Rexford Industrial Realty, Inc. (REXR) September 15, 2026 Conference Transcript

All right, everybody, why don't we get started? I know it's 4.30. This is the last panel of the day. So I know everybody's excited from that perspective. So welcome to the Rexford Roundtable.

Happy to have Laura Clark, CEO, up here.

Laura, why don't you introduce your team? I mean, we have a big group here and give us any opening remarks.

Okay, sounds good. Well, thank you all for joining us today, and thank you for your interest in Rexford. Thank you all for hosting Bank of America. With me today are Mike Fitzmaurice, who's our CFO, John Nahas, our COO, and Doug Fedesworth is our SVP of Investor Relations and Capital Markets. So before we move to your questions and Q&A and any questions that we have in the room, I'd like to provide an update on what we're seeing in the overall Southern California industrial market and an update on our current strategic priorities. So let me start with the market. The leasing activity continues to improve in our market. We are seeing evidence that demand is strengthening across Southern California. In the second quarter, the market generated nearly 6 million square feet of positive net absorption, resulting in the first decline in overall vacancy that we've seen in the market in four years. Leasing activity has been strong throughout the third quarter, and we are seeing demand from a broad range of industries, including advanced manufacturing, logistics, and consumption-based users like food and beverage, automobile, and construction-related businesses. Of note, demand across the market is broadening, and that's a good sign. We're seeing activity across more submarkets and size ranges than we were earlier in the year, and leasing momentum remains strong in spaces under 50,000 square feet, while activity in larger Class A spaces, especially in the North Orange County and Med County's market, has improved as corporate users have become increasingly active. While availability in the market remains elevated, we are moving in the right direction. That said, incremental tenant demand driving net positive absorption is fundamental to the market's continued recovery. So turning to our strategic priorities, we have taken decisive actions this year to strengthen our platform and sharpen our focus. Earlier this year, we completed a comprehensive portfolio review, and we identified approximately $2 billion of non-core assets for dispositions. This initiative reflects a very disciplined effort to concentrate our portfolio around properties we believe offer the strongest long-term growth and value creation potential. Including our recently announced $1.2 billion transaction with EQT, we have closed or have under contract approximately $1.5 billion of dispositions year-to-date, which positions us to achieve our full-year disposition objectives. Proceeds from our dispositions will enhance our ability to execute on our capital allocation priorities and increase financial flexibility. We are reducing near-term debt maturities, repurchasing shares when attractive opportunities arise, and we are continuing to invest in our high-return repositioning and development opportunities across our portfolio. At the same time, our conviction in the long-term outlook for infill Southern California industrial real estate remains strong. The Southern California industrial market benefits from one of the most diverse demand bases in the country. At the same time, supply under construction has fallen to multi-decade lows, and increasing restrictive state and local regulations, specifically including AB 98 and State Bill 415, are making new development increasingly more difficult. These dynamics further strengthen the long-term value of our portfolio and our differentiated platform. Before I conclude, I want to recognize the Rexford team. The progress that we've made this year reflects the exceptional execution across the entire organization. So in closing, we have acted decisively to strengthen Rexford. We have sharpened our portfolio. We have enhanced our balance sheet strength. We have improved operational efficiency and all reinforcing our long-term growth platform. So as market conditions continue to improve, we believe that Rexford is exceptionally well-positioned to create value for shareholders and capitalize on the opportunities ahead. So with that, I'll turn it to you for questions, Samir.

Yeah, I'll start, and I want to keep this interactive, so if anybody asks questions, please. So maybe talk about the submarkets, right? I mean, there are certain markets that are clearly doing well in L.A. and, you know, you're South Bay, but talk to us kind of broad, kind of what you're seeing within the markets.

Yeah, I'll start a little bit higher level, and then John can dive into some of the submarkets. As I mentioned in my prepared remarks, what we've seen from the second quarter into the third quarter is, I'd say, just a broad pickup across the market in terms of activity, and that includes across submarkets and size ranges. As I mentioned, that sub-50,000 square feet continues to be strong. That's been a spot of strength for several quarters now. We've even seen market rent growth for the past two quarters within that product that's sub-50,000 square feet. And what we've seen generally in the third quarter is that pickup in Class A, driven by those corporate users, as I mentioned, and that's been very positive for the pipeline, the leasing pipeline that we have from a development and repositioning perspective. So, generally, we've seen more activity and more lease executions around those assets that we have for lease up in the development and repositioning pipeline. John can certainly speak more about some of the sub markets.

Yeah. So you touched on South Bay. We've been describing that market in two parts. There's the coastal portion, which I think most people are familiar with. Advanced manufacturing demand is quite robust, and that is continuing. But that is acutely focused on the most coastal areas of the beach cities between El Segundo down to Torrance, with some spilling over into Long Beach. When you look beyond that one tenant sector, beyond advanced manufacturing, it is a bit different. General logistics demand is there, but not nearly at the level that we're seeing with advanced manufacturers. And so the whole market is a bit bifurcated. And we're seeing rents and occupancy and absorption behave differently across those two areas. Similarly, we have other markets like the San Gabriel Valley, which are exhibiting strength and pockets around the city of industry. That's one area, as Laura mentioned, where we're seeing increased demand for Class A product. We have a couple of development sites that were completed and are happy with increased activity we're seeing there. But like the South Bay, there's a bit of a bifurcation. And when you look at the Irwindale portion, which is the north part of the San Gabriel Valley market, it's not quite the same. We're seeing healthy demand, sub 50,000 square feet, as Laura noted, and as well as with product that's class B with higher functionality. But class A remains a bit slower in that market. Logistics demand is one of the bigger drivers for San Gabriel Valley overall. That is also true for the Inland Empire West, and so we're continuing to see good demand coming from those sectors. Our product in the IE is on the smaller scale as compared to most. Our average unit size in that market is 30,000 square feet. Nevertheless, we do own a few bigger boxes and have some exposure to some of the increased 3PL and warehousing tenant demand that we've seen there. Probably most notably, what's different from earlier this year, certainly even last quarter, is some of the Class A demand focused on markets like Orange County and Mid-Counties. Those markets year to date have been a bit quieter in that space. And over the last, you know, 60 to 90 days, we've seen increased activity and more deals getting to the finish line. Light manufacturing, some advanced manufacturing is driving a lot of that tenant activity in those markets. Mid-Counties, you'll see a little bit more logistics there as well. And then real quickly rounding out, you know, San Fernando Valley, which is a big presence for us, Class A remains a bit slow there. But Class B product and smaller sized units are continuing to lease and perform very well. That market does historically have a larger component, roughly around 20%. It's tied to entertainment. That sector has not gotten any better. It's still a lot of the same. And so we haven't seen that demand portion come back yet. But overall, again, activity generally is going in the right direction across all the markets and most size ranges that we operate in.

John, remind the audience, what is your exposure to South Bay?

Yeah, it's our largest sub-market, and we have product there that ranges as small as 2,500 square feet up to a few hundred thousand square foot size boxes. It's concentrated mostly in the coastal and harbor gateway corridor areas of the market, which are focused on the logistics corridor that extends from the port to downtown LA, as well as the advanced manufacturing epicenter that I described earlier.

I think it's around 12. Yeah, it's about seven have my square feet. What is that? Is that 12 to 15 percent or something like that?

Yeah, in the ballpark.

Okay, and is there a way to bifurcate A product versus B, what you own in South Bay? Just curious.

We have a bit of everything in that market. It's hard to give you a number off the top of my head. We also have a couple of projects in our development pipeline that are underway that are going to increase our presence in that sub market.

Okay, why don't you maybe you talk a little bit more about the development pipeline? It sounds like you've seen some more activity there this quarter.

Yeah, that largely aligns with the Class A tenant activity trends that we're describing. We have product in our pipeline that is completed and in lease up. Those buildings are generally located in Orange County, San Gabriel Valley. There's a few others and a couple of other markets, but that's the higher concentration. And so we're pleased with the increased activity that I was describing earlier. In terms of the future pipeline, we have a few projects that have started and will start as we get through the end of the year. Those are all projects that we're really excited to get underway and deliver to the market. They're projects that meet our current financial threshold guidelines and will deliver differentiated product to the market, which is really important. That's a big element of our strategy is to make sure that across our operating platform and when we do development, that our product has a competitive advantage. And so the projects that are in our future development pipeline are great examples of that.

Yeah, and from a financial perspective on development, we're selling for between 150 and 200 basis points on top of a market cap rate. So right now that's off to about a 6.5% to 7% yield, which are in line with the projects that we've started this year. And as we look ahead, it has to hit that hurdle for us to greenlight it. Otherwise, it's a no. And as we look at our development pipeline going forward, it's smaller. We sold six development sites earlier this year where they didn't pencil. They were penciled between a 3.5%, 4% because they were largely bought in 22% and 23%. So as we move forward, the focus is going to be more in the repositioning, the light CapEx work inside the four walls of the building where it's lower CapEx, lower downtime, much bigger tenant demand, broad-based demand from different tenants' sizes and industries. So it's a big change from how we allocated capital in the past.

And Laura, when you mention, I just want to make sure, when you say demand is strengthening, you're talking across the board, right?

Yes. Yeah. And as John mentioned, I mean, we're certainly seeing, you know, when you dive into the sub-market level, right, there's a differentiation in terms of the performance within a sub-market and within size ranges. But even when you compare to the levels of activity three months ago, six months ago, nine months ago, generally speaking, the levels of activity across the board are higher, and I would say the demand pool is also deeper.

Is there like a leasing pipeline?

Are you able to quantify versus like – Yeah, we haven't reported kind of mid-quarter stats, which will certainly – we report earnings in less than 45 days from now, and so we'll certainly provide updates at that point in time.

And, you know, you've talked about the demand improving. Have you seen a sort of a shorter timeline for decision-making as well from customers?

Yeah, I think that's been – I'm glad you asked that question because I think that's really key. I think, you know, we've had periods where we've had leasing activity kind of pick up, but what we've seen is that tenants are executing leases. They're making decisions, and I think that the tenant decision-making period has shortened as well. You know, I think there's a lot of reasons that can be driving. I don't think it's just one thing. We certainly continue to see the reconciliation of spaces. Tenants, you know, are very focused on driving efficiencies within their operations. They're also very focused on being in the right buildings from a functionality and quality perspective to be able to drive their businesses forward in the most efficient way possible. You know, when you think about, given the fact that there's more availability in the market today, there's more options, you see them going and looking at, you know, those options, looking at where rates are today, and wanting to lock in today's rates in better And so we certainly benefit from that, from our portfolio, from especially, I mean, Fitz mentioned in terms of, you know, our value creation model is about, you know, delivering the most functional and highest quality space on a relative basis to the market. And so we're certainly benefiting from that inflow. And I do think that tenant decision-making is strengthening just generally around the tenants are seeing, you know, activity pick up across the market and wanting to lock in today's rates. You know, some are trying to push that decision-making sooner. You know, maybe I've got a renewal in a couple of years, and I'd like to go ahead and lock in today's rates and extend my term substantially. So we are seeing that, I think, as also part of the driver there.

Did you talk about the lease negotiation process a little bit? Like, you know, now that tenants are coming in and wanting to lock in today's rates, how much are you able to push on the annual escalator? Is that still like in the 3-ish percent range? Yeah, around 3.5.

Yeah, and that's been pretty sticky over the last few quarters. It feels like overall the market has settled at that number. In our smaller size spaces, think sub 10,000 square feet, we're still able to achieve a bit higher. Average is around 4%. But really what it's coming down to, because that's pretty sticky. Concessions are still pretty sticky. It's generally about a month per year of term for new deals. And TIs aren't super meaningful in terms of overall dollar value in the deal economics. It's coming down to rate and it's coming down to commencement date. And going back to your question, Samir, and what Laura touched on, The urgency shows up in two ways. There's tenants that have been putting off decision-making, and now they want to go. And they want to get in the building in three weeks, which is great. We love that. Then there's other tenants who are entering the market proactively much earlier than they otherwise would to take advantage of where rates are today. And so the two biggest conversations our teams have is around rate and commencement date, some being accelerated, some being, as Laura was touching on, maybe further out in the future so that they can benefit from today's market versus what they might be doing. be dealing with later down the road if the market continues to improve.

And maybe on the rate piece, market rates have been declining, but the pace of the declines have slowed the last couple of quarters. I guess just any general sense of how close we are to sort of more of a flattish point?

Yeah, I would say what's been going on with market rates is a bit expected. We still have elevated availability and vacancy across all of our submarkets. And so with that, the tenants have options and can leverage that. The net absorption that we've been seeing, especially what we think is happening on the ground today in the market, is very encouraging and is steps in the right direction of chipping away at that elevated vacancy and availability. Until that comes down, we expect there to be continued pressure on rents because as landlords like us are competing for deals, going back to what I was mentioning before, rate is one of the big topics of discussion. So it's expected. We think that's going to continue, generally speaking, getting through this year and 27 and the first part of 28. We're going to be dealing with 2021, 22, and early 23 vintage leases that are expiring where tenants are going to reconcile their space needs and make different decisions in today's market versus what they decided to do when back in 21 and 22 vacancy was really low and they didn't have a lot of choice. So we expect it to continue to fluctuate. The rate of decline in rents flattening out has been helpful. And then there are certain areas of the market, particularly spaces under 50,000 square feet, where rents have been stable. And we've actually seen some growth over the course of this year. So it's important because when you think of Rexford, remember that our average unit size is 28,000 square feet. So we have a lot of exposure to that segment of the market, which is pretty stable.

Yeah, I mean, I think what's really important to focus on is that the recovery will not, in terms of net absorption and in terms of market rents, will not be linear. We're in a 2 billion square foot market, and it will different by sub-market, and it's going to different by size range. So really focusing in on the competitive set, that's what's really going to drive absorption. When you think about the competitive set within our portfolio and the market, the competitive set is what's going to drive our ability to push rates or not. And so that's really what we're focused on in terms of as we're looking through to the recovery is it truly is on a sub-market and a size and quality perspective going to vary as we get through this period I guess there's been a lot of conversations around cash leasing spreads I mean, you're still down, it was 11% in the second quarter.

Help us understand, like, how to think about that metric and if it feels like market rents are still under pressure for the next sort of, you know, whatever it's, 27, 28. Help us take that.

Yeah, look, we've been pretty clear-eyed with our investors over the last several quarters on what our expectations for cash release and spreads will be. And this year, they're going to be negative 10% and negative 15% Because what we're facing on the rent roll in terms of expirations is leases that were signed in 2021. Our average lease term is about five years. So rolling into next year, in 27 and 28, we're starting to get at those vintage leases that were signed in 22 and 23. And as a reminder, the height of the market in terms of market rents when they peaked was the first half of 23. So these are structural in nature. We sold some of this off via the EQT transaction that Laura noted earlier. So releasing spreads are a bit better, but you can't fix this stuff overnight. You know, we, 50% of our portfolio today is still above market. It's a little bit less after this, the sale of these 2 billion worth of assets. So we'll face some pressure. It'll probably be negative mid-teens in 27 and 28. Big caveat there, though, is that's assuming market rent does not grow from here on out. That assumes flat rent. But it's important to talk about the other side of it. And the biggest swing factor in terms of earnings growth for this company today is occupancy. And that's why we've been prioritizing this for the first, you know, almost nine months of this year. We're at 90 percent today. We have about three and a half million of square feet in a repositioning and development pipeline that has, you know, rough numbers, 60 million of NOI tied to it. So if we continue to experience positive net absorption like we did this past quarter and market rents begins to moderate, hopefully flatten out and maybe even go up, that will accelerate the occupancy. The other piece of it, which we haven't talked about, which I'm sure a question will come up, is that we're going to get our net debt down to three and a half times via this transaction that we're doing this year of the $2 billion or so. It's going to bring us down, like I said, three and a half times, and that's going to position us very, very well for the recovery. You want to have high liquidity. You want to have low leverage because you want to be able to buy when buy-in is low, which is kind of the inverse of what we were experiencing in 22 and 23 when we were buying at the height of the market. So it's quite the inverse of that, and having that type of firepower is going to change the direction of this company.

Rick, can you put that in the context of the market cycle? So the peak, 21-23, you were signing leases at typically a spread, cash spread of blank. You signed escalations on average of Y. I mean, the spreads from 21-23 were like 50%, 70%. Then, and you signed escalations in the leases. So we have cash rent roll-downs, but it's off a very cyclical market.

Yeah, that's correct. The market overall increased almost 80%. And the escalations at that point in time, we're north of four, many four and a half, and in some cases, even five.

So that compounds, you know, since, you know, 21, 22, and 23. That's why we're having to roll off that we expect. Like, look, time is the best gift we can give ourselves in just getting through this and getting to this reset. And we're getting there. The market's getting better. You know, 12 months ago, sitting in front of you guys, we were in worse moods. We're in much better moods today given the market fundamentals, the way we're allocating capital, leadership changes. It's been great.

Yeah, I mean, look, and we've said this a lot. We're controlling what we can control. There's structural headwinds, but we're bettering the portfolio. This $2 billion portfolio realignment is about bettering future growth, right? We're positioning the balance sheet better than ever. We're driving operational efficiencies. We've reduced G&A by $25 million. We've continued to reduce G&A this year. So we're doing all the things that we can control today that we believe are positioning this business for long-term growth as we move forward.

Maybe talk about the, and Laura, you touched on the disposition, right, the $1.2 billion. Talk a little bit about pricing, kind of the timing and the size relative to your expectation. And then also kind of how to think about the use of proceeds, right? But given that, you know, we talked about share repurchase at one point, but given where your stock trades today, how attractive is that?

Yeah, let me talk a bit about the overall $2 billion. I can touch on pricing, then I'll let you talk about proceeds. So I think it's important to kind of take a step back and, you know, how did we and why did we curate this $2 billion portfolio that we have deemed non-core that we want to sell? Number one is it started with the real estate. our goal, our objective, is to produce highest relative TSR for all of you, total shareholder return. And how do we do that? We do that by driving outsized cash flow per share growth. We do that by owning product that's differentiated in the market. We do that by owning the best real estate in the market, real estate that's differentiated in many ways, and real estate where we're able to execute our value creation business model. So that was the framework in which we identified the $2 billion of assets. So these assets don't align with that framework. Competitive set is higher. They're not as differentiated, maybe more commodity-like product in the market. And there's headwinds ahead for those assets. And over the long term, those are assets that we did not believe will allow us to achieve outsized cash flow per share growth. So that's how we circled those assets and identified those. And then we moved forward, and we marketed the portfolio, and we had a number of institutional buyers interested in a large percentage of that $2 billion. As I mentioned, we are executing $1.2 billion of the portfolio with EQT. We've already closed on $300 million. we've got another $500 million to go. I would say that we're in various stages of the disposition process with that $500 million and expect to be mostly complete with that other bucket by the end of the year. So we're excited about how it's going to position the business going forward. From a pricing perspective, we'll just speak to the $1.2 billion transaction with EQT. Those assets generally were above market, about 27% above market, certainly outsized compared to our overall portfolio. And WALT was shorter, so more near-term vacancy risk. So when we look at that portfolio overall, the 2027 cash NOI yield was about 5.5%. So we're excited about the opportunity to execute on this transaction. And before I turn it to That's for some comments on use of proceeds. You know, I also think it's, you know, when you look at the amount of institutional capital that's flowing back into the market and the demand that we have for this portfolio and other assets that we have on the market we're selling, I think that's a great look through in terms of how others are thinking about the market, the current state of the market, and their desire to grow, you know, a footprint long term in Southern California. So I'll talk about you.

Yeah, sure. In terms of deployment, as I mentioned earlier, we're going to prioritize debt. We got about a billion of debt maturing in 2027. So that's the opportunity set in front of us today. We can get at about half that, but round number, $500 million. Here in the third quarter, we can prepay at a filipon at par or has a de minimis prepayment penalty. Then the remaining $575 million comes due in March of next year. That's in connection with our $575 million convertible notes that mature. And then the remaining $700 million or so we're going to be opportunistic with. I think we've shown a track record on the sharey purchases over the last 12 months or so. We've bought about $550 million to date. The zone has been between $35 and $40 a share. That's a spot yield of about 6% to 6.5%. Still pretty attractive relative to other places we can put the cash. And look, we're going to be aggressive on putting the cash to work if it makes sense. I mean, for example, EQT waived due diligence in mid-August. So at that point, we've had pretty good conviction and confidence that we're going to execute in that portfolio. We've been trading between $35,000 and $40,000. So we've been taking advantage of the sherry purchases even during that time because that's the $1.25 billion revolver that gives us the opportunity to go ahead and do that. So we're ahead on that to a certain degree. But as we move forward, it's going to be a great position we're going to be in with three-and-a-half times on a not-that-debted basis. And we'll just have the firepower to redeploy towards the highest risk-adjusted return that we've been doing for the last 12 to 18 months.

As you negotiate the other $500 million that's left, right, in terms of asset sales, has anything changed here, given, I mean, you look at what rates are, is there, what's early indication in terms of buyer interest or pricing, anything that you can share?

I'd say, generally speaking, pricing, you know, when I look at the $500, all collectively is probably going to be right in line with that $5.5 that we've transacted on to date. Where we can transact on user sales, we will, and we are able to achieve higher valuation on those. But net-net, probably in that 5.5% range on a stabilized basis. So I think that's a strong indication, again, in the market in terms of the demand. I'd say buyer pool is pretty deep. And we're watching closely in terms of our rates having an impact on overall pricing. And we're not seeing that flow through yet. I think there's a couple of reasons we're not seeing that flow through. Number one, when you have a pretty deep pool of demand for assets, that can certainly keep pricing down, keep cap rates down, push pricing up. And the other thing I think is underwriting assumptions. As the activity picks up in the market, and I think people get more comfortable with their underwriting assumptions, lease-up assumptions, market-run assumptions. So when you kind of put all those together, I think that that is helping keep cap rates around our expectations, even in this rising rate environment.

That's a good question. So, because we're identifying the $2 billion, I have to assume that when you look at the bucket of, we're not going to sell, there was a bucket of, we're definitely going to sell, and then there was the stuff in the middle. Can you just talk about sort of how big the gray bucket was, and did we lean towards four less?

I would say we lean towards more. So the gray bucket was not that big, is what I would say. And look, I think that's a really important, I'm glad you asked the question, Tim, because I think it's a really important point. Look, we believe that capital recycling in a programmatic capital recycling program is a really important part of any great capital allocation strategy. So going forward, you're going to see us recycle capital on a programmatic basis, 1% to 3% of assets annually, and we'll evaluate that on an opportunistic basis. So that's going to be part of the DNA as we move forward. But we don't have said another way, there's not another billion dollars of assets that we look to go and sell next year or the next. It's going to be much more programmatic as part of any great capital recycling framework.

I know we've got a couple minutes here, but Mike, in terms of I'm not asking for earnings growth in the next year and what are the, help us understand swing factors to consider for 2027. There's clearly a lot of things going on here as a foe. We can have the floor to sort of have the foe as we think about it.

Yeah, look, I think 2027 potentially could be that floor. I think we'll share more updates on our third quarter call and into fourth quarter. Like I mentioned earlier, the biggest swing factors today are occupancy. We're at 90%. We feel like this portfolio can get to 94% to 95%. For every percent increase in occupancy, it's about three pennies, three to four pennies of FFO per share. And again, if we continue to see positive net absorption and market rent begin to flatten and to moderate, right. Occupancy could be a key driver in 27 and 28. And it really comes from the repositioning development pipeline that I mentioned earlier of about 50 million of NOI. Then again, we're going to have about a billion of dry powder with our net deck getting down to the mid threes. So if we can push forward on both those levers, I think you'll see better growth than maybe expected by the street in 27 and 28. But again, a lot depends on the market fundamentals.

It's got to be fully squared or back to make those comments true.

We've got a couple rapid-fire questions here. So one, if long-term rates stay higher for longer, which has the biggest impact on your sector? Is it higher expansion costs, lower transaction activity, or less new supply?

Less new supply.

And number two, over the next three years, will third-party capital become a more important source of growth for public rates at balance sheet capital, yes or no? Number three, for your sector, will same-strival growth in 2027 next year get higher, the same, or lower than this year?

I'm going to go with the same. Thank you. Thank you all for joining us today.