All right, welcome to Citi 2025 Global Property CEO Conference. I'm Nick Joseph here with Craig Mailman with Citi Research. Pleased to have with us Rexford and co-CEOs Michael Frankel and Howard Schwimmer. The session is for Citi clients only, and disclosures have been made available at the Corporate Access Desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC25 to submit any questions. We'll turn it over to you, Laura, to introduce the company and the team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.
Thank you so much. Thank you all for joining us today and spending some time with Rexford. With me today are our co-CEOs, Howard Schwimmer and Michael Frankel, as well as our CFO, Mike Fitzmaurice. I'll begin today with a few brief remarks around Rexford and an overview, as well as highlight the key reasons to invest in Rexford today. Rexford Industrial is the largest U.S.-focused industrial REIT. We are exclusively focused on creating value within infill Southern California, with 425 properties comprising 51 million sq ft of the highest quality and most functional product in the market. The scarcity of land and the increasingly high regulatory hurdles within infill Southern California, make it nearly impossible to introduce new supply.
On the demand side, our portfolio is occupied by an exceptionally diverse group of tenants who serve the nation's largest regional economy and one of the most dense and dynamic zones of consumption in the country. This creates a persistent supply-demand imbalance, and when you combine that with our best-in-class team, it drives long-term sustainable growth and our ability to outperform. Over the past five years alone, Rexford has delivered 16% average annual FFO per share growth. That's approximately 60% higher than our peers. So to the three key reasons to invest in Rexford today. Number one, our vertically integrated team that drives accretive internal growth through the renovation and repositioning of industrial properties to a superior quality and functionality. This further differentiates our portfolio within infill Southern California, where over 1 billion sq ft of industrial space was built before 1980.
Our deep local expertise also provides a competitive advantage. By way of example, in 2024, we executed 8 million sq ft of leasing at rates nearly 20% above the market average. This demonstrates our ability to execute on our value creation business model and drive long-term value for our shareholders. Number two, we are positioned to deliver projected embedded NOI growth of 40% or $280 million of incremental NOI driven by our value creation strategies. This is comprised of annual embedded rent steps averaging 3.7% for the total portfolio, our lease mark-to-market opportunity of 25% on a net effective basis, and projected incremental NOI of $75 million from our repositioning and redevelopment projects currently under construction or in lease-up. Number three, we maintain an investment-grade balance sheet with low leverage at 4.6 times net debt to EBITDA, with nearly $1.6 billion of liquidity.
We are taking a disciplined approach to capital allocation, focusing on maximizing returns and accretion through capital recycling and strategic repositioning and redevelopment opportunities, while proactively enhancing operational efficiencies to drive shareholder value. In closing, our business model is not dependent on market fluctuations or momentum. It's built on deliberate execution, discipline, capital allocation, and strategic value creation strategies that position Rexford to continue delivering substantial shareholder value. With that, I'll turn it over for Q&A.
Great, thank you. Why don't we start, Laura, with your last point there on capital allocation? You know, as we think about 2025, just wanted to talk about how you're prioritizing those opportunities that you see across the portfolio today.
Yeah, I think as we've talked about capital allocation in the past, we're very focused on driving accretion in the near term and long term. And that comes down to earnings growth, that comes to accretive cash flow growth, as well as NAV accretion. And so we're very focused on our cost of capital today and what our cost of capital is telling us in terms of how we can drive that accretion. So as we look internally, we've got significant opportunities on our repositionings and redevelopments. Fitz can go into more detail around what that opportunity looks like. But our repositionings and redevelopments, we're executing on incremental yields in the 15%-20% area. We've historically executed it, and as we look forward, we're continuing to see the ability to deploy capital very accretively into repositionings and redevelopments.
We also believe capital recycling is an important piece of capital allocation, and we announced a disposition pipeline of about $105 million with our earnings a few weeks ago. And you'll see us continue to assess the portfolio and look for those opportunities where we can capture value and enhance the quality of our cash flows over time. We also implemented a share repurchase program that gives us further opportunity in terms of how we can think about deploying capital.
Absent the $1 billion untapped revolver that we have today, we have about $575 million of dry powder, which includes the $400 million of unsettled forward equity that we raised in March of 2024 at $49 a share. Most of that is earmarked for a repositioning and redevelopment pipeline. In 2025, which translates to about $275 million to spend. We're left with about $275 million of opportunities in capital to either preserve for future pipeline for repositioning and redevelopment, the share repurchase program that Laura just alluded to, or an acquisition that meets our higher hurdle rates.
As you look at those assets that you're potentially disposing, what are you seeing in terms of buyer interest today in the market, and what would make you more apt to increase the size of that disposition pool?
Yeah, thanks. That's a good question, Nick. First of all, transaction volumes are down in the marketplace, but there is a pretty strong pool of capital that is looking at some of the multi-tenant assets that we've been selling in the marketplace. There's one component of the buyer pool that was pretty much shut out of the market in the past, which was these owner occupiers. So our average size assets are only about 26,000 sq ft. Those are really in the sweet spot. Those sales occur more in the lower 4% range, so dramatically outperforming where cap rates are in the marketplace today. We're continually reviewing the portfolio, and there's a variety of reasons that assets are being put out in the market from us for sale. Overall, I can't even tell you how many inbound inquiries we're getting.
It's an interesting time for us in terms of that opportunity size.
I think it's a testament to the quality of the Rexford assets, frankly, in terms of the functionality, location, and overall quality, dramatically exceeding what is typically in the market, and if you look at the cap rates that we're selling at, the effective cap rate to those buyers is below 5%, ranging 4.5%-5% in that general range, and I think that speaks volumes in today's market in terms of the quality of the assets and our ability to transact and, frankly, the value of our portfolio.
Howard, you said there's a variety of factors that could go into your decision to sell an asset. As you guys are going through, what are the kind of biggest factors you're weighing on whether hold or sell decisions these days?
Certainly the future growth potential of an asset. We think we're capping out on that growth. That's a prime asset to sell. There's some of the more management-intensive assets where they have lower margins. Those are some assets that we've been pruning out of the portfolio. Just some of the other opportunities, even perhaps slated for repositioning that come offline with a delayed income restart, perhaps. Those are some opportunities that we've seen some buyers wanting to take advantage as well and providing really strong returns for us in terms of IRRs.
And when you guys think about you put the buyback in place on a stabilized basis, you're trading at a fairly high implied cap rate versus redeploying that into redevelopment. But as you think about the impacts on liquidity, on leverage, how are you weighing that use of capital or the different uses of capital that you have today and kind of what's at the top of the list?
Sure, I can start with that question. So as I mentioned in the earlier comments, we've got $275 million of dry powder to put towards repositioning, redevelopment, share buyback, and just a high hurdle rate acquisition. Right now, our highest risk-adjusted return, Craig, is the repositioning and redevelopment where on an incremental basis, we're earning 15%-20%. So that's priority one. But that's balanced against the future repositioning, redevelopment pipeline that we have beyond that. But the share buyback, to your point, is attractive. You put it in place for a reason and will utilize it if it makes sense. But it's going to be balanced against the other competing use of capital that we have in our opportunity set.
I think to follow on the redevelopment, we have a question that came through, and it's just how do you think about the timing of redevelopment opportunities, particularly how concerned are you about bringing those redevelopments online in the current market environment?
Look, I can talk about 2025 and how we think about it long term. In 2025, we expect to bring on a net- net base about $15 million, so $35 million of positive NOI contribution in 2025, and we're taking about $20 million offline, but from a big picture perspective, the same way you think about a well-staggered maturity profile from a lease expiration perspective and a well-staggered debt maturity profile, that's how we think about our programmatic redevelopment, repositioning pipeline. We want to stagger that in a way where it hedges against the risk where you're in a market that you're delivering too much, or you can push forward some if you're in a market that's a little bit better, so we're looking at it from a very programmatic perspective and a staggered perspective as we move forward.
Just from a leasing perspective, how are the different repositionings, the demand on them trending? Just generally, I guess this dovetails into just overall LA fundamentals in your submarkets and for your asset types. How is that looking as we start 2025?
Yeah, I think we talked about on our earnings call a few weeks ago that as of the beginning of February, we had signed about a million sq ft of leasing activity. That was actually equal to the total leasing activity we did in the Q4. We've certainly seen an uptick in activity across the market. Internally, we track essentially the lease activity. That includes touring. That includes spaces where we're trading paper, where we're negotiating leases. And we track that as a percentage of activity on vacant spaces. As of our earnings call a few weeks ago, we had activity on about 90% of our vacant spaces. That includes the repositioning and redevelopment. That compares to the third and Q4 of last year. That number was about 60%. So we certainly have seen a market pickup in activity. We're very focused, though, on converting that activity.
Last year, we saw more starts and stops from the activity. We're really focused on the requirements within the market and converting that into executed leases. So far, it's tracking. And I would say that since our call a few weeks ago, we've seen that activity continue.
That pickup from 60% to 90%, is that being driven by any particular tenant vertical, or is it pretty broad-based? Kind of what are you seeing on the ground in LA and the demand profiles?
Yeah, I mean, I think for us, we have an extremely diverse tenant base, right? When you think about the tenant base that needs to serve the 11th largest economy in the world. So really, when we look at the demand, it's very broad-based. And important when you think about the demand for our portfolio, we are infill. We have a very different portfolio than maybe what you're hearing across the bigger box market, in particular the Inland Empire. Our average tenant size across our portfolio is 26,000 sq ft. We are focused in the infill markets. We do not have exposure to the Inland Empire East and the bigger box markets. And so we're seeing demand for our quality and functional product tick up.
All that being said, we're, again, really focused on executing activity, translating that into signed leases, and we'll continue to update you all as we see demand in the market.
Where the infill market rents are only down about 12.5% in our infill market in general, within our portfolio, our portfolio rents are only down about 8% year over year. So again, you see this tremendous bifurcation in performance. It's very different than a lot of the headline takeaways are for industrial in Southern California. Now, moving forward, we expect there is the potential for that bifurcation to continue or even increase in the sense that the backdrop for market rent growth and occupancy is still very strong in infill Southern California. Overall occupancy, or I'm sorry, vacancies around 4.5% within infill Southern California. For certain larger space sizes, there was some development during the pandemic years because of where rental rates went. That's going to be absorbed, and we're reverting back to the same supply-demand imbalance that we've had for decades within infill Southern California.
The same is not true for the big box markets where they have an endless supply of land and where we've already seen a bifurcation in terms of market rent performance, so I think our infill markets are well positioned, and I think that's an important takeaway in terms of getting a little more granular.
Another question coming in. Just do you believe market rents in your portfolio have roughly bottomed out?
No, we can't predict the bottom. Go ahead, Laura, what do you think?
Yeah, I mean, I was going to say, look, no one can predict when the inflection point is and what that looks like. But we can look at the performance of our tenants and the behaviors of our tenants, right? And what are they telling us with the leases that they're executing? And so we've been able to achieve the spreads in which we've guided to. And as we look at the levels of activity, which I talked about earlier, I think that that's in line with our expectations. And when you look at the overall markets, I think it's going to be really important to look at the submarket performance is going to vary. How product is performing in different size segments is going to vary. Remember, we're in a 2 billion sq ft industrial market.
The market and the performance across the board is going to be very much dependent on submarket and size performance. Just by way of example, space is less than 50,000 sq ft in our market. Rents have been very stable there. Demand continues to be very strong. By the way, that's the sweet spot of our portfolio. I mentioned earlier, our average tenant size is 26,000 sq ft. So the product in our portfolio at that under 50,000 sq ft is very differentiated in the market, and we continue to see very solid demand across all submarkets. So very much dependent on where that product is located as well as the size of the product.
Any other questions in the room? I'm sure a lot of your employees and you guys have been affected by the fires that have happened in LA. There's been a lot of questions that I've gotten just about what this could mean for the timing of the rebuilding effort, how industrial could play into that. I mean, you guys are in it, right? What are you seeing from the local municipalities in terms of their efforts to get the rebuilding effort back? What do you think sort of a realistic timeframe? And have you even started to see any demand related to a rebuilding effort yet, or could this be more of a 12- to 24-month out sort of phenomenon?
So I would say that it's pretty early to tell, right? We're still only about eight weeks out from the fires. But we're starting to see tenants talk about space and demand for space. We certainly believe that high level that there's going to be demand and could be pretty substantial demand that comes related to the fire. And it's going to have a long tail. It's going to take some time for rebuilding. And remember how the rebuilding and how you need supplies. So it first starts with infrastructure, then the materials that it takes to rebuild a house, and then everything that goes inside of your house, right? All the finishes, all the appliances, the furniture, etc. And the timing and pace in which people execute on the rebuild will vary as well. And so we believe that it could be a substantial driver of demand over time.
I would say in terms of the local municipalities, personally, my house was burned down in the fire, and I can tell you that the local municipalities are pushing very hard for rebuilding, and at this point, making that path to rebuilding is smooth and as quick as you possibly can go, so I think that's all really great for the rebuilding efforts. There were over 12,000 structures that need to be rebuilt, over 25,000 displaced families, so there is, we believe, a substantial tail of demand, and the timing of that will vary.
LA has other things going on with the Olympics coming and the building there. I mean, has that translated into demand also just with the special events that they're trying to put on also?
I don't think there's really much in terms of the build needed for the Olympics. I mean, we did a good job last time the Olympics were in LA regenerating existing facilities. And I think that's sort of the plan at this point. The biggest project, obviously, is at the airport and getting ready with some of the People Mover, the new rental car facility and so forth. And that construction continues.
I think if you look at the backdrop, even before the fires, I do believe the Olympics will bring a little bit of incremental demand, by the way, just on a lot of local basis, a lot of local development around the venues. But if you look at the backdrop prior to the fires, we had a mandate to increase housing by 20% in Southern California. That's equivalent to 2.5 million housing units. So already before the fires, we had already seen an uptick in the building trades in terms of general demand.
I think all these factors we're talking about, combined with a lot of latent demand out there, again, as business owners are just not making the growth decisions right now, despite the fact they feel pretty good about their business, I think we're seeing a lot of pent-up demand that is poised to come back to market. To your question about where we have bottom, we can't predict when exactly. I do believe the market backdrop is good. I believe the leading indicators such as the rent bumps were striking and the general rent levels we still see are very positive.
Then we had a question come in, but I'll frame it. Obviously, you've had some management changes, obviously, on the CFO and president side.
Improvements.
Improvements, changes. And so the question is, what does succession planning look like for the business going forward?
You know, we've had a long-term view of this business ever since we started it well over 20 years ago. And the mandate for Howard and myself, frankly, is to put in place a management team that can continue to run and grow Rexford far better than Howard and I have been able to. And I don't think we've done a terrible job. I think we've done an okay job. But I think that the opportunity forward is significant. And I also believe that we're making incredible progress to having a management team in place that will run and grow Rexford far better than Howard and I have. And I'm super proud of that. And I think that is a single most important measure of Howard and I's performance at this point in time because it's also the single greatest measure of our future success.
The people to my left and to my right are significant indicators of the quality of the team that we have in place today. I'll tell you, the way we are running this business today and into the future is very different, very exciting, and it's going to drive great results both internally and no matter how or which way you look at the business. We could spend all meeting on that in terms of the stuff Laura's focused on internally as our new Chief Operating Officer and the initiatives that Mike's focused on to my right.
We will turn to our rapid-fire portion of the segment. For industrial, for the group, what do you think cash same store NOI growth could be in 2026?
Say the same. Did you say the same property?
Yeah.
Yeah, 4%-5%.
Then 12 months from now, the size of the industrial group, you think there'll be more or fewer of the same amount of companies?
Same. No consolidation.
Great. Thank you all so much. And everyone, have a great time.
Thank you all.
Thank you.