Rexford Industrial Realty, Inc. ($REXR)

Good afternoon, everyone. Thank you for joining us. My name is John Kim with BMO Capital Markets. It is my pleasure to be hosting this presentation with Rexford Industrial, and one of the preeminent industrial REITs. With us today, Laura Clark, CEO, she's in the middle to her immediate left, Michael Fitzmaurice, or Fitz, the Chief Financial Officer; to her right to my left, John Nahas, Chief Operating Officer. And not to confuse everyone, but then all the way to the end of the table, Doug Bettesworth, Vice President of Corporate Finance. So at this point, I'm going to hand it off to Laura for some opening remarks, and then we'll go into Q&A.

Yes. Well, thank you so much. Thank you for being here, and thank you all for spending time with Rexford today. Investment in Rexford today offers a very unique and compelling entry point for investors. We remain focused on taking action and controlling what we can to build a stronger and more agile Rexford, which positions the company to deliver a resilient growing stream of cash flows that drives long-term shareholder value. Today, -- we are allocating capital with discipline. We're recycling capital accretively in the highest risk-adjusted return opportunities, all while enhancing operational effectiveness and efficiency within the business. Our decisive actions to evolve the business are taking hold, and we are beginning to see improving fundamentals in select segments of the market, which we'll talk about more later. Right now, I'm briefly going to recap our refresh strategy and recent progress, which reinforces our confidence in our path forward. We are successfully executing our programmatic disposition strategy and continue to assess the portfolio for additional opportunities that enhance the durability of future cash flow growth. We are redeploying capital today towards the highest risk-adjusted return opportunities and that includes share repurchases, repositionings and select developments, all supporting long-term value creation. Notably, we are capitalizing on the market dislocation between Rexford share price in the company's intrinsic value through opportunistic share repurchases while also preserving balance sheet strength. In the first quarter, we executed $200 million of share repurchases, and that was a key driver of our ability to be and raise our guidance. We will continue to be opportunistic around share repurchases, we have an ample capacity under our current program. Importantly, with share repurchases, we are executing and not only driving accretion today, but we're also contributing to FFO and NAV per share growth over the long term. Today, we're also focus on operating the business even more effectively and efficiently. We remain intensely focused on occupancy and operational execution, and you're seeing that in our results. In the first quarter, we executed on a high volume of activity from the leasing front. A direct result of our team's rigorous execution to prioritize occupancy and reduce downtime. Regarding operational efficiency, we have achieved meaningful G&A savings bringing G&A as a percentage of revenue below our peer average, and we expect to continue reducing this metric over time as well. We remain confident in Rexford's future due to our high-quality portfolio and supply-constrained locations. The infill Southern California market is driven by unique supply and demand dynamics that we believe are underappreciated and reinforce Rexford's differentiated positioning in the market. Supply under construction is at all-time lows and at the same time, recent regulatory changes impacting industrial development have further limited the ability to add new supply into the future. While the market today is currently working through elevated levels of vacancy, we believe these significant structural supply constraints further reinforce the value of our irreplaceable portfolio and position Rexford for outsized growth. So in closing, our renewed focus, differentiated value creation platform and the depth and expertise of our team enable us to continue to capture opportunities against this market backdrop. We are confident that the actions we are taking today are strengthening Rexford's foundation for durable growth and long-term value creation, and we remain highly energized for the opportunities we have ahead. So with that, we look forward to your questions.

And I will open the mic for questions to the audience at some point. But that was a great introductory remarks. You answered a lot of my questions. But I'm going to try to summarize what you said. So your strategy under your leadership has changed from being more focused on acquisitions to more discipline on developments, on dispositions on leasing execution and share repurchases. My question is, where are you and what phase are you in the strategy? And how should we measure success? Is success NAV growth, FFO per share growth? Or what are the metrics we should be looking at?

Yes. success should be measured. I'll start with that question. success should be measured in how we are driving highest in the outsized relative total shareholder return for all of you. So that means that we are allocating capital. We're operating the business in a way that's driving the highest FFO per share and NAV per share growth. And so as we look across -- our -- as we look across our focus, and I talked a lot about how we're focused around driving operations, so driving occupancy today, driving cash flow growth, how we're focused on allocating capital to the highest risk-adjusted returns, how we're focused on driving value creation within our portfolio and then recycling capital accretively. All of those including acquisitions at some point in the future when that is a compelling use of capital. All of those are going to contribute towards driving that FFO per share and NAV per share growth that then is what will allow us to produce that outsized relative to ESR.

One of the terms that I heard a lot in the call and looking at the transcript was operational rigor. So what does that mean exactly? Is that focusing on occupancy? Is it preserving cash, net cash flow? Just -- maybe you could just describe that a little bit more, please?

Yes. I'll take that one. We are certainly prioritizing occupancy. When we look at what's happening in the market where Southern California as a whole, still experiencing negative net absorption. We are prioritizing getting leases done. And so prioritization of occupancy means meeting tenant demand where it exists, where appropriate. We're not doing deals just to do deals. We're still very mindful of tenant credit and are very focused there, especially with certain tenant sectors. But we are being very proactive. And so that's the first part of the operational rigor. An additional component is really our strategy. We are scrutinizing business plans. We are evaluating multiple options and creating them where we can to make sure that we are maximizing value, and we are executing in a way that's going to deliver the best return for shareholders. So some examples of that could be pivoting on the strategy where -- and I think we talked about this last quarter where we were headed towards a repositioning of a certain property, but found a more accretive outcome through disposition and pivoted to execute there. So just a quick example of how we're constantly monitoring the market and making sure we're deploying capital and operating to the highest level of execution.

Turning to dispositions. I think you had $185 million under contract as of the first quarter. Can you talk about who the buyers are in the market today? And then when you get that the cap rate -- the distribution cap rate and you reinvest into share and buybacks or something else. What is the typical spread that you're achieving on that trade?

Yes. I'll answer the second part of the question first, and John or you can handle the buyer pool. Part of the question, but thanks for the softball. This is an easy answer here. It's compelling, the spread between what we're selling at. owner-user assets were sown around a 4% cap rate, marketed assets are around a 5% cap rate. So based on what we're trading today, we're an implied 7% cap rate. So it's between 200 to 300 basis points. And to go back to your opening remarks and your opening answer. That's -- we're driving FFO per share. We're driving NAV per share, not only today but over the long term.

Yes. In terms of the dispositions we've completed to date, there were 6 properties that were previously slated for development -- those projects did not meet our current underwriting criteria. And so an example of where we decided to pivot -- and so we went to market and engaged groups that were focused on Southern California development and closed on all 6 of those in the first quarter and a couple of them went into the second quarter. The buyer profile there were largely groups with institutional capital or institutions themselves that we're ready to make a bet on Southern California these sites represented development opportunities that, if tried to be replicated today would not be possible. We've had a lot of regulation change in our market. We see future supply coming in as being something that will be more constrained than it has been in previous cycles. And these buyers agreed with that and purchased the site so that they can take on that development opportunity. Outside of the development sales, we continue to execute on user transactions, which is businesses that want to own their real estate. Those are great transactions for us because we can create low cap rate opportunities to recycle capital into more accretive uses. But those transactions are a little bit harder to predict. And oftentimes, the buyers, which are businesses require financing. So -- we take them as appropriate. That example I gave earlier was an example of that, the property in St. Gabriel Valley that we pivoted away from a repositioning. We ended up selling it to a user to generate that additional accretion. So far, those have been the 2 buyer profiles through which we've executed transactions. It is important to note we are seeing more institutional capital form and start to look at opportunities in our market. We just haven't transacted there yet.

Fitz, just turning back to the share buybacks. A lot of investors like it, investors reward earnings growth. They also reward a good balance sheet, which you have. So how do you weigh preserving that balance sheet or maybe even improving that versus the earnings growth that you're getting from share repurchases?

Look, when we're evaluating share repurchases, paramount to that decision, #1 consideration is balance sheet strength. And that's what positions us and has a '25 here and '26, our leverage has been low. Our target range is between 4 and 4.5x. We're at the high end of the range right now at 4.5x. We have high levels of liquidity and that's paramount to us. We have capital needs to support the business organically over the next few years with our repositioning and select development spend. So it's going to be balanced between share repurchases in terms of deployment and repositionings in select developments. The balance sheet strength is number one. And look, next year, if we continue to lean into dispositions, that there's an opportunity set there, we have about $1 billion of debt coming due. So there is an opportunity to pay down debt there to keep leverage at bay and also continue to lean in on share repurchases if the equity price is there, and we're trading at a big discount.

I wanted to turn into leasing and the momentum that you had in the first quarter. It really accelerated during the quarter, which, from the outside, seemed like a surprise. There was the more rising interest rates, there's tariff uncertainty that's still lingering. Can you just talk about tenant health and why more tenants are making leasing decisions today?

Yes. So in the first quarter, as you mentioned, we did have a high amount of leasing volume. Keep in mind that also included a renewal for our largest unit in the portfolio, which is about 1.1 million square feet. So if you back that out, the total volume is consistent with what we've observed over the prior 2 quarters, the back half of 2025. And so throughout that period to date, tenant activity has ebbed and flowed. Well there's periods where we see increased activity, and that gets converted into leasing and then the cycle kind of repeats. . We don't expect the overall market recovery to be linear, and tenant activity in the market is also not linear as well. And so it ebbs and flows through the first part of Q1 this year was a bit slower. We didn't see as much leasing activity building in the pipeline that did change, as you noted, about halfway through the quarter, which allowed us to execute at a higher level of volume. And so we're seeing that same cadence and pattern continue on today as we observe what's going on in the market. In terms of tenant health, it's been pretty consistent and stable. Fitz, I don't know if you want to talk about that piece.

Sure. It's -- I'll just continue on what you're saying. It's been very stable for this portfolio. Over the last several years, bad debt as a percentage of our revenues has been between 40 and 50 basis points. Our assumption for this year is a little bit higher because of the uncertainty in the market. But in terms of the tenant watch list, we have 1,600-plus tenants within our portfolio. Our watch list and our pretty watch list. We have both -- it's about 15 to 20 tenants, which just kind of gives you the -- another strong indicator of the health of our portfolio. So the tenants are definitely sticky. You can also look at our retention ratios are open 70% and 80% over the last couple of years, and we see that continuing so far this year.

Can you talk about what pockets of strengths and maybe weaknesses are, either by submarket or by industry category?

Yes. I'll start here, and John probably step in and elaborate more. And John said it well in terms of as we move through the bottom phase of the cycle and to an inflection, the market is going to perform differently across size ranges, across submarkets, and that recovery won't be linear. So what that means is that you're going to see parts of the market where we could actually see positive absorption and landlord pricing power where there may be other parts of the market that may be softer and you could see some pressure on rents. . We're actually seeing that and we saw that in the quarter, and we're seeing that in the second quarter to date. Across all markets, importantly, from a strength perspective, properties or unit sizes less than 50,000 square feet continue to be very strong from a demand perspective, very stable in terms of overall rents actually across the market. It was the only segment of the market where there was actually rent growth sequentially quarter-over-quarter. That's great for Rexford. That is the heart of our portfolio. Our average tenant size is square feet. That's where we go and we really create value. We reposition space in that size range, that's smaller size range, smaller format size range, where we go when we increase functionality and quality of the real estate. And so we are very well positioned within our portfolio to capture that demand. So we are seeing -- continuing to see strength there. We're also seeing strength in parts of the South Bay market around advanced manufacturing and defense, and John will talk about a little bit more about that in a minute. In terms of the weaker areas in the market, the weaker areas in the market tend to be those submarkets and the quality or the size ranges where you saw more deliveries, where there was more supply and construction delivered into that market. So in particular, Class A new development in the North Orange County, Mid-Counties and St. Gabriel Valley markets where we did see more supply added during the pandemic phase. We are seeing more weakness there and largely driven by the competitive set and some softer demand there. But John, would you like to elaborate there?

Sure. So continuing on with the trends that Laura touched on a little bit more about advanced manufacturing. That's been a great area of the market for us. It is fairly specific to a small location within the South Bay market. It's particularly the coastal portion. So if you're looking at a map, think between LAX and the port and stay west to the 405, and that's really where those tenants are focused. And the reason for that is because of the consolidated highly skilled engineering labor that's located in that area. It's not to say it's the only place we're seeing that demand driver -- we are observing it in parts of San Diego as well as the San Fernando Valley, but very much localized overall for the South Bay. Outside of that tenant group, we continue to see increased activity from 3PLs, particularly in the Inland Empire West. Our average unit size out there is about 30,000 square feet. So we tend to participate in the lower end of the range where that activity bottoms out, which is around 100,000 square feet. But that's a trend that we've been observing for the last quarter, and it seems to be continuing on. Outside of that, more broadly, food-related uses, food and beverage as well as construction tends to be categories that we see showing up on our deal pipeline pretty consistently. When you get down to the 50,000 and under square foot size category that Laura mentioned, tenant demand is a lot more diverse. These are businesses that need to be located in the hearts of these communities and the Rexford portfolio offers great positioning there. And so we see wide diversification in that size range.

There's a lot of questions I could ask about L.A., but I wanted to focus on -- so this year, there's the World Cup. In 2028, you got the Olympic Games. It's estimated that the Olympic Games will bring $13 billion to $18 billion of economic impact to Southern California. When do you see that in terms of industrial leasing demand? And just talk about what you're seeing today and what you expect?

Yes. I mean those events are certainly very positive. Both of them, however, keep in mind our build is no build no building events, right? So we're not going to be constructing a lot of venues in Southern California to accommodate either one. So what we won't see in our market is all of the incremental demand associated with that construction that's not going to occur. But aside from that, as you've noted, there's going to be a large influx of people coming through. So it's more of operational demand -- we've seen a few Olympics-related requirements hit the market. It still is a bit early, given that there's less of a lead time for the operational component as opposed to something that requires construction.

And then right now, we're -- currently, there is a May race in L.A. and the [indiscernible] in California. We'll get a new governor -- can you talk about what that could mean for the L.A. economy? And could there be a annually moment like you had in San Francisco with Los Angeles.

Yes. I think it's a little bit too early to tell. We're not sure yet how the results from yesterday's election are going to unfold. It takes a little bit more time to get to those vote counts. And I do think it's -- we're going to have the election will be in November. So I think it's going to be some time before we get more visibility and what the potential impacts could be. to the overall market. I do want to -- I do think it's important to mention, while the mayor is very important within L.A. within L.A. also is the City Council. It's very important in terms of driving change. There's 15 districts across. There were 8 seats up for election in the cycle. And so when we think about the mayor and the impact the Mayor can have the City Council is very important in terms of being able to drive change as well.

And do you think change will be there no matter who wins the mayoral race if it's [indiscernible] Pratt. Will there be major changes that are going to?

I think it's challenging to predict at this point in time.

Okay. Where are you seeing the greatest amount of demand? A lot of your portfolios infill big box is also doing really well in L.A. Can you talk about overall the market where you're seeing the strongest amount of demand today?

Yes. It's the strongest demand is certainly in the smaller sized spaces. But it's also important to note that the way that we describe small and large might be different than a lot of our peers given our average unit size is 28,000 square feet. So -- when we say small, we mean that 50,000 and under category. As we've touched on, that represents an area of the market that has not seen new supply come in meaningful amounts really from the last couple of cycles. And so that's one of the reasons why it's healthier. And the other is the other comment I made about tenant diversification. That's where we see the widest opportunity set in terms of leasing prospects. For us, on the larger end, we don't have a tremendous amount of exposure to true big box, large-format bulk however you want to describe it. We have pretty limited exposure there. And so for the larger boxes when we describe it, call it, 100,000 square feet plus. And that's where we see variable demand, as Laura touched on, particularly in the Class A portion of that sector.

And with rising fuel prices, is there greater demand to have those NFL locations? And does that give you some increased pricing power?

The fuel cost topic doesn't come up as often as you might think, again, at least with our tenants, given where our portfolio is located and the size of businesses that operate within it, -- average lease term in our market is 5 years. So it's hard for businesses to make 5-year decisions based on near-term fluctuations in fuel. And also given the fact that we don't have that many businesses that are involved in the drayage component of moving a container to a specific location for the ultimate purpose of sending it out of market with super regional distribution. So a lot of our tenants are engaged in the local economy, which means the product stays there. And so they're kind of in that opportune location already, which makes variations in fuel prices and energy costs a little bit less impactful.

We touched upon this a little bit. But in the first quarter, you had a major renewal, which is Tyco, your largest tenants. It did have a pretty big negative rent spread as you focused on occupancy, but what should we take away from that lease? Is that something that could recur in other future lease negotiations? Or was this truly a one-off event?

It was generally a one-off event that is our largest tenant within our portfolio. It's over 1 million square feet. -- was at a negative 30% re-leasing spread. It's not a read-through necessarily '27 or '28. We did that because there was a threat that tenant would leave I think there was $20 million of ABR there, and we wanted to secure that cash flow and that was the right decision to make. More importantly, the question you didn't ask, which comes up often, if I get a nickel for every time I was asked, that'd be rich. But is what the rent roll looks like a rent roll down, looks like in '27 and '28. We're starting to get at those vintage leases that were signed in '22 and '23 at the height of the market. Since then, rents have rolled down overall in Southern California about 20%. So we're starting to experience that negative cash re-leasing spread. This year, they're going to be mid-single digits on the negative side. And then in '27, '28, they're going to give further pressured just given the rental we're going to be dealing with at that point in time. That's structural. So what are we doing about it? What are the solutions we're putting around it. Number 1 is occupancy. We talked about that today. We're prioritizing that. We have $50 million of NOI tied to our development and repositioning pipeline that will come online over the next 2-plus years. Number two, we are prioritizing capital recycling. We talked a bit about it today, dispositions into share repurchases as it has made the most sense. That was $0.02 accretive last year from an FFO per share basis. We're on track again for this year. And we will lean into that, if that makes sense to improve the quality of our cash flows going forward. The third thing is G&A. We've made a lot of progress on this front. If you look at end of 2024 on a percentage of revenue basis, we're at 9%. Today, we're at 6% on an absolute basis, in a dollar amount. We're at $60 million. So there's a little bit of room to run there. So all those things we can control. The market we necessarily can. But to Laura's point, we're going to focus on what we can control and improve the quality of cash flows going forward.

Yes. And I just want to -- I want to touch on 1 element that Fitz mentioned around the ability to mitigate some of that headwind -- from a cash flow perspective, these are structural challenges that we have, obviously, from the roll down, as Fitz mentioned, but 1 way that we can improve the future growth of the cash flow stream and build a more resilient cash flow stream as we have reunderwritten our portfolio. And number one, it starts with the real estate decision. What real estate do we want to own over the long term that aligns with our strategy and our strategy of generating value creation and that drives our ability to then create outsized cash flow per share growth. And so as we look across the portfolio, where are there opportunities where we could potentially dispose of assets that maybe have some of those headwinds, either rent roll downs, maybe there's a vacancy risk, maybe there's capital that's acquired to be put into those assets? And is there an opportunity to dispose of those assets, that then allow us to mitigate some of those headwinds, grow future cash flows at a higher level and build a more stable and consistent cash flow growth stream. And oh, by the way, recycling that capital on an accretive basis. And so as Fitz mentioned, where we have that opportunity to mitigate some of those near-term headwinds and then that then further impacts our ability to grow FFO and NAV per share over the long term, you're going to see us execute on that area of capital recycling as well.

Any questions from the audience? Here we go.

The East Group CEO noted that I think it was 10 consecutive quarters of negative growth in the L.A. market. And his comment was, when does it become a trend? So the question is, do you still have confidence overall in that market?

Yes. We absolutely have confidence in this market over the near, medium and long term. We certainly saw an increase of supply that was added to the market during the pandemic. In some cases, we saw rents double and triple. And we're in the phase of the recovery cycle where we're working through that availability. We're working through that vacancy. And we believe that this market is from the supply constraints as well as the demand perspective in a unique position to be able to perform over the long term. We are serving a population base of over 23 million people. We are the 12th largest economy in the world. We are focused on infill product that serves that consumption base. So we absolutely believe in the demand drivers of this market and the tenants which we focus on in these infill areas that serve that consumption base. On the supply side, and I think it's really underappreciated today and it's underappreciated because we do have some availability to work through because as I mentioned, there was an increased supply added to the market. But on the supply side, underappreciated as the regulatory changes that have been put into the environment just in the past 2 years. In particular, AB 98, it's a statewide mandate regulation around the development of industrial. That mandate is going to significantly impact the ability to add supply into the future. That's great for Rexford. It increases the value of our portfolio. It also is great in terms of our ability to -- our business model of repositioning assets, increasing that functionality and quality -- so our business model is going to thrive through that supply constraints. So we do have some time to work some supply to work through. But all that being said, that the supply constraints that will be experienced in this market going forward in terms of the inability to develop are going to set up a very unprecedented value proposition for this market over the long term.

Maybe just 1 final question because we're pretty much out of time. But as a follow-up to that, when do you think market rents will inflect? And when does Rexford go back on offense? And what are the indicators that will lead you to go back to offense?

Yes. In terms of an inflection point, as I mentioned earlier, it's not going to be linear. It is going to depend on the size of the space. It depends on the submarket and the segment from a quality perspective. So as I mentioned, you're going to have parts of the market where you see rent growth and us inflection and other parks that may be softer. And we're already seeing that happen in the market today. But all that being said, I think market-wide, if you kind of roll it all up, we're really focused on when we see positive absorption in the market is when we believe then you're going to -- then we can see that rent growth and flat and then you can start to see market rent growth again. .

And when you go back on offense?

We are focused on allocating capital to the highest risk-adjusted returns. So capital is not infinite. And so we are evaluating what are those areas of opportunity where we can allocate capital and achieve the highest return. So to date, that has been on share repurchases, that's allocating capital back into our portfolio through repositioning, through select developments, acquisitions will certainly be part of our growth strategy as we move forward. It's a critical component of our growth strategy into the future that allows us to embed those value creation opportunities. At this point in time, that's not our highest risk-adjusted return, but we'll continue to evaluate that over time.

With that, I think we're out of time. I want to thank you for your attendance and to Rexford management.

Thank you so much for joining us.

Thanks, everybody.