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

Good morning. My name is Holly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rexford Industrial Realty, Inc. Second Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the call over to Doug Bettisworth, Senior Vice President, Investor Relations and Capital Markets at Rexford Industrial. Doug, please go ahead.

Thank you, and welcome to Rexford Industrial's Second Quarter 2026 Earnings Conference Call. In addition to yesterday's earnings release, we posted a supplemental package and earnings presentation in the Investor Relations section on our website to support today's remarks. As a reminder, management's remarks and responses to your questions may contain forward-looking statements as defined by the federal security laws, which are based on certain assumptions and subject to risks and uncertainties outlined in our 10-K and other SEC filings. As such, actual results may differ, and we assume no obligation to update any forward-looking statements in the future. We'll also discuss non-GAAP financial measures on today's call. Our earnings presentation and supplemental package provide GAAP reconciliations as well as an explanation of why these measures are useful to investors. Joining me today are Rexford's CEO, Laura Clark, together with our COO, John Nahas, and our CFO, Mike Fitzmaurice. It's my pleasure to now introduce Laura Clark. Laura?

Thank you, Doug, and thank you all for joining us today. The Rexford team delivered another quarter of strong execution. Leasing volume is up 50% year-to-date compared to this time last year, and we are raising core FFO per share guidance for the second consecutive quarter. We are also encouraged by improving fundamentals across the broader infill Southern California industrial market with increasing tenant demand, driving positive net absorption and lower market vacancy. Our second quarter results reflect continued progress against the strategic priorities we laid out earlier this year, opportunistic dispositions, accretive capital recycling and operational rigor. We have moved with discipline, conviction and speed, taking meaningful action to position Rexford to deliver durable growth and shareholder value. Today, we are building on that momentum by announcing a comprehensive portfolio realignment through the planned disposition of approximately $2 billion of non-core assets. This is a pivotal and deliberate step to further strengthen Rexford's portfolio, enhance the quality and sustainability of our cash flows and position the company to deliver outsized total shareholder returns. Over the first half of the year, we conducted a comprehensive asset-by-asset review of the portfolio, evaluating every property through the lens of future growth potential, cash flow durability and the opportunity to create value. That review identified approximately $2 billion of non-core assets, representing approximately 8 million square feet that do not align with our long-term strategy. These assets are generally characterized by more limited value creation opportunity, elevated competitive supply, shorter remaining lease durations and substantially above market in-place rents. Just as importantly, this process reinforced our conviction in the quality, durability and embedded growth potential of the approximately 43 million square feet of core assets that will comprise our go-forward portfolio. These are assets we believe will drive outsized FFO and NAV per share growth and form the foundation of Rexford's next chapter. We have made significant progress executing this planned portfolio realignment. During the quarter, we launched a robust disposition process, and we are now in advanced discussions on a substantial portion of the planned sales. Based on the depth of interest and progress to date, we are confident in our ability to execute this realignment, and we expect the vast majority to be completed this year. The current valuation gap between private and public markets creates a compelling window to act now. Our disciplined capital recycling strategy gives us the ability to capitalize on this opportunity in a way that is accretive over the long term. As we redeploy capital, our priorities remain clear and unchanged. We will continue to allocate capital to the highest risk-adjusted return opportunities available. This includes strengthening our balance sheet and liquidity profile, opportunistically repurchasing shares at a meaningful discount to intrinsic value and selectively investing in high-yielding repositioning and development opportunities across our portfolio. Taken together, this portfolio realignment enhances our financial flexibility, improves the quality and consistency of our cash flows and positions Rexford for long-term growth and value creation. To be clear, these actions together reflect conviction around our long-term view of infill Southern California industrial real estate. This market is powered by a robust local economy larger than most countries. New supply remains limited, and barriers to future development are increasing. In fact, supply under construction today is at multi-decade lows and recent regulatory changes have introduced additional development constraints that will make it increasingly difficult to bring new industrial supply to the market. These dynamics reinforce the scarcity and long-term value of the assets we are choosing to own and strengthen the competitive advantages of the Rexford business model. Operational rigor also remains a core priority and is reflected in our execution to date. Through an in-depth and ongoing review of our cost structure, we identified an additional $3 million of G&A savings this quarter, bringing our total G&A savings since 2025 to $22 million. Our focus remains on driving greater operational effectiveness and efficiency across the business. In summary, our transformative strategic actions, combined with the strength of our team, value creation framework, dynamic market fundamentals and commitment to operational rigor provide a powerful foundation for Rexford to deliver meaningful value for our shareholders in the years ahead. Before I turn it over, I want to thank the entire Rexford team for their extraordinary efforts this quarter across the platform. I am energized by the focus, dedication and execution our team continues to bring every day. John?

Thank you, Laura, and good morning, everyone. The infill Southern California market experienced positive net absorption in the second quarter, with overall vacancy declining by 30 basis points. Performance continues to vary by submarket, size range and product type, reflecting diverse demand drivers and varying levels of competitive supply, but we are optimistic about the signals we're seeing. Net absorption turned positive in the IE West and San Diego markets this quarter and Greater Los Angeles posted its second consecutive positive quarter. Orange County continued to experience negative net absorption, though we are encouraged by our recent pickup in tour activity there. As the market works through elevated supply and landlords compete for deals, market rents remain under pressure, declining just over 1% sequentially in the quarter. We are pleased by the overall trajectory and are closely monitoring the market for successive quarters of positive net absorption, which we believe is a precursor to market inflection. Leasing activity in our portfolio gained momentum throughout the second quarter. We executed 2.1 million square feet, which brings our year-to-date total to 6.2 million square feet, a 2 million square foot improvement compared to the first half of last year. Cash re-leasing spreads for the quarter were negative 11.3% driven primarily by rent roll downs from leases signed at the peak of the market. Rexford's leasing activity continues to be driven by a diverse mix of industries, including advanced manufacturing and consumption-related uses such as logistics, food and beverage, automotive and construction. We are seeing healthy demand across our portfolio for spaces under 50,000 square feet and activity is picking up in spaces over 100,000 square feet, partially driven by incremental corporate demand for Class A product. Tenants continue to evaluate the efficiency of their operations and Rexford has directly benefited from the resulting flight to more functional space, which supports our leasing pipeline and builds our confidence in our leasing expectations for the remainder of 2026. As we have done throughout the year, we will continue to aggressively prioritize occupancy to capture demand. Shifting to capital allocation, our planned portfolio realignment will further concentrate ownership in the assets best aligned with our long-term strategy, focusing on the opportunities where we see the greatest long-term value creation potential. Through this process, we are targeting non-core disposition candidates generally having lease durations shorter than our portfolio average and in-place rents that are more than 20% above market while having characteristics that do not align with our value creation strategy, operational focus on uniquely competitive assets. We believe that executing upon this $2 billion rebalancing will enhance the portfolio's long-term growth profile and value. Our decision to execute this strategy now is supported by the increasing depth and activity of institutional capital focused on infill Southern California as investors continue to be drawn to these markets because of their unique supply-constrained characteristics and long-term fundamentals. This investor activity in part is why we are confident in our ability to execute this planned realignment at scale. With respect to repositioning and development, we continue to focus on creating value by executing on opportunities within our portfolio that are best suited to deliver appropriate risk-adjusted returns. We started on new development project, 16425 Gale, which exceeds our return thresholds and will deliver a highly differentiated property to the City of industry submarket featuring best-in-class specifications and demisable cross-dock layout that is unique to the market. The project is expected to be complete in late 2027. I'll now pass the call over to Fitz.

Thanks, Laura, John, and good morning, everyone. Through this phase of the cycle, we remain focused on what we can control. Today, we're taking the next step in executing our strategic priorities acting on our comprehensive asset review to realign the portfolio and meaningfully strengthen our balance sheet to unlock significant capital allocation flexibility. Our updated full year disposition guidance of $1.5 billion to $2 billion gives us optimal flexibility to allocate capital where it creates the most value. We view balance sheet flexibility as an important strength, supporting both financial resilience and capital allocation optionality. We will use approximately $1 billion of the projected proceeds to repay debt maturing in 2027 rather than refinance into a higher rate environment, which will meaningfully strengthen our balance sheet. We estimate this will bring us to 3.5x on a net debt to adjusted EBITDA basis, down from 4.5x today, reflecting a deliberate disciplined sequencing of our capital allocation. This improved leverage profile puts us in a position of strength. Combined with remaining disposition proceeds, it provides us significant flexibility and liquidity to allocate capital toward the highest risk-adjusted return opportunities, including share buybacks. As a result, making this planned portfolio realignment accretive over the long term. The ultimate magnitude of that accretion will depend on how we deploy the remaining proceeds, which will be guided by market conditions, and the most attractive opportunities available to us at that time. We're not delevering to sit idle. We're delevering to redeploy, and we are committed to being prudent and disciplined in deploying shareholders' capital. Turning to results. Second quarter core FFO per share came in at $0.63, $0.02 above the first quarter, driven by accretive share buybacks, settlement income and lower G&A. Same-property NOI growth was 1.5% on a cash basis and a negative 0.5% on a net effective basis, both ahead of expectations. Same-property ending occupancy was 95.1%, up 30 basis points year-over-year. We ended the quarter with net debt to adjusted EBITDA of 4.5x and total liquidity of approximately $1.3 billion. During the quarter, we redeployed year-to-date disposition proceeds into $100 million of share buybacks, repurchasing approximately 3 million shares at a weighted average price of $36. Over the last year, that brings our buyback activity to approximately 15 million shares for $550 million or approximately 6% of shares outstanding. Given the additional capacity created by our planned portfolio realignment, our Board has authorized a new $1 billion share repurchase program. As for guidance, we're raising our full year core FFO per share midpoint by $0.01, driven by better-than-expected same-property NOI growth, lower G&A and second quarter settlement proceeds. This is partially offset by modestly dilutive projected capital recycling activity due to the timing of deployment, but it meaningfully lowers leverage, while also avoiding future rent roll-down risk and eliminating the need to refinance our 2027 maturities at higher rates. To execute this, we plan to pay off all but $575 million of our 2027 maturities in 2026 with the remainder repaid at maturity in March '27. As a result, we are reducing our 2026 interest expense guidance to $105 million. These prepayments carry little to no penalty, making this an efficient use of projected proceeds. We've also raised our same-property NOI growth outlook by 75 basis points at the midpoint on both a net effective and cash basis, primarily reflecting the removal of lower growth assets tied to our 2026 expected dispositions, along with continued leasing momentum. Consistent with that, we raised our average same-property occupancy guidance to a range of 95.3% to 95.7% for the year, up 15 basis points at the midpoint. Cash re-leasing spreads are now expected to be a negative 15% to negative 10%. This incremental change from last quarter reflects a change in the mix of leases we expect to execute in 2026. Further, our total portfolio cash mark-to-market stands at approximately negative 4% down from negative 3% last quarter. Lastly, G&A guidance now stands at $57 million, down from our original $60 million target, a tangible result of our continued cost discipline. I also want to provide context on the $625 million impairment charge we recognized this quarter, which has no impact on cash flow and is excluded from core FFO. As part of our increased disposition guidance, we shortened the holding period on non-core assets, which triggered the charge, a deliberate portfolio decision to drive long-term value. Before we turn to questions, here's the one thing I want you to walk away with. Everything we're doing, including scaling our portfolio realignment, executing our plan to lower leverage and authorizing a new $1 billion buyback plan enhanced our flexibility to act on the opportunities ahead. That's what will drive sustainable FFO and NAV per share growth over the long term. Finally, I want to thank the entire Rexford team. I see the work everyone puts in every day, and I don't take it for granted. I'll now turn the call back to the operator to open the line for questions.

[Operator Instructions] I will now hand the call back to Doug Bettisworth to begin the question-and-answer session.

Our first question comes from Blaine Heck from Wells Fargo.

Great. So the disclosure on dilution in 2026 was very helpful. And obviously, I'm not looking for guidance on '27 yet, but I think it would be helpful to contextualize how much dilution from these specific transactions we should expect to impact '27 earnings. I guess the question is, how should we think about cap rates on the dispositions? And how are you thinking about keeping cash on the balance sheet for eventual debt paydown at maturity in March of '27 versus maybe putting the cash to work immediately or at least earlier through the share repurchases?

Blaine, I'll start and Fitz will jump in with some more detail around '27 and expectations. But what I'll say around cap rates and valuation is that, as I mentioned in my prepared remarks, we are well underway and in advanced negotiations on a substantial portion of the dispositions -- but given that negotiations are ongoing, disclosing valuation at this point and cap rates could impact optimal execution. So as transactions close, we will provide cap rates and valuation at that time. But what I can tell you is this, we have confidence in our ability to execute the planned dispositions by the end of the year. We expect that pricing will be achieved at levels that allow us to redeploy proceeds on a neutral to accretive basis to our 2027 FFO per share, and this is not a dilutive exercise.

And look, we're going to redeploy the proceeds pretty quickly. We estimate that the $1.5 billion to $2 billion will close in probably the mid-fourth quarter. We have an opportunity, like I said in my prepared remarks, to bring forward some of the $1 billion of debt maturities that are maturing next year about $500 million or so, we can pay off pretty quickly. And then the remaining $575 million, which is tied to our converts, doesn't mature until March '27. So I can't get it that early. And then in between all that, we're going to be very opportunistic with share repurchase, depending on where our share price is. We've been very active, very committed over the last 12 months. As I mentioned in my prepared remarks, we bought over $550 million. We're very grateful for the Board to authorize a new program, and we're going to put it to work. And we do believe that this will be at the minimum neutral next year and potentially accretive depending on market conditions.

Our next question comes from Samir Khanal of BofA.

I guess, John, you talked about positive signs in the overall market there in Southern California. Maybe just expand on those comments. I mean where are you seeing those sort of improvements, maybe some strength. And on the other side, I mean, where are things still under, sort of, the pressure or weakness in terms of these submarkets?

Yes. Samir, so overall, consistent with last quarter, sub-50,000 square feet continues to be a good vein of strength. We're seeing pricing stability and some growth in some submarkets below that threshold. And that's fairly consistent across all the submarkets. We obviously like to talk about the under 50 and then everything above that. When you get to the larger sized space, which for us, 100,000 square foot or larger, it starts to vary a little bit. What we saw overall in the market is a good step, right? We saw a positive net absorption, and that's been growing. So as you look into where that's occurring within each submarket, that's an important nuance. So for example, in the IE, most of the positive net absorption was coming in much larger spaces, those over 500,000 square feet. We don't have a lot of exposure to that size range in that submarket. Our average unit size there is around 30,000 square feet, but that falls into the sub-50 where we've seen some continued strength. And converse to the IE, if you look at Greater LA, which had an additional quarter of positive net absorption, most of the gains there are sub-200, which fits right in the wheelhouse of the Rexford portfolio and has been a good trend for us where there's pockets of weakness continue to be around Class A in certain submarkets. As I mentioned in the prepared remarks, Orange County is one of those. That's a market that received a lot of additional supply in the peak periods. And it's going to take some time to work through that. And so we saw negative net absorption there again this quarter. And I would say rents probably moved the most in that specific size range within that submarket. So it continues to be varied. This is expected as we've, kind of, progress towards recovery here, we do not expect it to be linear. We're going to see certain pockets of certain submarkets improve before others and pricing stability will occur kind of in tune. So we continue to be very focused on the net absorption numbers by market and by size range and are optimistic that things will continue to improve.

Our next question comes from Craig Mailman from Citi.

Mike or Laura, I just want to go back to the commentary that you think that at the end of this, the transaction could be potentially a push or accretive to '27. Maybe just help me walk through the math on that. I know you guys don't want to talk about cap rates today, but if you're selling a good amount of assets with 20% above market rents, I can't imagine you're getting super low cap rates on those because those would roll down even more, right? So if you assume that -- I don't want to put a number out there, but if you assume 6% or higher on that, and you're paying off $1 billion of your '27 roll, which is on average, 4.1%. I'm just trying to figure out how that can ultimately be accretive even if you then swap out and relever back up to 4.5 and buy back stock. Could you just try to help me bridge that math? And also just -- I know you guys said this -- your math could be accretive. Does that just mean that the dividend is safe here? Is there any risk to that going forward?

Sure, Craig. Thanks for the question. Look, directionally, the full year interest savings from the $1 billion debt repayment, the in-place rents or in-place interest is about 4.1%. That's a highly certain quantifiable benefit. You combine that with the redeployment of the remaining proceeds plus the option to lever up into buybacks. It's all designed to be accretive on a run rate basis. If you look at the last 12 months and what we bought in terms of share buybacks, that yielded anywhere between 6% and 7%. So that's a toggle in terms of -- or the range of possibility as we look at share buybacks going into next year. We can combine those 2 factors with how we're selling these assets and what we're selling them at in terms of pricing. We do believe it's going to be neutral to accretive next year. I'd remind you that in our disclosure last night in the prepared remarks, I think you heard in John's or Laura's sections that the roll-down risk is real here, right? That's what we're eliminating with the sale of these assets. It's plus 20%. So that roll-down risk is real. It's going to happen, expect it to happen in '27 and into '28. So that also allows us to -- this transaction to be accretive as well. And as far as the dividend, it's safe. Like, this portfolio realignment plan: one, it strengthens the balance sheet; and two, it strengthens the durability of our cash flow. So we're very confident that we can continue to grow the dividend.

Our next question comes from John Kim from BMO.

On the impairment, I just wanted to clarify, was that on the full $2 billion that you've identified for sale? And can we assume that you have a good sense of where the market value is for these assets? And finally, can you confirm that these assets will be sold at a taxable loss and there's no need for 1031?

Great question. The impairments, so let's take a step back on that. So the planned dispositions, the $1.5 billion, $2 billion that we expect to sell this year were largely bought at the height of the market. To Laura's point, we're in advanced negotiations on a substantial amount of those planned dispositions or the intent to sell is very clear, which triggered the impairment charge. Look, further charges are possible if additional assets are added to the pool and there's an intent to sell. But this impairment charge is not indicative of any impairment risk within our broader portfolio. As far as any need to -- I think this is what you are alluding to, to issue a special dividend, the answer is no. Similar to the impairment, there are tax losses which will offset any tax gains as part of these planned dispositions.

Our next question comes from Vikram Malhotra from Mizuho.

Congrats on a lot of work, I guess, done to get the step done already started, I should say. I just want to go back again. I know you've been asked on this sort of how to keep this accretive? And I'm wondering, in effect, are you saying that there are certain buyers willing to pay a 5% cap even though there's a big roll down because they're assuming a lot of rent growth going forward. And then do you mind just sort of clarifying on the -- on your presentation, you talked about 20% roll down for these assets and then the portfolio at 4%. I just want to clarify, the 4% or roll down 4% including these assets as it is today? Or is it like ex these assets, the roll down is 4%?

Yes. As far as the roll down that we put in our disclosure last night, the 4% includes the entire portfolio that exists today. We do believe that, that 4% will get better after we get through the portfolio realignment, but that's just like one part of our growth profile going forward. So I want to spend a little time there to discuss that as we move through this portfolio alignment plan throughout the remaining part of this year. Look, this puts us in a much better place, just given the roll down and the vacancy risk associated with this portfolio and the firepower that it gives us the $1.7 billion to reshape the business from a position of strength, paying down debt ahead of maturity while we're buying back stock at a discount to intrinsic value, we're preserving the optionality to invest where we see the best risk-adjusted return as conditions change. We absolutely believe a stronger balance sheet plus real capital to deploy here is what creates the most value for shareholders. You can't forget the embedded opportunity that we have already underway within our repositioning and development pipeline that represents approximately $50 million of annualized NOI once it's fully leased. And the backdrop is getting better, as John noted, fundamentals are improving, real signs of improvement, net absorption turn positive, vacancy is going down, construction starts continue to remain at multi-decade lows. Now the re-leasing spreads that you're alluding to, Vikram. Let's be clear-eyed on this, re-leasing spreads on our retained portfolio will stay under pressure for a bit as we do have leases signed that are rolling -- that were signed at the peak that are rolling over the next couple of years. That's real, and that's something a portfolio this size fixes overnight, but it's a known. It's a shrinking headwind. I can tell you that, it's not an open-ended one. It's why we prioritize selling the assets that face a steep reset. So overall, one thing that we wanted to continue to walk away with here. This is a cleaner, lower risk portfolio, stronger balance sheet and higher liquidity with strong embedded growth in place from our pipeline.

And I'll -- Vikram, I'll offer some general commentary on the cap rate component of your question. And what we're seeing in the market broadly across Southern California is transactions that are focused on good product quality, good locations with good credit and a decent amount of [ wall ]. That's hitting about a 5.5% on average is where I would put market cap rates. Cap rates, as we've discussed and you know, fluctuate significantly up and down from there, largely depending on the mark-to-market and how much duration there is, in fact, on the lease and the quality of the real estate, which is preeminently important. We've seen some transactions in the market where there was a big positive mark-to-market opportunity. We've seen cap rates dip well below 5% for that type. Conversely, it's well above 5.5% and can be into the 6s if you have lower quality assets or significant negative mark-to-market. Generally, the buyers in the market are going to underwrite to a restabilized deal that is congruent with today's market cap rates, adjusting for all those factors that I went through.

Our next question comes from Greg McGinniss from Scotiabank.

I appreciate the commentary on the market and the backdrop that's improving. But the market also saw vacancy go down while Rexford's vacancy increased. Is this related to timing, and so we should assume some occupancy growth in the back half of the year? Were there specific assets that were drivers? Any explanation on this disconnect would be appreciated.

Sure. Greg. So yes, we saw quarter-over-quarter average occupancy decline about 60 basis points. This was largely driven by a few larger move-outs. The two most significant ones were located in the IE West market, a couple of spaces that were just north of 200,000 square feet a piece. One of those move-outs was unplanned. It was related to a bankruptcy. The other one was expected and budgeted. Just a quick note on the one that was a result of bankruptcy. We actually just re-leased that unit this week with occupancy recommencing in September. So good results on that. So part of it is just some of these move-outs that are getting offset by move-ins that you'll see in the next quarter's data.

And Greg, in terms of the shape of the occupancy as we move through the second half of the year, we do expect it to decelerate some in the third quarter between 50 and 100 basis points. due to planned move-outs and then reaccelerate in the fourth quarter of this year.