Man with Citi Research. Pleased to have with us Rexford and CEO, incoming CEO, Laura Clark. This 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 GPC26 to submit questions. Laura, I'll turn it over to you to introduce the company and team, providing the opening remarks. Tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.
Great. Well, thanks so much, Nick, and thank you, Craig, as well. Thank you all for spending time with Rexford today. I would like to introduce, joining me today is Michael Fitzmaurice, our CFO, as well as John Nahas. He's our current Managing Director of Operations, but also the incoming COO. Last week, we announced the promotion of John to COO. With that completes the strategic realignment of our management team. I am very energized to partner with Fitz and with John as we enter Rexford's next chapter. We believe that now is the right time to buy Rexford, and my conviction is driven by three key factors. The first is that our reformed approach to capital allocation and to operational rigor.
The second reason to buy Rexford today is that there are current market indications that the bottom is forming in Southern California industrial, that as market rent declines are tapering and touring activity levels are increasing, this represents a very compelling entry point for Rexford. The third reason to buy Rexford today is that Rexford's unique portfolio, our team, and ability to drive value creation that position us to deliver shareholder value. I'll spend a few minutes expanding on these factors and then turn it over to you all for Q&A. First, in November, we outlined a reformed, return-driven strategy that's focused on portfolio optimization as well as operational rigor to enhance the resilience of our portfolio and improve the quality of our cash flows. This shift is designed to drive accretive growth in per share FFO and NAV. We're refining our portfolio through capital recycling.
Today, we're selling properties where we can, number one, capture premium valuation, where number two, we're reducing development exposure, and number three, we're mitigating future cash flow risk or lower growth assets. We are redeploying that capital into superior risk-adjusted returns, such as share repurchases today and select value add properties. Since November, we have moved swiftly from strategy to execution. We initially identified six development projects that no longer meet our return thresholds. We put those projects under contract for sale within 30 days. These very decisive actions allowed us to avoid dilutive capital spend, and we preserved about $150 million of future capital requirements. Today, we have about $185 million of dispositions that are under contract or accepted offer, and we project $400 million-$500 million of dispositions for the full year.
In the current market environment, share repurchases offer a very compelling opportunity to drive FFO and NAV per share accretion. Year to date, as announced last week, we've accretively recycled capital into $100 million of share repurchases. This is on top of $250 million of share repurchases last year. As we move forward, we will prioritize repurchases to capture the dislocation today between our share price and the intrinsic value of our high-quality industrial platform. We also have reformed our approach to operational rigor and efficiencies. In regard to revenue, today, we are prioritizing occupancy and protecting cash flow in the market. On the expense side, we've made significant change in a very short period of time as well there.
In 2026, we expect that our G&A as a percentage of revenue will be 6%, that's in line with peer average, we expect to reduce this further over time. We've also recalibrated both the structure as well as absolute level of executive compensation to better align with all of you, our shareholders. In aggregate, total executive compensation is now approximately half compared to prior levels. The second reason to buy Rexford today is that current market indications signal that the bottom is forming. While net absorption does remain negative in the market and we are seeing vacancy continue to increase, the pace of market rent decline is moderating, touring activity levels have picked up in the market over the last 30 days.
While it's too early to call an inflection today, we are confident in the strong supply and demand fundamentals within Infill Southern California. New supply under construction is near historic lows, and long-term structural supply constraints continue to increase. Southern California remains one of the country's most dynamic and diverse economic engines, reinforced by our immense population density and increasing growth across key sectors. Lastly, and finally, the reason to buy Rexford today is that we own the highest relative quality and functional industrial product in the market, with exceptionally high and continually increasing barriers to entry, and that's all supported by our on-the-ground operating expertise. This underpins our value creation business model and our ability to produce outsized growth.
Our value add platform enables us to unlock embedded growth opportunities within our existing portfolio, and we continue to advance projects that have superior risk-adjusted returns that will fuel our future growth. By way of example, in 2025 alone, we stabilized 21 projects that generate nearly $40 million of incremental annualized NOI. Finally, and very importantly, is our team. The Rexford team is our competitive edge and the driving force of our success. Rexford is well positioned to capture future rent growth and occupancy upside as the market continues to stabilize. In closing, we are acting with urgency to position Rexford for superior growth. We are creating alpha through a fundamental shift in our capital allocation strategy and execution, and that has a direct benefit to our shareholders today and into the future.
Lastly, this past week, members of this management team, including Fitz and myself and a board member, have made significant open market purchases of Rexford stock, increasing our Rexford investment alongside each of you, our investors. With that, I'll turn it back over to you, Nick and Craig.
Great. Thank you. Maybe just diving into one of your early comments was on share repurchases and kind of the opportunity that you're seeing right now. Makes a lot of sense financially. How do you think about other considerations around share repurchases? Is there anything from a scale perspective or a float perspective, you know, or is it purely just a financial opportunity where if you see a discount relative to where you're trading and it makes sense, you do it?
Sure. I can answer that question. Look, the things we look at is one, the dislocation between our intrinsic value and where our share price is trading. Two, we look at leverage. We're at mid-4s today. Our target range is between four and four and a half. Three, we're solving for the highest risk-adjusted return. Look, it made a ton of sense last year to take advantage of it. We sold about $217 million worth of assets, bought back 250 million shares, created about $0.02 of FFO per share plus NAV accretive. This year, same playbook, no different. We're looking forward to executing upon that as we move throughout the year, but it's going to be a function of dispositions.
There's no diseconomies of scale as you shrink a little.
No.
No biggie. Okay.
Laura, it, you said we're bottoming, right? Not bottomed. So, I wanna parse the nuance there.
Sure.
O f, you know, when you look at the market, and every sub-market is different that you operate in L.A., right? It's a huge market, or Southern California. If you were to kinda divide up your SoCal exposure, what sub-markets or what areas of SoCal are closer to bottoming or maybe have bottomed versus where are things still soft and could be further down? I'm just kinda curious as you get more specific, right? Versus look at the overall average, which in this market it's tough because it's so big.
Yeah, that's a great question, and I'm glad that you asked it. I'll let John jump in.
Yeah, sure. I'll start generally speaking and then dive into a couple of key differences that we see across the sub-markets. Generally speaking, under 50,000 sq ft is generally pretty stable. I think when we get above that, we start to see some differences across the various sub-markets. A couple of examples would be looking at the Inland Empire West, for example. The current weak spot in that market, I would describe, is between 400,000-700,000 sq ft. Now we're fortunate to not have exposure there today. Above that threshold, things are certainly looking more stable, and below it, that's definitely the case. I think we're seeing a lot of absorption in that market, in that size range that's kinda sub 400.
I would say the San Fernando Valley has continued to struggle, especially with Class A product. When you look at smaller Class B, highly functional product, that segment of that sub-market is more stable. Similar dynamic in Orange County and Mid-Counties, where the Class A product that represents more expensive space, is typically taking longer to lease, and there's more pressure on rents. The more value option, again, with Class B that has higher functionality, is leasing up better. Finally, I'll touch on the South Bay. Similar dynamic to the other two sub-markets I just described, except there you have a wider variety of product types. Those that cater to more logistics-intensive uses are tending to be a little bit slower as we're not seeing the tenant demand recover quite as quickly in the South Bay market as we are in some others related to that use.
As you were to overlay, kind of your expiration schedule for the next year or two, I know you guys have guided to a little bit weaker occupancy this year. How much of that versus just continued consolidation because some of these tenants maybe took too much space in 2021 and 2022? Like, where are we that it's the consolidation phase ending and kind of working its way through the expiration schedule versus just maybe some weaker sub-markets or weaker verticals that the tenants operate in that could continue to pressure a little bit on occupancy?
Yeah. I think the space reconciliation trend is ongoing. you know, we're about five years removed from the peak, the start of the peak of the market, and our market generally trades in five-year term. I think we're gonna continue to see tenants evaluate their space footprint and their needs and reconcile those two things. We've been seeing that, by the way. It's part of what's been contributing to the negative net absorption that we've experienced throughout Southern California over the last number of quarters. Now that trend is lessening. Negative net absorption is less than it has been, but we're very focused on that because I think that's the metric that's gonna tell you when that reconciliation process has been worked through.
You guys are in the ongoing asset recycling phase. Laura, you're coming in, you guys re-underwrote the whole portfolio.
Yeah.
Clearly you guys were significant buyers in 2021 and 2022. As you kind of put the parameters around keep versus sell, how much of it is sub-market? How much is the physical aspects of it? How much is it just you bought wrong, and it's just time to punt it because that capital's better used somewhere else.
Yeah.
R ather than being stuck in an asset. Could you just walk us through the decision tree, how far through the underwriting process you are? I'll follow up after that.
Yeah. I mean, all of those things are things we're thinking about, Craig, as we're building out, right, what are the right properties to sell. What underpins kind of what are we trying to achieve? Like, let's start there, right? What we're trying to achieve is a portfolio that has a more resilient stream of cash flow growth per share. How can we create a cash flow stream that has higher relative growth than where we are today, that allows us to mitigate future risk, that allows us to mitigate future dilutive capital spend, as you've seen us do in some of the development sales, and at the end of the day, position the FFO per share or earnings growth of this business higher than where we would have been otherwise, right?
On a relative basis, how do we have a more consistent growing cash flow stream? We know that value creation, and I talked about it in my prepared remarks, is a key element of our business model. That is what ultimately allows us to drive cash flow per share growth that's above what you could achieve in the market. How do we position the portfolio in a way to be able to do that, while at the same time mitigating some of this disruption to cash flow growth? That's what we're thinking about high level and what we're trying to achieve. To your question around, what does that mean? That means that we're looking at everything, right?
We're looking at those assets, as I mentioned, where we can capture compelling valuation because that's a, that's a great way for us to creatively recycle capital. We're looking at the developments, right, and not allocating dilutive, you know, capital to those. Just as an example, those six projects that I talked about, we had projected to stabilize those projects at a 4% yield on an aggregate. That's not a great use of our capital, and that allows us to avoid dilutive capital spend of about $150 million. We can then avoid that spend and redeploy that in the future to more accretive uses. Lastly, as we look at, you said, you know, is it, is it unit size? Is it sub-market specific?
It's really just about how do we build the better cash flow stream, and how do we embed those opportunities into our portfolio where we can drive value creation over time.
In terms of the buyer pool for the assets you're putting out there, I mean, how deep was it on the assets that you put out there from the development side versus what does it maybe look like for the stabilized assets? How deep is that pool today given you guys were one of the most active players in L.A., that is kinda taken out of the market?
Sure. Yeah, I'll take that.
Jump in.
On the development sales specifically, we had a pretty long interest list. We had over 85 qualified groups, you know, enter the process and, you know, sign the required documentation to take a look. On each individual asset, we had a focused bid list of between five and 10 groups that were competitive. We were very pleased to see that level of interest. The composition of the bidders was also interesting. We had groups that certainly focused on development as a primary strategy in the region but also saw larger institutions, enter the mix as well. I think that speaks to just the overall level of interest that we're seeing from capital for Southern California, given where we are in the cycle and, you know, the bottom forming.
I think a lot of groups are recognizing that it's a good entry point. I would suspect that as we sell other types of assets, we'll have similar interest.
Yeah. What I would add to that is overall in the market, there aren't a lot of properties on the market for sale at this point. It is pretty quiet on the seller side. We are hearing that there's more capital, and John said, you know, we're seeing some of that capital wanting to get into Southern California. You're not seeing as much on the market today on from the seller side. Where we have been able to take advantage of those premium valuations is in the owner-user market. Those are businesses that wanna buy their real estate. Where we can take advantage of that, we have. They tend to pay higher premium valuations. They clearly look at real estate valuations from a different perspective.
We're taking advantage of that where we can. That pool, though, is unpredictable in terms of where they want to be and what properties can trade. It's unpredictable from an execution perspective. They tend to need financing as well, tend to not be typically real estate investors. So, where we can take advantage of it, we will. It's not somewhere where, you know, you can say, "Okay, we wanna tee up X million dollars, you know, dollars of owner-user sales and execute." It's more opportunistic in nature.
If you take out the users, have you tried to back into maybe what investor IRR are trending to on an unlevered basis for assets in the market? Or maybe even and on the development side, the yields that people are trying to develop too to make the risk reward work?
I'd say we're pretty close obviously to the development side, selling the six properties. Generally speaking, we saw those developers solving to somewhere between a 6% - 6.5% yield. I would caution that a little bit. You know, you typically see developments in the market, developers solving to somewhere between 150 to 200 basis point spread. In this case, because these sites were fully entitled and, in some cases already permitted, you're taking a lot of that pre-development risk off the table. It did allow for those developers to solve for a bit tighter spreads than you'd typically see, from a development underwriting perspective.
You kinda touched on this a bit. You've done a lot of work coming in. Well, the management team was kind of the core there, but John got elevated, right? You're recognized to people internally. From a culture standpoint, from what you stepped into taking the lead, you know, formally, what inning do you think you are in resetting the bar at Rexford to where you want it to be as a go forward versus maybe where it was under predecessors?
Well, we're still pretty early here. We're just a few months into the announcement, and the transition officially happens on April the 1st. I would say that the work has been being done, as Craig, that you mentioned. I'd say as a team, internally, there's a lot of excitement for this next phase of Rexford. There's a lot of excitement from all of us as well in terms of taking an incredible business model that we have, and being able to just make it better and grow it from here. The Rexford team is excited and behind that. We will continue to mold the team and the culture around what drives success at Rexford because they're such an important part of that.
As part of, kind of looking forward in those opportunities, how are you thinking about using and deploying AI within Rexford to, you know, either become more efficient or from a capital underwriting perspective and just kind of the opportunity that you see right now?
Yeah. It's pretty exciting. I think everyone probably agrees with that. We take an incremental approach to it. It's the best way to describe it. It starts with utilizing platforms that are already part of our data and software strategy for data security and integrity reasons, but also ease of deployment to the larger organization. We are accomplishing tasks that are more broad and widespread through those existing tools that we already have in our ecosystem. Think things like workflow automation and data analysis and search optimization that we can put in the hands of all of our teams, easily. We're a Microsoft shop, we're using their tools for that. On a property operations standpoint, you know, we use Yardi. They have some tools in development that we're looking at that are pretty exciting too.
Kind of the base level of our strategy is to utilize those platforms. The next level up, is bringing in, which we're doing now, tools that are for a bespoke purpose that aren't available through those platforms. Things like lease abstraction or lease document drafting and contract drafting, things that can effectively speed up the process, thereby creating more efficiency and productivity. We see a lot of opportunity and have enjoyed some success to date with that, and we're gonna focus on those two areas. There's a lot more that we can do there. We're a ways off from taking what I would describe as probably the next step after that, which is building something custom. I think there's enough tools in the market that we can get a lot of value out of based on what we see.
Makes sense. How about just from a tenant perspective? you know, obviously, I'm sure there's a lot of deployment of AI across their businesses. Is that starting to impact leasing decisions? Is that becoming more of a conversation as you, as you look to lease space?
Yeah. It, it starts to come up a little bit more, primarily in the sense of using those types of tools to help inform real estate decisions, whether you're looking at, you know, a tenant who's mapping out their customers and figuring out the ideal location to service them. The valuation of lease comps, you know, is another application which we use it for internally at Rexford as well. We're starting to see more groups deploy it. Now, it tends to be more with the more sophisticated, larger, more corporate type users. With, you know, the plethora of options out there, we're even seeing some of the smaller tenants get into it as well.
We've heard from a couple other of your peers, right? Not heard, but had a conversation with them around power allocations, what tenants are using, right? L.A. is starting to see some more high-tech manufacturing, light manufacturing. As you guys look through your portfolio, have you seen power needs from tenants start to increase? Does this inform your decision on certain buildings to keep that may be antiquated where you can't pull the power? Even though physically truck courts, other things, it's functional, but power-wise, it's getting to be obsolete. Like, how is that impacting the L.A. market and your portfolio specifically?
Yeah. It's a big factor. We've been focused on it for quite some time. As we look at upgrading, you know, certain properties, power is usually at the forefront of the conversation. As you touched on, you know, it's not just about what you c an put in the building in terms of infrastructure. It matters how much capacity the circuit has. What the utilities are doing is basically delivering capacity on a first-come, first-served basis. So you won't know how much technically you can get if a certain circuit in the grid is nearing capacity until you're ready to receive that power upgrade. It adds some risk to the equation.
We're very early in planning for that ahead of time to try to get ahead of it. It does limit, you know, the potential for certain properties, and we do take that into consideration when planning improvements or potentially considering a property for disposition.
I'll just add to that. It is an important factor, an important functionality factor that certainly drives demand and can differentiate your product in the market today. If you were able to deliver a building with 4,000 amps in the market versus 2,000 or 1,000, it absolutely will differentiate the demand and certainly the leasability of that project sooner. We are It's not just from advanced manufacturing, by the way. There's a, you know, there's a significant shift to electrification, which is driving the need for more power across the board from all tenants, regardless of industry. It is something that, as John said, that we've been focused on for some time, working directly with the utilities.
Those relationships are very important, and it's something that because it's been something we worked on for some time, we're really well-positioned to get, you know, the outsized power that we need, and position our properties in a different way in the market.
Transitioning maybe a little bit to earnings. We've talked about a lot of the sort of inputs with a little bit of dilution from asset sales in some instances offset by buybacks, you know, you have the occupancy pressure that feels like it's gonna be there for maybe a year or two until you really start to see the market inflect potentially. You have instances like Tireco, right? Where strategically it's better to take the rent hit and lock them in, right? If I put this all through the grinder from an investor expectation in terms of, I know you haven't given 2027 guidance, so this is more high level.
The investor expectation for a snapback in FFO growth, should that be tempered to where maybe that's a little bit later dated, where there's some of these things you've identified are hit to run rate, they pressure, you guys aren't redeveloping as much? You're taking stuff out of the pipeline, right? Like, I'm trying to get to the algorithm without kind of boxing you in from a guidance perspective. You kinda see where I'm going. I'll let you take it from there.
Sure. Thanks, Craig f or the b elabored question here.
Guidance.
We're gonna control what we can control. That's why we prioritize the occupancy. We've spoken about it quite a bit. It's why Tireco, we did an early renewal on that. That was $20 million of NOI. A market like this, the most expensive thing you can do is not renew a tenant, especially your biggest tenant, 1.1 million square feet. They had a negative 30% releasing spread. I do wanna make clear that that's not what the expectation is for 2027. They're not gonna be anywhere near a negative 30%. Back to prioritizing occupancy. You know, we have about $55 million of NOI that's tied to our repositioning and development pipeline that's either in lease up, or the construction's already complete, or where we have a shovel in the ground.
That's gonna come online over the next two plus years. That's one lever we're gonna pull. The next one we're gonna control to the best of our ability is taking advantage of the disposition market. We talked a lot about that today. We have $400 million-$500 million of dispositions that we expect to get done ratably over the course of 2026. Right now, share repurchases are extremely attractive based on my earlier commentary. We'll take advantage of that dislocation. The last thing, and Laura commented on this to a certain degree, is G&A. You know, at the end of 2024, our G&A as a percentage of revenue was about 9%. This year it's expected to be about 6%, so roughly $20 million less than last year. We're coming in right around $60 million.
We'll continue to drive operating leverage where we can there. What we can control are those three things to a certain degree. The pressure on the releasing spreads is something to be seen. We do expect we could have pressure in 2027 and 2028 just based on when market rents peaked in 2022 and 2023. We feel at this point we have a lot of other things that we can control to offset some of that.
Yeah. I'll add one other offset is just how we're thinking about capital recycling. To the extent that, you know, we have some of those headwinds, and more near term, and the specific assets that we think that we can sell, and then be able to mitigate some of that, those headwinds and risk, it's absolutely something that we'll consider doing.
I know your tenants kind of skew smaller generally, but are there more risks of a Tireco-type hit in the near term as you look at the expiration schedule in 2027 and 2028?
Not at this point, no.
As we think. A lot of this talk has been about kind of rationalizing, right-sizing, but at the same time, you guys ultimately do want to grow, right? How do you, I know it's not the priority today, but do you spend much, if any time today underwriting opportunities either in your markets? Are you spending time looking to see if it makes sense to diversify from just being SoCal to maybe a broader West Coast footprint? As you get through this stage, which I know is gonna take a while, but you always gotta be a couple steps ahead. What are the longer term strategic focuses that you're thinking about, at least initially?
Yeah.
What could we expect?
Look, we've got a lot of blocking and tackling in front of us, as you said. We're spending time thinking about how we position this portfolio for the future and for better growth, as I talked about earlier. That's, that's number one, two, and three in terms of the current focus. That means that, you know, as we do that and we're able to position this portfolio for better growth, it will improve our cost of capital. There will be a point in time where we will be able to grow again. There's obviously a significant growth opportunity for us in Southern California into the future.
The relationships that we have in the market and across the market and the vast, you know, data that we have around what those opportunities look like, we continue to cultivate. That's really important 'cause that will be an important part of our growth in the future. Importantly, though, as we think about how we will grow in the future, we are gonna grow being very cognizant of achieving the appropriate risk-adjusted returns as we allocate capital in the future. When we do grow again, it will be focused on what is our cost of capital, how are we underwriting in a very rigorous way, and so that when we allocate that capital, that we are truly driving value creation for shareholders in the future.
I'd also add that that opportunity set is there. As Laura mentioned, we are monitoring it day in and day out, the fundamentals in our market are only gonna get more favorable for us. I think this is something that is underestimated for our market, is that there's something different about this cycle, which is the land use regulation has increased substantially over the last two years. As we get to the recovery portion of the cycle, what's going to be different from previous cycles is that you're not gonna be able to add the same level of supply that was added to our market going forward, that comes from state and local level land use changes.
We're pretty excited by that, and very bullish and continue to be on the opportunity set in Southern California, because that's gonna benefit the existing industrial stock and it's gonna benefit us because we're well equipped to upgrade that stock and drive, you know, the mid-teens returns that we get through our repositioning program.
Yep.
Just to maybe clarify or get you guys on the record, once you get through the initial asset sales, will asset recycling continue to be a key part of the capital deployment discipline going forward?
Yeah, absolutely. I think capital recycling should be a part of any great capital allocation strategy and framework. I would expect going forward, we'll continue to evaluate the portfolio on an annual basis, and we'll probably sell something between 1%-3% of assets annually and recycle that capital accretively.
Perfect. just quickly, rapid fire. same story on YoY growth, we'll just say for industrial sector overall, so not just Southern California, next year in 2027.
Higher.
Needs to be typed into a spreadsheet.
5%.
5%? Perfect. Then, a year from now, will there be more, fewer, or the same number of public industrial REITs?
Same.
Thank you very much.
Thank you so much.