are really engaged and focused on the local economy in Southern California, and the consumption that's contained within it. When you look at our average unit size across the portfolio, it's 26,000 feet. And so generally speaking, we have smaller businesses that fit into that vein. Those types of businesses we are not hearing from them that they're focused on tariffs, largely because they're not as focused on importing into the United States.

If there were to be tariffs that were implemented, how do you think that might impact demand over the next 3 to 5 years? It sounds like you're somewhat insulated just by the size of your assets and the tenant base, but do you envision that there could be any change if those tariffs were implemented?

Again, specific for our portfolio, we don't see any material impacts coming from tariffs, whether in the near term, preemptively in front of the election or over the next 3 to 5 years.

Right. let's talk a little bit about supply. The Inland Empire clearly had a lot of attention for the supply growth that I've seen over the past couple of years. Maybe you can walk us through your portfolio and where you're seeing the most supply pressure and where it's the least?

Yes. I think in terms of the Inland Empire, so the way we view that market is broken up into two segments. There's the Inland Empire West, which is more of an infill market, and then there's the Inland Empire East, which represents more of kind of the sprawl and the expansion. We don't operate in the Inland Empire East. We focus on the IE West. In that market, our average unit size is 30,000 square feet. It has been quite some time since it's been feasible to develop product in that size range. And so for most of our properties located in that market, we've seen kind of continued strength and health. Where there are pockets of weakness in the Inland Empire,, generally speaking, is between about 100,000 square feet on up to 300, maybe 350. That's where we've seen a lot of supply in over the market it in terms of new deliveries and projects that are in the pipeline today. We just actually leased the last two spaces that we had that fit into that. One of them is 100,000 square foot building that was already in the portfolio. We had zero downtime leasing that to a new business that was moving in right away. They were attracted to the relative higher functionality that, that property offered compared to the rest of the market. The other space is 500 DuPont, which is a recently completed repositioning project that we wrapped up. That was 274,000 square feet, and we leased that to a 3PL who is moving in, in October. So we don't have any other exposure to that segment of the market where we're seeing the supply pressure. So we're pretty comfortable with the business in that market.

And one thing I'll add is that -- so there's a lot of supply in the market in that price range. We don't have a lot of exposure there. But John mentioned we did the two spaces that we have in the market. You may say, why are these two spaces leased when there's all other supply market? And it really goes back to our strategy, which is delivering on the highest relative functionality and quality in the market. And so those two spaces leased because of the funnel aspects of those properties that are going to allow the businesses that are going to operate in these properties to operate more efficiently and effectively. And so that is what's driving demand for our product on a relative basis in the market.

Great. Maybe following on there on demand. I've heard one of your peers say we're much more focused on the durability of demand than supply growth. How would you characterize the demand outlook now relative to the past few years?

I'll just maybe give a brief overview on that because one of the fundamental reasons we focus on investing solely in infill Southern California it's because of that long-term durability of demand. That is what we would consider to be long-term arguably permanent downside protection in our business model. One of the many reasons we focus only on infill Southern California. We have a deep supply-demand imbalance, where supply cannot be increased over time. In fact, we're experiencing that decrease in supply over time. Because infill industrial product, that is in and among an adjacent to population centers, the largest regional population in the nation, is being converted to other uses over time. So we have a net reduction in supply over time, while demand actually continues to grow. And a lot of the incremental drivers, secular drivers that are substantial, like e-commerce, aerospace, the building trades, and we're going to enter a new cycle and growth in building trades for a variety of reasons in Southern California. So that's the backdrop, tremendous durability of demand. And then our focus on the smaller midsized tenant spaces, our average space size is under 30,000 square feet. And again, you cannot replicate that today. It's too expensive. Even if you could find the land, it's too expensive to replicate in that size. And so we're in a protected market in that sense. And so generally speaking, demand is very diverse. Incrementally, we're seeing strong demand from, again, aerospace and that includes space telecommunications and the satellite business, food, consumer staples, electronics, referencing some recent leasing activity. 3PL and e-commerce. Those are all very strong sectors demand for us today.

Great. In terms of occupancy, levels are offbeat, but still well above the long-term average. I think maybe broadly, it would be 94%. Maybe you could give us some color on what it has been in your specific Southern California markets? Do you think you can maintain the 97% range that you're in now over the next several years?

Yes, I think that's attainable. Generally speaking, you might be somewhere nominally above or below that range. And I think that's how our market has been performing for some time. on a relatively normalized basis. We think 5% was a normalized vacancy factor, especially for multi-tenant products, smaller tenant spaces because there's always some natural transition in those tenants. But the market since you're telling us that this is not far from steady state for where we ought to be performing generally speaking.

Maybe just one more on demand. How do you think your portfolio will perform in a recession? You address this a little bit, but maybe go a little bit.

We're always seen -- we've seen that. We've been there. We've operated through a range of recessionary periods in the last 20 years. The Great Financial Crisis was probably the best real-world example of a deep recession. Today, we're not really in a recession, we're just normalizing from the extreme acceleration in rents, driven by pandemic level demand. And -- but I'll briefly describe what happened during The Great Recession because we did think in February of 2009, I don't know where you were, but we are operating a sizable portfolio of industrial properties in Southern California. And they were very nervous times, order flows for tenants literally stopped. We've never seen that before, not in any cycle. And -- but what's happened within infill Southern California and our tenant base was counterintuitive and was far more positive than we expected. And what we saw was we never had a real occupancy problem. Again, in the smaller-sized tenant-based range, we didn't have an occupancy problem. You didn't have to go far though, in the big box market to see an occupancy problem. Even in the IE, Inland Empire East, which as John mentioned, is not our market focus, but that's a big box market, despite the fact it's Fortune 500 tenants predominantly occupying spaces 500,000 square feet and larger, they had an occupancy problem. So in the smaller space, infill markets, we didn't see an occupancy problem. And the reason being that, again, they were serving regional consumption, people weren't picking up and leaving the region. Whereas in the big box market, they were adjusting their global trade flows to adjust for a global drop in demand. So they consolidated those big box warehouses. We didn't see that in the infill markets. Secondarily, we did see some rent decline. But as a company, we're actually NOI-positive every single quarter through The Great Recession. And the reason being is that we could outcompete the market in functionality because that's our business model. Our business model is predicated upon buying typically older legacy assets within infill Southern California, dramatically improving their functionality by modernizing them, adding dock-high loading and a thousand other ways we can create value. So we outcompete in the market through all phases of the economic cycle. And that was most well illustrated during the great financial crisis. So there was a flight to quality, and we were able to capitalize on that. So tenants were saying, they were saying, "Oh my God, I could occupy that brand, newly renovated space with modern functionality, which is worth more to me because I can stack more products I can move product more efficiently. I can pay a $0.10 less than 6 months ago, let's do it. So there was a flight to quality. And that's where Rexford position ourselves within the market.

Stick with the theme of the quality of the assets. You have about 1 million square feet under repositioning now with an estimated unlevered stabilized yield of 6.2%. Maybe talk a little bit about some of those things that you were alluding to there, where you're adding value and making the assets more productive relative to increasing the curb appeal through or superficial upgrades?

Yes. No, it's a key point because we are increasing the per square foot value of these assets through the tenants, through our renovation activity. And when you look at industrial buildings, you think, oh, it's a relatively simple building, concrete tilt-up walls, you have a root structure. How can you create value in that? The fact of the matter is some of these older assets, many of them built during the post World War II era, they're not to modern standards. Some of them do even have dock high loading. Some of them might have whatever the clear height is call it 24 feet, 30 feet or even higher than 30 feet, but if they don't have modern ESFR high-piled sprinkler systems, they can't utilize the high clear storage within the warehouse. So we'll typically go in, we'll create dock high loading if there isn't, we'll enhance the loading and the truck ability. We're put in a modern high-piled sprinkler systems. So we're literally increasing the value on a per square foot basis of the properties in a substantial way to the tenants and they can move more product, they can increase their throughput and they can decrease their cycle times with regard to moving product in and out. And we modernize the office, make it functional. When tenants typically go and look at a Rexford office space that's a complement of the warehouse complex. It doesn't feel like any other property in the submarket that might otherwise be available. So it has a fundamentally different feel and level of functionality.

There's actually a term that the brokers in the market have -- they say that when Rexford goes and then repositions or redevelops a building, they say that we've Rexfordized it. So we're going to climb out in the market.

And just to quantify it a little bit, the order of magnitude of value creation, simply by going into, let's just say, 100,000 to 150,000 square foot older space, demising it down, which is not expensive, it's drywall and some new office components, simply by demising it down to 10,000 or 20,000 square foot units, you might be increasing the rents by 40%, plus or minus, sometimes more. So it's a dramatic amount of value creation.

I think one important point to add to is that our repositioning program is informed by feedback that we get from the market. We're vertically integrated. So we do in-house construction management, in-house design. We manage our properties in-house, and we lease them in-house to in part with the brokerage community. So given the amount of leasing that we're doing, and touch points we have with tenants in our portfolio already, the feedback looks substantial. And so we're hearing directly from them on a live basis about the features that are most impactful to driving efficiency as Michael was describing. And that's really a key differentiator is we're able to, in the moment, start tweaking our plans, make changes and always be in a best position to deliver the most competitive product in the market.

And what is that opportunity going forward? I'd imagine this is an ongoing process all the time, but you can scale it up, scale it back as demand warrants. What do you see as the opportunity for repositioning assets over the next couple of years, especially considering the large acquisitions that you've made or even in that?

It's substantial and it's growing. I would say the quality of Rexford's forward growth has never been stronger, and it's really driven by two factors: one, internal and the other is external. On an internal -- from internal perspective, we are deeper in the markets than we have been. And by the way, the majority -- the vast majority of our investments are through off-market and lightly marketed transactions that are catalyzed through Rexford's own research and lead generation. We don't wait for brokers to bring us our growth opportunities. Through our own research and networking and broker loyalty programs, we're catalyzing and identifying our growth opportunities, with a focus on the value creation opportunities where we can reposition those legacy older assets. So we've never been better and deeper at that. So that's the internal driver. And then from an external perspective, what's really interesting about our infill Southern California industrial market, despite the fact that it's the largest industrial market in the country, the most highly sought after from a tenant or investor perspective and the most -- for the most competitive industrial market in the nation. Despite those factors, it is predominantly owned by non-real estate professional, private individuals, mom-and-pops who, one way or another, bought, build or aggregated these properties during the post World War II era. Many of them started with the business, they end up owning the warehouses for that business, and they end up buying more warehouses because it was great investment over time. And so we are in the middle, simply because of the passage of time. We're in the middle of a historical transition of these assets from one generation to the next. There is generational shift in these assets is something that we are feeding on because that's a tremendous amount of inefficiency in terms of the ownership structures underlying this market. And so that transition in terms of these assets in terms of the generational shift in these assets is happening today in a way that is a historic proportions. And so an ownership base and their need to transact, they're aging out of the ownership of this real estate is happening at a level today is truly never going to happen again of this proportion from this tight time frame. So externally, that market opportunity is marching increasingly into our arms. And again, those are the first developed best locations, older assets, tremendous opportunities to create value.

And going back to our portfolio, we've maintained strategic plans for each and every asset that we have. And so we are very proactively planning for the next turn of that space. And oftentimes, we'll shell plans that we may have drawn and execute a renewal with the tenant because that's the best option to go forward. But we're constantly in this planning process, generally speaking, 18 to 24 months ahead of every lease expiration. So in terms of the opportunities for repositioning, there are many. It just whether we execute on it just depends on the other scenarios and what they look like. You asked specifically about the acquisitions this year, the large portfolio that we picked up we don't expect to touch most of those spaces for somewhere between 3 to 4 years just depending just on lease expiration. But again, we've started the planning process for some of those near-term expiration dates, and some of that will have some great repositioning potential.

Michael, you mentioned doing a lot of internal research. Maybe you could talk a little bit about data and analytics that you're gathering? And what that means for your portfolio? And what type of efficiency gains we might be able to realized?

Absolutely. When we started this business over 20 years ago, our goal really was to build a great business. And we thought to do so, we couldn't really be, again, relying on third parties, mainly brokers, to bring us those growth opportunities. And so our research is focused on identifying catalysts in the marketplace that we believe could be leading or requiring an owner to maybe need or want to sell over a certain time frame. And we've created a dedicated research capability, people, a team, going back over 20 years. So I think it was a very unique effort in the marketplace. And again, the data collection and the data analysis is varied. And it also evolves through cycles because as we move through cycles, economic sector, business cycles and otherwise, there are different drivers of potential opportunity. And so our data, it revolves around the ownership base, it evolves around the real estate itself, it revolves around the tenant base, and world events, that could be impacting that tenant base one way or another. So to give you a couple of examples over time, we track tax information in the ownership base in terms of the property tax and when they might be going late on their tax payments. We track the ownership base in terms of where they are in their personal family partnership life cycles. A lot of times, there is -- a partnership that started with two brothers, one passes away and somebody 15 heirs slotting into the partnership. Before you know it, you have 75 people in the partnership, et cetera. They become very complex. They can't make decisions. And so we're feeding on those sorts of inefficiencies in the marketplace and the ownership structures. We track the tenant base. For instance, we'll track secular activity among different business segments or economic segments that could be impacting tenant base. We track M&A activity among the tenants, because of the tenants expanding or contracting that can lead to an opportunity in the real estate. We track the debt scenarios associated with the owners and the properties. We track the condition of the properties. Because a lot of times if a property is broken, meaning it's an older dysfunctional property, it probably has very low embedded rent because the owner hasn't invested in that property, and the tenant puts up with a dysfunction because they're paying a very low rent. We'll look at that, and maybe we can offer the tenants or the owner a very low cap rate based on the current condition and cash flow generating capability of the properties. And that can be very attractive back and catalyze out that owner. But remember, we're going to drive that property vacant, and we're going to reposition it to take the flow from level here to a substantially higher level of cash flow. So our stabilized yields, as you described, are well north of 6% on average. And so that's kind of the secret sauce to the business is catalyzing those types of opportunities.

I'd also add that we have some new technology that we've brought into the business as well in terms of portfolio management. We're using mobile data to track utilization across the buildings throughout the portfolio as well as using it for due diligence when we're acquiring. And what that allows us to do is see how the properties are being utilized within the buildings themselves and things like tracking where product is coming in from and where it's going out. And so that's been something that's been pretty exciting for us to deploy to the team, which gives us new insights beyond all of the things that Michael described.

And we've built our own workflow system internally because it's too much data to track anecdotally or through an Excel worksheet. And actually going back 20 years, we started creating a workflow system. And it's very robust, and it really drives the activity of our team and make sure that we're really -- if any one of you ever want to come visit Rexford, we'd really encourage you to do. We'll actually sit down and we'll bring you into that workflow system as if you were an acquisitions person at Rexford, and you'll see how we move that data.

One other thing I'll add around data analytics, because we have really powerful data analytics from an external perspective and know the market like nobody else in the market, because of it, but we also own a portfolio of 50 million square feet in the market, which gives us significant insights into the overall market. So when you pair those together, the internal data that we're getting within our own portfolio and then the external data that we have, because we are deeper into the market than anybody else, that's what we bring together that allows us to be able to execute at the level that we do internally and externally because we literally understand. And John talked about this, and then we understand what the needs of the tenants and what the supply looks like in a market, what's the coming supply, what's happening from a demand perspective, literally on a block-by-block basis. And we're able to do that because of our external efforts as well as the internal efforts that we have around data.

Great. I wanted to circle back on the 275,000 square foot lease that you signed this morning, who was for a 3PL tenant. And you could talk about the pluses and minuses of 3PL tenants. I believe they comprised about 25% of your portfolio now. So maybe just walk us through some of those dynamics.

I think what we're seeing from the 3PLs that we have in the portfolio is that, again, because they're tied like many other businesses to the local economy, we see some continued health. Where we've seen 3PLs maybe struggle in the market overall has been a function of where their contract rates lie and how they've managed contract structure. And what I mean by that is, in that business, you can execute short-term contracts that traditionally higher rates or you can execute longer-term contracts, maybe at more stable rates. And so those businesses that have managed that dynamic are well are ones that are continuing to do well, and we see many of those. Where we've had some 3PL businesses that maybe haven't done so well, it's been because of that. I think when you go back and look at what happened over the last few years in that space, the rate environment was substantially increased. And that wasn't sustainable as things started to normalize. And so as that business kind of found its footing, we've kind of worked through some of those issues. So I think, overall, 3PLs within the portfolio are doing well. 500 DuPont is a great example. That's a business that's expanding in Southern California. They have an existing facility. They're picking up additional contracts and new product, and they leased our space because it fit the bill for them in terms of all of the functional attributes that they needed, fire sprinklers, as Michael mentioned, allowing for maximizing the cubic capacity of the building is a big part of it. And so there's plenty of examples like that where we're continuing to see growth in that space.

And are they predominantly retail, e-commerce-oriented 3PL operators? Or is there diversity among the 3PLs as well?

There's diversity, one of our tenants, just by way of example, actually handle solar products. And they distribute that regionally in terms of all of the necessary components to deploy large solar arrays. Obviously, in Southern California, solar is a really important part of our energy platform. And so there's businesses that are in the 3PL space, specifically for those types of industries. So while there is a significant concentration in consumer products, there's all of these other businesses that require 3PL support.

Great. I just want to open it up to the room. If anybody has any questions, please raise your hand. If not, I can keep going. Maybe another secular theme that we could dig in on is the on-shoring and near-shoring trends that have been discussed at length. One, are you seeing any evidence of onshoring yet? And would you consider your portfolio went be benefiting from that trend as it materializes? Or maybe more in terms of the growth that we're seeing in Mexico, is that having any impact on your Southern California portfolio?

Yes. I think generally speaking, we describe our portfolio as having generic space that can serve a wide variety of functions. And so that means it's, in some cases, can be less specialized to accommodate certain businesses that might be looking to relocate and onshore. I think where we've seen the most impact has been from what you've described in terms of the nearshoring in Mexico. A lot of products, because of the lack of infrastructure in Mexico, still comes in through the L.A. Long Beach port complex, and then is trucked down across the border for assembly or whatever they're doing in those facilities. And then it comes back. We've seen certainly a lot of growth in Mexico for that. Medical device in that whole industry is something that is really concentrated in locations that are just across the border from San Diego. And so we've seen and direct evidence of that near-shoring impacting us. But when you look at the overall trend, a lot of it is related to automotive. That product goes into Mexico, and then usually gets distributed through Texas. So in terms of that trend, we're not seeing impact. For our business.

Let's talk a little bit about net pricing. Your cash mark-to-market now, I think it's about 26%. You're signing leases with 4% escalators. Concessions are coming up a little bit. Occupancy is still around 97%, as we were discussing earlier. How should we think about each of these factors going forward? Where you can push to be a little bit more aggressive and maybe where you might be experiencing some resistance?

Yes, the lease negotiations are all customized for the tenants' needs, and they vary quite a bit. I think the best way I could answer that is we've seen the annual escalation rates hold for a large part. There's very few leases to date that we've executed with less than 4% annual bumps. So most of the movement that we've seen thus far, maybe has been on rate or concessions, which are slightly up. But at the end of the day, we're there to partner with the tenant and figure out how to construct the deal that works best for everybody. And so there can be some movement, in certain cases, even with the rates as an example. But if we did that, there would be some other elements of the deal that compensates for it. So again, I think to date, the annual escalations have been pretty steady, and we would expect that to continue.

You're guiding to 1.5 months of concessions in 2024, but lower in the back half. Maybe just walk us through those dynamics?

Yes. Year-to-date, concessions are about 1.7 months. So that does imply about 1.4 months for the second half of the year. It's really driven by the leases that we're rolling in the second half of the year. They tend to be about 80% of the leases rolling in the second half of the year or smaller spaces generally lower concession shorter term.

Great. Let's talk a little bit about the long-term guidance. You're guiding to 6% to 7% AFFO per share growth in 2024 and 11% to 13% from '23 through '26 based on organic growth. What dynamics do you expect to change to allow you the stronger acceleration in '25 and '26 relative to '24?

Yes. So we have put out a 3-year average annual FFO per share growth target of 11% to 13%. So that does imply, as you mentioned, an acceleration into '25 and '26. And it's really being driven by our repositionings and redevelopments, and we talked a lot about those today, but that is the engine that drives and will continue to drive outsized growth for Rexford. So we have about $95 million of embedded NOI, and these are projects that are -- have started or are about to start that are going to be delivering and stabilizing into '25 and '26. And that's the single greatest driver of our growth as we look forward and even beyond the 3 years as well. We also have embedded mark-to-market. As we talked -- as you mentioned, on a cash basis, that's 26%, 38% on a net effective basis. That's driving another about $80 million of NOI, and then pair that with our annual embedded room steps, which in our portfolio today is about 3.7%. So all in all, if you look over the next 3 years, we have about $230 million of embedded internal NOI growth in the portfolio. It's about 35% growth. A couple of important factors there that implies no future acquisitions, and that also implies no further rent growth. So rents where they're at today and no future acquisitions.

I believe it also excludes Blackstone acquisition that was after you provided the original 11% to 13% guidance?

That's correct. But we did mention on the call prior -- after that acquisition that we're comfortable with that 11% to 13% guidance after that acquisition.

Okay. Fair enough. And a question, yes, sure thing.

If you wouldn't mind talking about the competitive environment a little bit, especially with some of that external growth opportunities that you talked about at the beginning? Is it private equity? What's -- has anything changed from a competitive environment? That would be helpful.

No, it's a great question. Thank you for that. And again, this is, generally speaking, over time, the most competitive industrial market in the nation in terms of investor appetite. Because the underlying fundamentals are the strongest of any major market in the country. That hasn't been said, with the shifts in the capital markets over the last couple of years, there's been a vast diminishment of overall competition, which we've been able to benefit from. We're starting to see that coming back incrementally, not in a major way, incrementally. But the most important thing to remember about competition is that because there is competition, generally speaking, that's why we've decided to make sure that we have the capability to generate our own investment opportunities that the competition has generally not seen. And so upwards of 80% or more of our transaction volume has been driven through what we call off-market or lightly marketed transactions that we're catalyzing through our internal efforts that the competition is not seeing, even during periods when the competition is very intense, for instance, during the pandemic or prepandemic, where we didn't have the capital markets impacts. And so that is really the key to Rexford because our ability to identify most of our investment opportunities through off-market and lightly marketed situations that we're catalyzing that translates into our ability to generate substantially higher yields on investment and return on investment that is otherwise available through those marketed transactions in that competitive environment.

Great. Well, it looks like we're just about out of time. Laura, Michael, John, thank you very much for doing this. And for those of you in the room, we have Extra Space Storage coming up in just a few minutes. Thank you.

Thank you.

Thanks, everyone.