Conference Transcript - REXR 2026-03-02

Operator

Man with City Research, pleased to have with us Rexford and CEO, excuse me, incoming CEO, Laura Clark. This session is for City clients only, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit questions. Laura, I'll turn it over to you to introduce the company and team, provide any opening remarks. Tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.

Laura Clark, CEO

Great. Well, thanks so much, Nick. And thank you, Craig, as well. And thank you all for spending time with Rexford today. I would like to introduce joining me today is Mike Fitzmaurice, our CFO, as well as John Nahas. He's our current managing director of operations, but also the incoming COO. Last week, we announced the promotion of John to COO. And with that, that completes the strategic realignment of our management team. And I am very energized to partner with Fitz and with John as we enter Rexford's next chapter. So we believe that now is the right time to buy Rexford. And my conviction is driven by three key factors. The first is that our reformed approach to capital allocation and to operational rigor. The second reason to buy Rexford today is that there are current market indications that the bottom is forming in Southern California Industrial and that as market rent declines are tapering and touring activity levels are increasing, this represents a very compelling entry point for Rexford. And the third reason to buy Rexford today is that Rexford's unique portfolio, our team, and ability to drive value creation that position us to deliver shareholder value. So I'll spend a few minutes expanding on these factors and then turn it over to you all for Q&A. So first, in November, we outlined a reformed, return-driven strategy that's focused on portfolio optimization as well as operational rigor to enhance the resilience of our portfolio and improve the quality of our cash flows. This shift is designed to drive accretive growth in per-share FFO and NAV. we're refining our portfolio through capital recycling today we're selling properties where we can number one capture premium valuation we're number two we're reducing development exposure and number three we're mitigating future cash flow risk or lower growth assets we are redeploying that capital into superior risk adjusted returns such as share repurchases today and select value add properties. Since November we have moved swiftly from strategy to execution. We initially identified six development projects that no longer meet our return thresholds. We put those projects under contract for sale within 30 days. These very decisive actions allowed us to avoid dilutive capital spend and we preserved about $150 million of future capital requirements. Today we have about 185 million dollars of dispositions that are under contract or accepted offer and we project four to five hundred million dollars of dispositions for the full year and the current market environment share repurchases offer a very compelling opportunity to drive ffo and nav per share accretion year to date as announced last week we've accretively recycled capital into a hundred million dollars of share repurchases and this is on top of 250 million dollars of share repurchases last year as we move forward we will prioritize repurchases to capture the dislocation today between our share price and the intrinsic value of our high quality industrial platform we also have reformed our approach to operational rigor and efficiencies in regard to revenue today we are prioritizing occupancy and protecting cash flow in the market on the expense side we've made significant change in a very short period of time as well there in 2026 we expect that our gna as a percentage of revenue will be six percent and that's in line with peer average and we expect to reduce this further over time we've also recalibrated both the structure as well as absolute level of executive compensation to better align with all of you our shareholders an aggregate total executive compensation is now approximately half compared to prior levels The second reason to buy REX for today is that current market indications signal that the bottom is forming. While net absorption does remain negative in the market and we are seeing vacancy continue to increase, the pace of market rent decline is moderating and touring activity levels have picked up in the market over the last 30 days. While it's too early to call an inflection today, we are confident in the strong supply and demand fundamentals within infill Southern California. New supply under construction is near historic lows and long-term structural supply constraints continue to increase. Southern California remains one of the country's most dynamic and diverse economic engines reinforced by our immense population density and increasing growth across key sectors. And lastly, and finally, the reason to buy Rexford today is that we own the highest relative quality and functional industrial product in the market. with exceptionally high and continually increasing barriers to supply to entry and that's all supported by our on-the-ground operating expertise. This underpins our value creation business model and our ability to produce outsized growth. Our value-add platform enables us to unlock embedded growth opportunities within our existing portfolio and we continue to advance projects that have superior risk-adjusted returns that will fuel our future growth. By way of example, in 2025 alone, we stabilized 21 projects that generate nearly $40 million of incremental annualized NOI. And finally, and very importantly, is our team. The Rexford team is our competitive edge and the driving force of our success. Rexford is well positioned to capture future rent growth and occupancy upside as the market continues to stabilize. In closing, we are acting with urgency to position Rexford for superior growth. We are creating alpha through a fundamental shift in our capital allocation strategy and execution, and that has a direct benefit to our shareholders today and into the future. And lastly, this past week, members of this management team, including Fitz and myself and a board member, have made significant open market purchases of Rexford stock, increasing our Rexford investment alongside each of you, our investors. So with that, I'll turn it back over to you, Nick and Craig.

Operator

Great, thank you. Maybe just diving into one of your early comments was on share repurchases and kind of the opportunity that you're seeing right now. Makes a lot of sense financially. How do you think about other considerations around share repurchases? Is there anything from a scale perspective or a float perspective, you know, or is it purely just a financial opportunity where if you see a discount relative to where you're trading and it makes sense, you do it?

Michael P. Fitzmaurice, CFO

Sure, I can answer that question. Look, the things we look at is, one, the dislocation between our intrinsic value and where our share price is trading. Two, we look at leverage. We're at mid-fours today. Our target range is between four and four and a half. Three, we're solving for the highest risk adjusted return. And look, it made a ton of sense last year to take advantage of it. We sold about $217 million worth of assets, bought back $250 million shares, created about two cents of FFO per share plus NAVA Creative. This year, same playbook, no different. So we're looking forward to executing upon that as we move throughout the year. But it's going to be a function of dispositions.

Operator

But there's no dis-economies of scale as you shrink a little? No. No big hit.

Speaker 5

And, Laura, you said we're bottoming, right, not bottomed, and so I want to parse the nuance there of, you know, when you look at the market, and every sub-market is different than you operate in LA, right, it's a huge market, or Southern California, if you were to kind to divide up your socal exposure where would you what sub markets or what areas of socal are closer to bottoming or maybe have bottomed versus where are things still soft and could be further downside i'm just kind of curious as you get more specific right versus look at the overall average which in this market it's it's tough because it's so big yeah that's a great question i'm glad that you asked it.

Laura Clark, CEO

I'll let John jump in.

John Nahas, COO

Yeah, sure. So I'll start generally speaking and then dive into a couple of key differences that we see across the sub markets. So generally speaking, under 50,000 square feet is generally pretty stable. I think when we get above that, we start to see some differences across the various sub markets. A couple of examples would be looking Looking at the Inland Empire West, for example, the current weak spot in that market, I would describe as between 400,000 and 700,000 square feet, and we're fortunate to not have exposure there today. But above that threshold, things are certainly looking more stable, and below it, that's definitely the case. I think we're seeing a lot of absorption in that market, in that size range that's kind of sub 400. I would say the San Fernando Valley has continued to struggle, especially with Class A product. But when you look at smaller Class B highly functional product, that segment of that sub-market is more stable. Similar dynamic in Orange County and Mid-Counties where the Class A product that represents more expensive space is typically taking longer to lease and there's more pressure on rents, whereas the more value option again, with Class B that has higher functionality, is leasing up better. Finally, I'll touch on the South Bay, similar dynamic to the other two sub-markets I just described, except there you have a wider variety of product types, and those that cater to more logistic intensive uses are tending to be a little bit slower, as we're not seeing that tenant demand recover quite as quickly in the South Bay market as well and some others related to that use.

Speaker 5

And as you were to overlay kind of your expiration schedule for the next year or two, I know you guys have guided to a little bit weaker occupancy this year. How much of that versus just continued consolidation because some of these tenants maybe took too much space in 21 and 22 like where are we that it's the consolidation phase ending and kind of working its way through the expiration schedule versus just maybe some weaker sub markets or weaker verticals that the tenants operate in that could continue to pressure a little bit on occupancy yeah I think the space reconciliation trend is ongoing you know we're about five years removed from the peak the start of the peak of the market and our market generally trades in five-year term so I think we're going to continue to see

John Nahas, COO

tenants evaluate their space footprint and their needs and reconcile those two things we've been seeing that by the way it's part of what's been contributing to the negative net absorption that we've experienced throughout Southern California over the last number of quarters now that trend is lessening negative net absorption is less than it has been and but we're very focused on that because i think that's the metric that's going to tell you and that reconciliation process has been worked through and you guys are in the ongoing asset recycling phase and laura you're coming in you guys re-under wrote the whole portfolio um clearly you guys were significant buyers in 21 and 22

Speaker 5

Two, as you kind of put the parameters around keep versus sell, how much of it is sub-market? How much is the physical aspects of it? How much is it just you bought wrong and it's just time to punt it because you'll never... That capital is better used somewhere else rather than being stuck in an asset.

Laura Clark, CEO

Could you just walk us through the decision tree, how far through the underwriting process you are? then um i'll follow up after that yeah i mean all of those things are things we're thinking about craig as we're building out right what what are the right properties to sell but it all what what underpins and what are we trying to achieve like let's start there right what we're trying to achieve is a portfolio that has a more resilient stream of cash flow growth per share so how can we and how can we create a cash flow stream that has higher relative growth than where we are today that allows us to mitigate future risk, that allows us to mitigate future dilutive capital spend, as you've seen us do in some of the development sales, and at the end of the day position the FFO per share or earnings growth of this business higher than where we would have been otherwise, right? and on a relative basis how do we have a more consistent growing cash flow stream and we know that value creation and I talked about it in my prepared remarks is a key element of our business model and so and that is what ultimately allows us to drive cash flow per share growth that's above what you could achieve in the market and so how do we position the portfolio in a way to be able to do that while at the same time mitigating some of this disruption to cash flow growth so So that's what we're thinking about high level and what we're trying to achieve. So to your question around, so what does that mean? That means that we're looking at everything, right? We're looking at those assets, as I mentioned, where we can capture compelling valuation because that's a great way for us to creatively recycle capital. We're looking at the developments, right, and not allocating dilutive, you know, capital to those. So just as an example, those six projects that I talked about, we had projected to stabilize those projects at a 4% yield on an aggregate. That's not a great use of our capital and that allows us to avoid dilutive capital spend of about $150 million. And so we can then avoid that spend and redeploy that in the future to more accretive uses. And then lastly, as we look at, you said, is it unit size, is it sub-market specific?

Speaker 5

It's really just about how do we build the better cash flow stream and how do we embed those opportunities into our portfolio where we can drive value creation over time. and in terms of the the buyer pool for the assets you're putting out there I mean how deep was it on the the assets that you you put out there from the development side versus what does it maybe look like from for the stabilized assets how deep is that pool today given you guys were one of the most active players in in LA so that is kind of taken out of the market on the development sales specifically

John Nahas, COO

we had a pretty long interest list we had over 85 qualified groups you know enter the process and you know sign the required documentation to take a look and on each individual asset we had a focused bid list of between five and ten groups that were competitive so we were very pleased to see that level of interest the composition of the bidders was also interesting we had groups that certainly focused on development as a primary strategy in the region but also saw larger institutions enter the mix as well and I think that speaks to just the overall level of interest that we're seeing from capital for southern california given where we are in the cycle and you know the bottom

Laura Clark, CEO

forming um i think a lot of groups are recognizing that it's a good entry point uh and so i would suspect that as we sell other types of assets we'll have uh similar interest yeah what i would add to that is over on the market there there aren't a lot of properties on the market for sale at this point so it is pretty quiet on the the seller side uh we are hearing that there's more capital and john said you know we're obviously we're seeing some of that capital wanting to get into southern california but you're not seeing as much on the market today on the on from the seller side where we have been able to take advantage of those premium valuations is in the owner user market those are businesses that want to buy their real estate and where we can take advantage of that we have they tend to pay higher premium premium valuations they clearly look at real estate evaluations from a different perspective and and we're taking advantage of that where we can that pool though is is uh unpredictable uh in terms of where that where they want to be and and what properties can trade it's unpredictable from an execution perspective they tend to need uh financing as well uh tend to not be typically real estate investors and so um where we can take advantage of it we will but it's not somewhere where you know you can say okay we want to tee up X million dollars of owner user sales and execute it's more opportunistic in nature.

Speaker 5

And if you take out the users have you tried to back into maybe what investor IRRs are trending to on an unlevered basis for assets in the market or maybe even what people and on the development side the yields that people are trying to develop to make the risk reward work?

Laura Clark, CEO

Yeah, I would say we're pretty close, obviously, to the development side, selling the six properties. Generally speaking, we saw those developers solving to somewhere between a six and six and a half percent yield. I would caution that a little bit, you know, you typically see developments in the market, developers solving to somewhere between 150 to 200 basis points spread.

Speaker 5

In this case, because these sites were fully entitled and in some cases already permitted, you're taking a lot of that pre-development risk off the table so it did allow for those developers to solve for a bit tighter spreads than you typically see from a development underwriting perspective and then you kind of touched on this a bit you've done a lot of work coming in you rejiggered well the management team was kind of the core there but John got elevated right you're recognizing the people internally from a from a culture standpoint from what you stepped into taking the lead you know formally what inning do you

Laura Clark, CEO

think you are in resetting the bar at Rexford to where you want it to be as a go-forward versus maybe where it was under predecessors well we're we're still pretty early here we're just a few months into the announcement and the transition officially happens on April the 1st but I would say that the work has been being done as Craig that you mentioned and and I'd say as a team internally there's a lot of excitement for this next phase of Rexford and there's a lot of excitement from all of us as well in terms of taking an incredible business model that we have and being able to just make it better and grow it from here and the Rexford team is excited and behind that and we will continue to mold the team and the culture around what drives success at Rexford because they're such an important part of that.

John Nahas, COO

As part of kind of looking forward in those opportunities how are you thinking about using and deploying AI within Rexford to you know either become more efficient or from a capital underwriting perspective and just kind of the opportunity that you see right now. yeah it's pretty exciting I think everyone probably agrees with that so we we take a incremental approach to it's the best way to describe it and it starts with utilizing platforms they're already part of our data and software strategy for data security and integrity reasons but also ease of deployment to the larger organization and so we are accomplishing tasks that are more broad and widespread through those existing tools that we already have in our ecosystem so think things like workflow automation and data analysis and search optimization that we can put in the hands of all of our teams easily we're a microsoft shop so we're using their tools for that on a property operation standpoint you know we use yardy there have some tools in development that we're looking at that are pretty exciting too and so kind of the base level of our strategy is to utilize those platforms. The next level up is bringing in, which we're doing now, tools that are for a bespoke purpose that aren't available through those platforms. So things like lease abstraction or lease document drafting and contract drafting, things that can effectively speed up the process thereby creating more efficiency and productivity. So we see a lot of opportunity and have enjoyed some success to date with that and we're going to focus on those two areas. There's a lot more that we can do there. And so we're a ways off from taking what I would describe as probably the next step after that, which is building something custom. I think there's enough tools in the market that we can get a lot of value out of based on what we see.

Operator

Makes sense. And then how about just from a tenant perspective? You know, obviously, I'm sure there's a lot of deployment of AI across their businesses.

John Nahas, COO

Is that starting to impact leasing decisions or is that becoming more of a conversation as you as you look to lease space yeah it starts to come up a little bit more primarily in the sense of using those types of tools to help inform real estate decisions whether you're looking at you know a tenant who's mapping out their customers and figuring out the ideal location to service them the evaluation of lease comps you know is another application which we use it for internally at Rexford as well so we're starting to see more groups deploy it now it tends to be more with the more sophisticated larger more corporate type users but with you

Speaker 5

know the plethora of options out there we're even seeing some of the smaller tenants get into it as well we've been we've heard from a couple other of your peers right or not heard but had a conversation with them around power allocations what tenants are using right LA is starting to see some more high tech manufacturing light manufacturing as you guys look through your portfolio have you seen power needs from tenants start to increase does this inform your decision on certain buildings to keep that may be antiquated where you can't pull the power and so even though physically truck courts other things it's functional but power wise it's getting to be obsolete like how is that impacting the LA market in your portfolio specifically?

John Nahas, COO

Yeah, it's a big factor. And we've been focused on it for quite some time. And as we look at upgrading certain properties, power is usually at the forefront of the conversation. As you touched on, it's not just about what you can put in the building in terms of infrastructure. It matters how much capacity the circuit has. And what the utilities are doing is basically delivering capacity on a first come, first serve basis. And so you won't know how much technically you can get if a certain circuit in the grid is nearing capacity until you're ready to receive that power upgrade. So it adds some risk to the equation. We're very early in planning for that ahead of time to try to get ahead of it. But it does limit the potential for certain properties and we do take that into consideration when planning improvements or potentially considering a property for disposition.

Laura Clark, CEO

Yeah, and I'll just add to that, it is an important factor, an important functionality factor that certainly drives demand and can differentiate your product in the market today. So if you were able to deliver a building with 4,000 amps in the market versus 2,000 or 1,000, it absolutely will differentiate the demand and certainly the leasability of that project sooner. It's not just from advanced manufacturing, by the way. There's a significant shift to electrification, which is driving the need for more power across the board from all tenants, regardless of industry. So it is something that, as John said, that we've been focused on for some time, working directly with the utilities. Those relationships are very, very important, and it's something that, because it's been something we worked on for some time, we're really well positioned to get, you know, the outsized power that we need and position our properties in a different way in the market.

Speaker 5

And transitioning maybe a little bit to earnings, we've talked about a lot of the sort of inputs worth a little bit of dilution from asset sales in some instances offset by buybacks, but then, you have the occupancy pressure that feels like it's going to be there for maybe a year or two until you really start to see the market inflect potentially. Then you have instances like Tire Co. where strategically it's better to take the rent hit and lock them in. So if I put this all through the grinder from an investor expectation in terms of and i know you haven't given 27 guides so this is more high level but um the investor expectation for a snapback in ffo growth that should that be tempered to where maybe that's a little bit later dated where there's some of these things you've identified are hit to run rate they pressure you guys aren't redeveloping as much you're taking stuff out of the pipeline right like I'm trying to get to the algorithm without kind of box you in from a guidance perspective but you kind of see where I'm

Michael P. Fitzmaurice, CFO

going I'll let you take it from there sure thanks thanks Craig for the labored question here we're going to control control and that's why we prioritize the occupancy we've spoken about it quite a bit it's white tarco we did an early uh renewal on that that was 20 million uh of noi and a market like this the most expensive thing you can do is not renew a tenant especially your biggest tenant 1.1 million square feet they had a negative 30 percent releasing spread i do want to make clear that that's not what the expectation is for 2027 they're not going to be anywhere near a negative 30 percent so back to prioritizing occupancy you know we have about 55 million of NOI that's tied to our repositioning and development pipeline that's either in the lease up or the construction's already complete or where we have a shovel in the ground. That's going to come online over the next two plus years. That's one lever we're going to pull. The next one we're going to control to the best of our ability is taking advantage of the disposition market. We talked a lot about that today. We have 400 to 500 million of dispositions that we expect to get done radically over the course of 2026. And right now, share repurchases are extremely attractive based on my earlier commentary so we'll take advantage of that dislocation and the last thing and lower comment on this to uh to a certain degree is gna you know at the end of 24 our gna as a percentage of revenue was about nine percent this year is expected to be about six percent so roughly 20 million less than last year coming around 60 million we'll continue to drive operate leverage where we can there so what we can control are those three things to a certain degree the pressure on the releasing spreads is something to be seen we do expect we could have pressure in 27 and 28 just based on when market runs peaked in 22 and 23

Laura Clark, CEO

but we feel at this point we have a lot of other things that we can't control to offset some of that yeah and i'll add one other offset is is just how we're thinking about capital recycling and so So to the extent that, you know, we have some of those headwinds and more near-term and the specific assets that we think that we can sell and then be able to mitigate some of those headwinds and risk, it's absolutely something that we'll consider doing.

Speaker 5

I know your tenants kind of skew smaller generally, but are there more risks of a tire co-type hit in the near term as you look at the expiration schedule in 27 28 now at this point no so as we think a lot of this talk has been about kind of rationalizing right-sizing but at the same time you guys ultimately do want to grow right and so how do you I know it's not the priority today but do you spend much if any time today underwriting opportunities either in your markets are you spending time looking to see if it makes sense to diversify from just being SoCal to maybe a broader West Coast footprint like what's the as you get through this stage which I know is gonna take a while but But you always have to be a couple of steps ahead. What are the longer-term strategic focuses that you're thinking about, at least initially? What could we expect?

Laura Clark, CEO

Look, we've got a lot of blocking and tackling in front of us, as you said. And we're spending time thinking about how we position this portfolio for the future and for better growth, as I talked about earlier. year. So that's number one, two, and three in terms of the current focus. And that means that as we do that and we're able to position this portfolio for better growth, it will improve our cost of capital. And so there will be a point in time where we will be able to grow again. There's obviously a significant growth opportunity for us in Southern California into the future. So the relationships that we have in the market and across the market and the vast data that we have around what those opportunities look like, we continue to cultivate. And that's really important because that will be an important part of our growth in the future. Importantly, though, as we think about how we will grow in the future, we are going to grow being very cognizant of achieving the appropriate risk-adjusted returns as we allocate capital in the future. So when we do grow again, it will be focused on what is our cost of capital? How are we underwriting in a very rigorous way? And so that when we allocate that capital, that we are truly driving value creation for shareholders in the future.

John Nahas, COO

I'd also add that that opportunity set is there. As Laura mentioned, we are monitoring it day in day out and the fundamentals in our market are only going to get more favorable for us i think this is something that is underestimated for our market is that there's something different about this cycle which is the land use regulation has increased substantially over the last two years and so as we get to the recovery portion of the cycle what's going to be different from previous cycles is that you're not going to be able to add the same level of supply that was added to our market going forward and that comes from state and local level land use changes. So we're pretty excited by that and very bullish and continue to be on the opportunity set in Southern California because that's going to benefit the existing industrial stock and it's going to benefit us because we're well equipped to upgrade that stock and drive the mid-teens returns that we get through our repositioning program and just to maybe clarify or get you guys on the record once you get through the initial asset sales will asset recycling continue to be a key part of the capital deployment discipline going forward yeah absolutely i think capital recycling should be a part of any great capital allocation strategy and framework

Laura Clark, CEO

so i would expect going forward we'll continue to evaluate the portfolio on an annual basis and we'll probably sell something between 1% to 3% of assets annually and recycle that capital accretively.

Operator

Perfect. Just quickly, rapid fire, same story on Hawaii growth, we'll just say for industrial sector overall, so not just Southern California, next year in 2027. Higher. Needs to be typed into a spreadsheet. 5%. 5%, perfect. And then a year from now, will there be more, fewer, or the same number of public industrial REITs same thank you very much thank you so much you