Earnings Call Transcript - REXR Q3 2025

Operator, Operator

Good afternoon. My name is Lacy, and I will be your conference operator today. I would like to welcome everyone to the Rexford Industrial Realty, Inc. Third Quarter Earnings Call. I will now hand the call over to Mikayla Lynch, Director of Relations and Capital Markets at Rexford Industrial. Mikayla, please go ahead.

Mikayla Lynch, Director of Relations and Capital Markets

Thank you, and welcome to Rexford Industrial's Third Quarter 2025 Earnings Conference Call. In addition to yesterday's earnings release, we posted a supplemental package and earnings presentation in the Investor Relations section on our website to support today's remarks. As a reminder, management's remarks and responses to your questions may contain forward-looking statements as defined by federal securities laws, which are based on certain assumptions and subject to risks and uncertainties outlined in our 10-K and other SEC filings. As such, actual results may differ, and we assume no obligation to update any forward-looking statements in the future. We'll also discuss non-GAAP financial measures on today's call. Our earnings presentation and supplemental package provide GAAP reconciliations as well as an explanation of why these measures are useful to investors. Joining me today are our Chief Operating Officer, Laura Clark; and Chief Financial Officer, Mike Fitzmaurice. Our co-CEOs, Michael Frankel and Howard Schwimmer, will join us for the Q&A session following prepared remarks. It's my pleasure to now introduce Laura Clark. Laura?

Laura Clark, Chief Operating Officer

Thank you, Mikayla, and thank you all for joining us today. I'd like to start by recognizing the Rexford team for their hard work and strong execution of our strategy. Third quarter results, which were ahead of expectations, are a testament to the strength of our business model and our focus on driving value. We executed 3.3 million square feet of leasing, nearly double last quarter and healthy leasing spreads. Our performance demonstrates three broad themes that position Rexford to generate long-term value for our shareholders. One, our irreplaceable and high-quality infill Southern California portfolio; two, our ability to drive outperformance through strategic asset management powered by our vertically integrated team; and three, our focus on accretive capital allocation. Starting with the performance of our portfolio and current market dynamics. Rexford's portfolio continues to outperform the broader infill market, and we are encouraged by improving tenant sentiment in the quarter. However, uncertainty around the overall macroeconomic environment and tariff policy remains, which could continue to impact tenant demand in an unpredictable manner. For the overall 1.8 billion square foot infill Southern California market, net absorption was nominally positive at 400,000 square feet in the quarter according to CBRE. In comparison, net absorption in Rexford's portfolio was a positive 1.9 million square feet, equal to 380 basis points of positive net absorption. This reflects the solid execution by our team and the superior quality and functionality of our assets relative to the overall market that is generally comprised of older vintage inferior properties. Strong new leasing activity and healthy retention levels throughout the portfolio drove same-property ending occupancy to 96.8%, a 60 basis point increase compared to the prior quarter. Leasing spreads for comparable leases were 26% and 10% on a net effective and cash basis, respectively, and in line with expectations. Additionally, bad debt levels are below historical averages at 30 basis points as a percentage of revenue year-to-date, underscoring the health and quality of our diverse tenant base. As it relates to market rents, Rexford's portfolio experienced a decline of 1% sequentially compared to the overall market decline of 2%. Notably, this quarter marks an improvement with respect to sequential rent change compared to recent quarters within the Rexford portfolio as well as the overall infill Southern California market. While we cannot predict when market rents will reach an inflection point, the underlying supply-demand dynamics in our market remain strong with supply growth severely limited by scarce developable land and highly restrictive development regulations. These supply constraints, combined with demand from the nation's largest regional zone of population and consumption in key growth sectors, including aerospace, defense, manufacturing, consumer products, and construction, to name a few, will continue to support favorable long-term industrial fundamentals. Turning to our strategic approach to asset management that drives outperformance and value creation. Our vertically integrated team's on-the-ground presence and expertise enables us to proactively identify opportunities to capture tenant demand and drive occupancy. Through strategic asset management, we continually evaluate each property to determine the optimal value creation strategy, whether that be repositioning or redevelopment, leasing as is, or disposing of an asset that strengthens and derisks our future cash flows and capital requirements. For example, during the quarter, our team procured tenants and executed leases at two properties in the San Gabriel Valley, totaling 556,000 square feet. These properties had been previously slated for near-term repositioning and redevelopment. We also opportunistically disposed of a 76,000 square foot property in the San Gabriel Valley, which would have otherwise been a near-term redevelopment, unlocking an accretive capital recycling opportunity at an implied exit cap rate of 3.7%. The execution of our strategy on these assets afforded us the flexibility to generate near-term NOI, avoid additional capital investment and downtime while capitalizing on an accretive disposition. Turning now to our capital allocation priorities. We continue to focus on allocating capital to drive the highest risk-adjusted returns while remaining cognizant of market conditions. We are pleased with our progress on repositionings and redevelopments, which continue to yield double-digit incremental returns. In the quarter, we executed 845,000 square feet of repositioning and redevelopment leases, bringing total year-to-date lease-up of our repositionings and redevelopments to 1.5 million square feet, representing $27 million of annualized incremental NOI. Regarding dispositions, we sold three properties totaling $54 million in the quarter, bringing year-to-date dispositions to $188 million at a weighted average exit cap rate of 4.2%, with proceeds being redeployed into accretive share repurchases. We currently have $160 million of dispositions under contract or accepted offer. We have not closed any acquisitions year-to-date and have none under contract or accepted offer. In summary, we're pleased with our performance in the quarter and are encouraged by improved leasing activity across our portfolio. We remain focused on strengthening our cash flow, accretive allocation of capital, and expanding our operating leverage while maintaining a low levered, flexible balance sheet. We appreciate your continued support. And now I'll turn the call over to Fitz.

Michael Fitzmaurice, Chief Financial Officer

Thanks, Laura. Third quarter Core FFO was $0.60 per share, up $0.01 from last quarter, driven by higher occupancy and accretive capital recycling from dispositions and the share repurchases. Total portfolio occupancy, including repositioning and redevelopment, was up 260 basis points sequentially. Notable rent commencements included 500,000 square feet at 1601 Mission as well as 191,000 square feet at 218 Turnbull Canyon and 123,000 square feet at 8888 Balboa, the latter two being recently repositioned or redeveloped properties. Turning to guidance. We are raising our full year 2025 core FFO per share midpoint to $2.40, up $0.01 compared to last quarter. The increase is driven by strong leasing activity, accretive capital recycling from dispositions and the share repurchases and higher capitalized interest. This is partially offset by projected lease-up delays related to repositioning and redevelopment projects. We also increased our same-property cash NOI midpoint to 4%, up 150 basis points from last quarter, primarily due to lower concessions within our same-property pool. We continue to allocate capital with a focus on FFO and NAV per share accretion while preserving healthy levels of liquidity totaling $1.6 billion as of quarter end and maintaining a low net debt to EBITDA of 4.1x. During the third quarter, we executed $150 million of share repurchases funded by disposition proceeds, capturing a 200 basis point spread between the weighted average exit cap rate and implied FFO yield. Our Board also authorized a new $500 million share repurchase program, which provides us renewed capacity and the ability to remain opportunistic. Turning to repositioning and redevelopment NOI. As of the third quarter, we have approximately $65 million of projected annualized NOI, of which $41 million is tied to projects that stabilized during the quarter or are in lease-up, with an additional $24 million related to properties under construction. This is offset by about $25 million of annualized NOI expected to come offline as future projects commence construction in late 2025 and throughout 2026. Importantly, these projects are expected to deliver incremental cash flow upon stabilization. The off-line impact is largely driven by four assets: the Hertz site at 9000 Airport Boulevard, 9400 Santa Fe Springs Road, along with two obsolete office buildings, Herbalife at 950 West 190th Street and 600 Vermont Avenue. As we move forward, we will continue to evaluate the full range of strategic value creation opportunities for our assets, be it reinvestment, leasing as is, or selling, while remaining disciplined and responsive to evolving market conditions and our cost of capital. This discipline has led us to release or sell certain assets that had otherwise been slated for repositioning or redevelopment, reducing future capital spend by about $40 million. In closing, I want to thank our team for their commitment to excellence, execution, and a winning attitude, which continue to be the foundation of Rexford's success. And with that, I'll turn the call back to the operator and open the line for questions.

Operator, Operator

I will now hand the call back to Mikayla Lynch to begin the Q&A session.

Mikayla Lynch, Director of Relations and Capital Markets

Our first question comes from Samir Khanal from Bank of America.

Samir Khanal, Analyst

I guess, Mike, you mentioned the 3.3 million square feet in the third quarter. How should we think about the run rate of that? How much of it is carryover from the second quarter, considering that second quarter was low? Can you help us understand the run rate and what is sustainable?

Laura Clark, Chief Operating Officer

Samir, thanks so much for your question. Yes, we had a great quarter of leasing 3.3 million square feet, the highest actually leasing quarter in our history, strong positive net absorption, the highest ever as well, as we're seeing improved tenant decision-making across the portfolio and strong retention levels. As we look at activity across our portfolio today, we have activity on about 80% of our vacant spaces. That's in line with activity levels at this time in the second quarter. So we are certainly encouraged by what we're seeing in the market. As I mentioned in my remarks, though, there continues to be a lot of uncertainty around the macroeconomic picture, volatility, and tariffs. So it's challenging to predict the go-forward demand and what that could look like, but we are certainly encouraged by signs we're seeing in the market today.

Mikayla Lynch, Director of Relations and Capital Markets

Our next question comes from Michael Griffin from Evercore ISI.

Michael Griffin, Analyst

I want to circle back, Laura, just to your comments on leasing and really I think driving occupancy as we saw with the sequential uptick this quarter relative to last. How should we think about the trade-off of boosting that occupancy maybe at the expense of some elevated concessions or the rent side? Or maybe walk us through those two pieces to how you solve for revenue growth going forward?

Laura Clark, Chief Operating Officer

Thank you for your question. Our strategy has been focused on driving occupancy, cash flow, and net operating income. In some instances, we can increase immediate net operating income by adjusting rates or other deal terms, including concessions and tenant improvements. We’re also signing shorter lease terms, which allows us to return to that space more quickly. Overall, the emphasis is on increasing net operating income and occupancy. Importantly, our properties are of higher quality in the market, and our team is actively generating demand. These factors are contributing to our leasing success this year, especially this quarter.

Mikayla Lynch, Director of Relations and Capital Markets

Our next question comes from Mike Mueller from JPMorgan.

Michael Mueller, Analyst

I guess going back to the redevelopment pipeline. When you sit there and look at everything today that's there, how much of it do you think could be sold off as you previously referenced? And on a go-forward basis, how are you thinking about what's the right level to have either under construction and in process at any given time?

Howard Schwimmer, Co-CEO

Mike, it's great to hear from you. Regarding your question about dispositions, we are continuously evaluating our portfolio for opportunities that can enhance its quality and growth potential while minimizing risk. We are actively pursuing dispositions as we are realizing very favorable spreads in that area. Currently, we have approximately $160 million under contract or in letters of intent. Additionally, we have successfully closed a notable amount of acquisitions year-to-date, totaling around $350 million. There are also future opportunities within the portfolio that will enable us to reinvest capital at attractive spreads.

Laura Clark, Chief Operating Officer

We are evaluating various options for each asset as part of our strategic planning. Our priority is to choose the best path forward that will enhance cash flow and support the portfolio's long-term growth. In this process, we are considering advancing, pausing, or selling projects based on current leasing opportunities. This flexibility is key to our value creation strategy. Ultimately, we will continue to refine our strategy with a focus on our capital allocation framework to ensure we invest in the highest risk-adjusted returns.

Michael Fitzmaurice, Chief Financial Officer

And Mike, the way we would like to think about in terms of managing the risk around it is based on square footage today. We have around 5.5% to 6% of our square footage is in redevelopment and repositioning. Our comfort zone on that front is in a range between 5% and 7.5%.

Mikayla Lynch, Director of Relations and Capital Markets

Our next question comes from Craig Mailman from Citigroup.

Craig Mailman, Analyst

I have a couple of questions. First, you are increasing share buybacks and divestitures. Have you communicated with Elliott, and is this related to their feedback? Secondly, how much can you sell while still being able to absorb the gains within your current dividend without needing to distribute a portion of the proceeds as a special payout?

Michael Frankel, Co-CEO

Craig, it's Michael. Thanks so much for joining us today, and thanks for your question, and thanks for your three-part question, I think. Yes, we have met with Elliott, and we have a constructive dialogue with them as we encourage with all of our shareholders. And addressing your question around buybacks and whatnot, actually, that's a process that started almost a year ago. We announced it at the beginning of the year, and we were executing on it. Frankly, long before there was a rumor that Elliott had even become a shareholder. So certainly not a reaction to that.

Michael Fitzmaurice, Chief Financial Officer

Yes. And Craig, as far as dispositions goes, we're committed to being a bigger part of our fabric as we move forward in terms of capital allocation priorities. Today, we sold $190 million. We have another $160 million under contract, as Howard alluded to. In terms of tax gains versus losses in 2025, we don't expect to have to do a special dividend. But as we continue to evaluate the portfolio and dispositions going into 2026, we'll share more information whether or not there'll be a special dividend or not next year.

Mikayla Lynch, Director of Relations and Capital Markets

Thanks, Craig. Our next question comes from Blaine Heck from Wells Fargo.

Blaine Heck, Analyst

Can you just talk about where you are with respect to credit and bad debt relative to expectations? And any visibility into how those metrics could trend throughout the rest of this year and into next? Any trends on the watch list?

Michael Fitzmaurice, Chief Financial Officer

Yes, sure. From a watch list perspective, Blaine, not much has really changed since the outset of the year. We have about 20 or so tenants on our watch and pre-watch list. The tenant health in our portfolio has been resilient and look no further than the bad debt levels that we've experienced over the last couple of quarters. In the second quarter, we had a negligible $100,000. This quarter, it was effectively 0. As we look forward into the fourth quarter, we do have a reserve of about 70 basis points, which is obviously heightened in the second and third quarter, which equates to about $1.7 million of NOI. And that's just out of a bunch of caution. There could be upside there, but we're watching a few tenants within our watch list that could be disruptive in the fourth quarter. As we look out to next year, it's a bit early to talk about, but I think there's a possibility we can get back to more historical levels between 40 and 50 basis points of revenue.

Mikayla Lynch, Director of Relations and Capital Markets

Our next question comes from Vikram Malhotra from Mizuho.

Vikram Malhotra, Analyst

I guess just one clarification and a question. The asset sales you mentioned, the 4.4%, I think, cap rate, I believe some of those assets were vacant. Do you mind just giving us a sense of like what the square footage or the occupancy of those assets were? And does that play into future sales? Meaning are you looking to sell vacant assets? And then just secondly, can you just confirm the mark-to-market? I think it's 0% or 1% cash mark-to-market. What does that mean for rent spreads into '26?

Michael Fitzmaurice, Chief Financial Officer

Sure. So the occupancy on the assets that we sold during the quarter were about 67%. But the cap rates that we quote within our disclosure are based on market cap rates. So we do assume a market cap rate for those vacant assets. And in terms of occupancy as well, I think this is kind of where you were going, the occupancy increase that we had. Sequentially, both on the same property and total portfolio, that was primarily driven by net absorption. We only had about a 10 basis pickup due to dispositions that we sold during the quarter. Your other question on mark-to-market, yes, net effective this quarter was about 10%. On a cash basis, it's negative 1%. As we look forward, we could have pressure on our re-leasing spreads into '26 and '27. But here's how we're thinking about it. Here are some of the mitigants of Vikram. One, our lease maturity profile is fairly staggered, no more than 15% of our rent expires in any given year. And we have plenty of other cash flow drivers that we can pull, starting with repositioning and redevelopment. As I noted in my prepared remarks a few minutes ago, we have $65 million of NOI tied to our repositioning and redevelopment. $12 million of that stabilized during the quarter with another $30 million tied to what's in lease-up, which represented about 1.5 million square feet. We have 75% of activity on that space, meaning we're trading paper with tenants through LOIs and lease negotiations. We also have other mitigants like accretive capital recycling. This year, we've showcased our abilities on that with dispositions and the share repurchases, and we are absolutely committed to that if the opportunities arrive going forward in 2026. And we're going to continue to drive operating margin. We made some tough decisions earlier this year with the reduction in force, reducing some of the comp there. And then we also had a reorg during the quarter with our asset investment management team. So we're very focused on operating margin as well. So we have multiple levers to pull to drive our cash flow from an FFO per share perspective and create NAV.

Mikayla Lynch, Director of Relations and Capital Markets

Our next question comes from Greg McGinniss from Scotiabank.

Greg McGinniss, Analyst

How did the assets that stabilized in Q3 at that 4.4% yield compared to the initial underwriting when they were put into the pipeline? And how have you adjusted assumptions for assets currently in the pipeline? And how should we think about targeted yields going forward?

Laura Clark, Chief Operating Officer

Thank you for your question. We have stabilized 14 properties year-to-date with an average yield of 5.8%. In the last quarter, we stabilized seven properties at a 4.4% yield. Some of these yields are not meeting our expectations due to current market conditions and the decline in rents over the past two years. However, we are excited about the strong position of these properties in the market and their potential for better performance in the medium to long term. These properties are of the highest quality and functionality in their submarkets, standing out compared to older properties. They are generating an annualized $12 million of net operating income. Moving forward, we are committed to allocating capital where we will see the best risk-adjusted returns. We will adjust our yield expectations based on the achievable rents. Our capital allocation decisions will focus on the best risk-adjusted returns, and if necessary, we will pause future projects or consider selling projects that do not meet our criteria.

Mikayla Lynch, Director of Relations and Capital Markets

Our next question comes from Rich Anderson from Cantor Fitzgerald.

Richard Anderson, Analyst

Could you speculate on how long it might take to transition from the current low point to a growth phase? Considering factors like declining supply, stagnant market rent growth, tenant sentiment, and potential influences from China and port activity, how quickly can we expect to see a growth trajectory emerge? Based on your experience in this market, do you think it will take a year, two years, or perhaps six months to return to a growth narrative instead of just finding the bottom?

Michael Frankel, Co-CEO

Thank you for your question, Rich. I believe you've partly answered it already, and I’ll expand on it. It all begins with a strong market environment. The overall market vacancy is around 5%. However, when we focus on high-quality properties similar to ours, that vacancy rate is much lower. This indicates a robust backdrop, and the health of our tenants remains solid. For instance, in our 51 million square foot portfolio, tenant bad debt was virtually nonexistent this quarter. We are also witnessing favorable demand drivers. There’s pent-up demand returning to the market, but we’re seeing significant additional demand across various industry sectors. As Laura mentioned, some of this is aided by the interest rate environment, and many business leaders seem to be adapting to the evolving tariff situation and are ready to engage in business accordingly. Notably, our portfolio attracts tenants for two main reasons: the exceptional quality and functionality of our assets, and our team's proactive approach in capturing and fostering additional tenant demand and leases, which helps us excel in our markets. All these factors create an optimistic outlook. However, the current macroeconomic and geopolitical uncertainties make it challenging to forecast the recovery timeline or predict when rent growth will begin. As Fitz eloquently pointed out, our portfolio has numerous growth drivers, positioning the company well to leverage our significant embedded net operating income growth moving forward, regardless of short-term or medium-term market rent fluctuations.

Mikayla Lynch, Director of Relations and Capital Markets

Our next question comes from Nick Thillman from Baird.

Nicholas Thillman, Analyst

I appreciate the added disclosure on the upcoming repositioning and redevelopment. Just for clarification on the mark-to-market, that excludes all redevelopment and repositioning and future redevelopment. And then as we look at just the overall projected square footage of like 2.3 million square feet, what is the actual amount that is currently in place as a square footage amount and the occupancy as we kind of are looking at what's going to be rolling out of just expirations in late '25 and 2026?

Michael Fitzmaurice, Chief Financial Officer

Yes. So the negative 1% excludes anything from repositioning and redevelopment to answer your first question. And the way I would think about the building blocks for repositioning and redevelopment, I go back to my previous comments there, Nick, is $12 million of the $65 million that we have in future projected annualized NOI with repo and redev stabilized during the quarter. So that will come online in the fourth quarter. And then we also have another $30 million that currently is tied to about 1.5 million square feet that is in lease-up that we expect to come on in the near term. And then we have about $20 million, plus $20 million or so that's related to projects that are currently under construction. So it's a bit longer dated, coming online late in '26 and '27.

Mikayla Lynch, Director of Relations and Capital Markets

Our next question comes from Jon Petersen from Jefferies.

Jonathan Petersen, Analyst

Great. I was hoping we could talk about G&A levels. I know as a percent of revenue, it's a bit above the peer group. I know there's been some efforts though to control that in 2025. So just curious if you could maybe give us your longer-term vision as we start to think towards '26 and '27, how you're trying to trend that expense line?

Michael Frankel, Co-CEO

John, it's Michael, and thank you so much for joining us today and for your question. And this is really front and center for the company. If you look back to our transcripts of our IPO, we described this business as one that should drive significant operating leverage as we grow and scale the company. And we're super pleased that the company today is at a scale where we can really double down on that focus, and I think you've seen great progress this year. For example, you saw about 17% NOI growth year-over-year from last year with 0 G&A growth this year. And we've talked a lot this year about some of the initiatives internally. Fitz described some of them a few minutes ago. And those are really designed to continue to drive efficiency and more importantly, effectiveness as we move forward. And so I think we see a lot of opportunities as we move forward. Obviously, we're not going to provide guidance into the future years around G&A, etc., but we're pretty optimistic there.

Mikayla Lynch, Director of Relations and Capital Markets

Our next question comes from John Kim at BMO Capital Markets.

John Kim, Analyst

Just a follow-up on Elliott. Was there any topic discussed that was maybe surprising to you or different than you've had with other shareholders? And are they still a major shareholder of the company today?

Michael Frankel, Co-CEO

John, it's Michael, thank you so much for joining and for the question. We really aren't in a position to comment on the nature of discussions that we're having with any of our investors. Above all, we think they generally don't appreciate that. And so I'm afraid that that's pretty much all that we can comment on.

Mikayla Lynch, Director of Relations and Capital Markets

Our final question comes from Brendan Lynch from Barclays.

Brendan Lynch, Analyst

You mentioned that you have kind of been leaning into occupancy versus pushing rate for a while now. Maybe you can just talk about where you fall on that spectrum now relative to the past 18 to 24 months?

Laura Clark, Chief Operating Officer

Yes. I mean it's a great question. And I would just say today and throughout the year, that's been our focus. So I wouldn't say that, that focus has shifted more so today versus it did at the beginning of the year. Where we can capture immediate NOI today, we'll make those decisions. And like I said earlier, whether it's around rate, term, TIs, or rent steps, we do believe that driving cash flow today is a really important focus.

Mikayla Lynch, Director of Relations and Capital Markets

That concludes the Q&A portion of our earnings call. I'd now like to turn the call over to Laura Clark for closing remarks.

Laura Clark, Chief Operating Officer

In closing, Rexford's third quarter results underscore the strength of our platform and high-quality infill portfolio, strategic approach to value creation, and our focus on accretive capital allocation to deliver long-term shareholder value. Thank you all again for joining us today.

Operator, Operator

This concludes today's conference call. You may now disconnect.