Why don't we get started? I know it's 4:30. This is the last panel of the day, so I know everybody's excited from that perspective. Welcome to the Rexford Roundtable. Happy to have Laura Clark, CEO, up here. Laura, why don't you introduce your team, I mean, we have a big group here, and give us any opening remarks.
It sounds good. Well, thank you all for joining us today, and thank you for your interest in Rexford. Thank you all for hosting, Bank of America. With me today are Mike Fitzmaurice is our CFO, John Nahas, our COO, and Doug Bettisworth is our SVP of Investor Relations and Capital Markets. Before we move to your questions in Q&A and any questions that we have in the room, I'd like to provide an update on what we're seeing in the overall Southern California industrial market and an update on our current strategic priorities. Let me start with the market. The leasing activity continues to improve in our market. We are seeing evidence that demand is strengthening across Southern California.
In the second quarter, the market generated nearly 6 million square feet of positive net absorption, resulting in the first decline in overall vacancy that we've seen in the market in four years. Leasing activity has been strong throughout the third quarter, and we are seeing demand from a broad range of industries, including advanced manufacturing, logistics, and consumption-based users like food and beverage, automobile, and construction related businesses. Of note, demand across the market is broadening, and that's a good sign. We're seeing activity across more submarkets and size ranges than we were earlier in the year, and leasing momentum remains strong in spaces under 50,000 sq ft. While activity in larger Class A spaces, especially in the North Orange County and Mid Counties market, has improved as corporate users have become increasingly active. While availability in the market remains elevated, we are moving in the right direction.
That said, incremental tenant demand driving net positive absorption is fundamental to the market's continued recovery. Turning to our strategic priorities, we have taken decisive actions this year to strengthen our platform and sharpen our focus. Earlier this year, we completed a comprehensive portfolio review, and we identified approximately $2 billion of non-core assets for dispositions. This initiative reflects a very disciplined effort to concentrate our portfolio around properties we believe offer the strongest long-term growth and value creation potential. Including our recently announced $1.2 billion transaction with EQT Real Estate, we have closed or have under contract approximately $1.5 billion of dispositions year to date, which positions us to achieve our full year disposition objectives. Proceeds from our dispositions will enhance our ability to execute on our capital allocation priorities and increase financial flexibility.
We are reducing near term debt maturities, repurchasing shares when attractive opportunities arise, and we are continuing to invest in our high return repositioning and development opportunities across our portfolio. At the same time, our conviction in the long term outlook for infill Southern California industrial real estate remains strong. The Southern California industrial market benefits from one of the most diverse demand bases in the country. At the same time, supply under construction has fallen to multi-decade lows, and increasing restrictive state and local regulations, specifically including AB 98 and Senate Bill 415, are making new development increasingly more difficult. These dynamics further strengthen the long term value of our portfolio and our differentiated platform. Before I conclude, I want to recognize the Rexford team. The progress that we've made this year reflects the exceptional execution across the entire organization.
In closing, we have acted decisively to strengthen Rexford. We have sharpened our portfolio, we have enhanced our balance sheet strength, we have improved operational efficiency, all reinforcing our long term growth platform. As market conditions continue to improve, we believe that Rexford is exceptionally well positioned to create value for shareholders and capitalize on the opportunities ahead. With that, I'll turn it to you for questions. Samir.
Yeah, I'll start, and I want to keep this interactive, so if anybody has questions, please. Maybe talk about the submarkets. There are certain markets that are clearly doing well in L.A. and South Bay, but talk to us kind of broad, kind of what you're seeing within the markets.
Yeah. I'll start a little bit higher level, and then John can dive into some of the submarkets. As I mentioned in my prepared remarks, what we've seen from the second quarter into the third quarter is, I'd say, just a broad pickup across the market in terms of activity. And that includes across submarkets and size ranges. As I mentioned, that sub 50,000 sq ft continues to be strong. That's been a spot of strength for several quarters now. We've even seen market rent growth for the past two quarters within that product that's sub 50,000 sq ft. And what we've seen generally, in the third quarter, is that pickup in Class A, driven by those corporate users, as I mentioned. And that's been very positive for the pipeline, the leasing pipeline that we have from a development and repositioning perspective.
So generally, we've seen more activity and more lease executions around those assets that we have for lease up in the development and repositioning pipeline. John can certainly speak more about some of the submarkets.
Yeah. So you touched on South Bay. We've been describing that market in two parts. There's the coastal portion, which I think most people are familiar with. Advanced manufacturing demand is quite robust and that is continuing. But that is acutely focused on the most coastal areas of the beach cities between El Segundo down to Torrance, with some spilling over into Long Beach. When you look beyond that one tenant sector, beyond advanced manufacturing, it is a bit different. In general, logistics demand is there, but not nearly at the level that we're seeing with advanced manufacturers. The whole market is a bit bifurcated. We're seeing rents and occupancy and absorption behave differently across those two areas. Similarly, we have other markets like the San Gabriel Valley, which are exhibiting strength in pockets around the city of industry.
That's one area, as Laura mentioned, where we're seeing increased demand for Class A product. We have a couple of development sites that were completed, and are happy with increased activity we're seeing there. But like the South Bay, there's a bit of a bifurcation. When you look at the Irwindale portion, which is the north part of the San Gabriel Valley market, it's not quite the same. We're seeing healthy demand, sub 50,000 sq ft, as Laura noted, and as well as with product that's Class B with higher functionality. But Class A remains a bit slower in that market. Logistics demand is one of the bigger drivers for San Gabriel Valley overall. That is also true for the Inland Empire West. We're continuing to see good demand coming from those sectors. Our product in the IE is on the smaller scale as compared to most.
Our average unit size in that market is 30,000 sq ft. Nevertheless, we do own a few bigger boxes and have some exposure to some of the increased 3PL, and warehousing tenant demand that we've seen there. Probably most notably what's different from earlier this year, certainly even last quarter, is some of the Class A demand focused on markets like Orange County and mid counties. Those markets year to date have been a bit quieter in that space. Over the last 60-90 days, we've seen increased activity and more deals getting to the finish line. Light manufacturing, some advanced manufacturing is driving a lot of that tenant activity in those markets. Mid counties, you'll see a little bit more logistics there as well. Then real quickly rounding out, San Fernando Valley, which is a big presence for us. Class A remains a bit slow there.
Class B product and smaller sized units are continuing to lease and perform very well. That market does historically have a larger component, roughly around 20%, that is tied to entertainment. That sector has not gotten any better. It is still a lot of the same. We have not seen that demand portion come back yet. Overall, activity generally is going in the right direction across all the markets and most size ranges that we operate in.
John, remind the audience, what is your exposure to South Bay?
Yeah. It is our largest sub-market. We have product there that ranges as small as 2,500 sq ft, up to a few hundred thousand square foot sized boxes. It is concentrated mostly in the coastal and harbor gateway corridor areas of the market, which are focused on the logistics corridor that extends from the port to Downtown L.A., as well as the advanced manufacturing epicenter that I described earlier.
I think it is around 12%.
Yeah, it's about 7.5 million square feet-9 million square feet.
What is that? Is that 12%-15% or something like that?
Yeah, in the ballpark. Yep.
Yeah.
Okay. Is there a way to bifurcate Class A product versus Class B, what you own in South Bay? Just curious.
We have a bit of everything in that market. It's hard to give you a number off the top of my head. We also have a couple of projects in our development pipeline that are underway that are going to increase our presence in that sub-market.
Okay.
Why don't you maybe talk a little bit more about the development pipeline? It sounds like you've seen some more activity there this quarter.
Yeah, that largely aligns with the Class A tenant activity trends that we're describing. We have product in our pipeline that is completed and in lease-up. Those buildings are generally located in Orange County, San Gabriel Valley. There's a few others in a couple of other markets, but that's the higher concentration. We're pleased with the increased activity that I was describing earlier. In terms of the future pipeline, we have a few projects that have started and will start as we get through the end of the year. Those are all projects that we're really excited to get underway and deliver to the market. They're projects that meet our current financial threshold guidelines and will deliver differentiated product to the market, which is really important.
That's a big element of our strategy is to make sure that across our operating platform and when we do development, that our product has a competitive advantage. The projects that are in our future development pipeline are great examples of that.
Yeah, from a financial perspective on developments, we are solving for between 150 and 200 basis points on top of the market cap rate. So right now that is out to about a 6.5%- 7% yield, which are in line with the projects that we have started this year. As we look ahead, it has to hit that hurdle for us to green light it, otherwise it is a no. As we look at our development pipeline going forward, it is smaller. We sold six development sites earlier this year, or they did not pencil. They were penciling between a 3.5%, 4% because they were largely bought in 2022 and 2023.
As we move forward, the focus is going to be more on repositioning the light CapEx work inside the four walls of the building, where it is lower CapEx, lower downtime, much bigger tenant demand, broad-based demand from different tenants sizes and industries. So it is a big change from how we allocated capital in the past.
Laura, I just want to make sure, when you say demand is strengthening, you are talking across the board, right?
Yes. Yeah.
Like all.
Yeah. As John mentioned, we're certainly seeing, when you dive into the sub-market level,—
Yeah
—there's a differentiation in terms of the performance within a sub-market and within size ranges. But even when you compare to the levels of activity three months ago, six months ago, nine months ago, generally speaking, the levels of activity across the board are higher. I would say the demand pool is also deeper.
Is there a leasing pipeline? Are you able to quantify versus like, if you—
Yeah. We haven't reported mid-quarter stats.
Yeah.
Which will certainly, we report earnings in less than 45 days from now.
Right.
So we'll certainly provide updates at that point in time.
And you've talked about the demand improving. Have you seen a sort of a shorter timeline for decision making as well from customers, or?
Yeah. I'm glad you asked that question, because I think that's really key. I think, we've had periods where we've had leasing activity pick up. But what we've seen is that tenants are executing leases, they're making decisions. And I think that the tenant decision making period has shortened as well. I think there's a lot of reasons that can be driving. I don't think it's just one thing. We certainly continue to see the reconciliation of spaces. Tenants are very focused on driving efficiencies within their operations. They're also very focused on being in the right buildings, from a functionality and quality perspective, to be able to drive their businesses forward in the most efficient way possible. When you think about, given the fact that there's more availability in the market today, there's more options.
You see them going and looking at those options, looking at where rates are today, and wanting to lock in today's rates in better buildings. And so we certainly benefit from that, from our portfolio, from especially, Mike mentioned in terms of our value creation model is about delivering the most functional, and highest quality space on a relative basis to the market. And so we're certainly benefiting from that inflow. And I do think that tenant decision making is strengthening just generally around the tenants are seeing activity pick up across the market and wanting to lock in today's rates. Some are trying to push that decision making sooner. Maybe I've got a renewal in a couple of years and I'd like to go ahead and lock in today's rates and extend my terms substantially. So we are seeing that, I think, as also part of the driver there.
Can you talk about the lease negotiation process a little bit? Now that tenants are coming in and wanting to lock in today's rates, how much are you able to push on the annual escalator? Is that still in the 3%-ish range?
Yeah, around 3.5%.
3.5%.
Yeah. That's been pretty sticky over the last few quarters. It feels like overall the market has settled at that number. In our smaller size spaces, think sub 10,000 sq ft, we're still able to achieve a bit higher, averages around 4%. But really what it's coming down to, because that's pretty sticky, concessions are still pretty sticky. It's generally about a month per year of term for new deals. TIs aren't super meaningful in terms of overall dollar value in the deal economics. It's coming down to rate and it's coming down to commencement date. Going back to your question, Samir, and what Laura touched on, the urgency shows up in two ways. There's tenants that have been putting off decision making and now they want to go. They want to get in the building in three weeks, which is great. We love that.
There's other tenants who are entering the market proactively much earlier than they otherwise would to take advantage of where rates are today. The two biggest conversations our teams have is around rate and commencement date. Some being accelerated, some being, as Laura was touching on, maybe further out in the future so that they can benefit from today's market versus what they might be dealing with later down the road if the market continues to improve.
Maybe on the rate piece, market rates have been declining, but the pace of the declines have slowed the last couple of quarters. I guess just any general sense of how close we are to more of a flattish point?
Yeah. I would say what's been going on with market rates is a bit expected. We still have elevated availability and vacancy across all of our submarkets. With that, the tenants have options and can leverage that. The net absorption that we've been seeing, especially what we think is happening on the ground today in the market, is very encouraging, and is steps in the right direction of chipping away at that elevated vacancy and availability. Until that comes down, we expect there to be continued pressure on rents. Because as landlords like us are competing for deals, going back to what I was mentioning before, rate is one of the big topics of discussion. It's expected. We think that's going to continue, generally speaking, getting through this year in 2027 and the first part of 2028.
We're going to be dealing with 2021, 2022, and early 2023 vintage leases that are expiring where tenants are going to reconcile their space needs and make different decisions in today's market versus what they decided to do when back in 2021 and 2022 vacancy was really low and they didn't have a lot of choice. So we expect it to continue to fluctuate. The rate of decline in rents flattening out has been helpful. Then there are certain areas of the market, particularly spaces under 50,000 sq ft, where rents have been stable and we've actually seen some growth over the course of this year. It's important because when you think of Rexford, remember that our average unit size is 28,000 sq ft. So we have a lot of exposure to that segment of the market, which is pretty stable.
Yeah. I think what's really important to focus on is that the recovery will not, in terms of net absorption, in terms of market rents, will not be linear. We're in a 2 billion sq ft market, and it will different by submarket, and it's going to different by size range. So really focusing in on the competitive set, that's what's really going to drive absorption. When you think about the competitive set within our portfolio in the market, the competitive set is what's going to drive our ability to push rates or not. That's really what we're focused on in terms of when as we're looking through to the recovery is it truly is on a submarket and a size, and quality perspective, going to vary as we get through this period of time.
I guess my—you know, t here's been a lot of conversations around cash leasing spreads. I mean, you're still down, it was 11% in the second quarter. Help us understand how to think about that metric, and if it feels like market rents are still under pressure for the next sort of, whatever it is, 2027, 2028. Help us take that.
Yeah, look, we've been pretty clear-eyed with our investors over the last several quarters on what our expectations for cash releasing spreads will be. This year, they're going to be negative 10% to - 15%, because what we're facing on the rent roll in terms of expirations is leases that were signed in 2021. Our average lease term is about five years. So rolling into next year, in 2027 and 2028, we're starting to get into those vintage leases that were signed in 2022 and 2023. As a reminder, the height of the market in terms of market rents and when they peaked was the first half of 2023. So these are structural in nature. We sold some of this off via the EQT transaction that Laura noted earlier. So releasing spreads are a bit better. But you can't fix this stuff overnight.
50% of our portfolio today is still above market. It's a little bit less after this, the sale of these $2 billion worth of assets. So we'll face some pressure. It'll probably be negative mid-teens in 2027 and 2028. Big caveat there, though, is that's assuming the market rent does not grow from here on out. That assumes flat rent. But it's important to talk about the other side of it. The biggest swing factor in terms of earnings growth for this company today is occupancy. That's why we've been prioritizing this for the first almost nine months of this year. We're at 90% today. We have about 3.5 million of square feet in our repositioning and development pipeline that has, rough number, $60 million of NOI tied to it.
If we continue to experience positive net absorption like we did this past quarter, and market rents begins to moderate, hopefully flatten out and maybe even go up, that will accelerate the occupancy. The other piece of it, which we haven't talked about, which I'm sure a question will come up, is that we're going to get our net debt down at 3.5x via this transactions that we're doing this year of the $2 billion or so. That's going to bring us down at, like I said, 3.5x, and that's going to position us very well for the recovery.
You want to have high liquidity, you want to have low leverage because you want to be able to buy when buying is low, which is kind of the inverse of what we were experiencing in 2022 and 2023 when we were buying at the height of the market. It's quite the inverse of that, and having that type of firepower is going to change the direction of this company.
See if there's any.
Can you put that in context of the market cycle. The peak 2021, 2023.
You were signing leases at typically a spread, cash spread of blank. You signed up escalations on average of Y. I mean, the spreads from 2021 to 2023 were like 50%-70%.
Yeah.
Then, you signed escalation in the leases. So we have cash rent rolldowns.
Yeah.
But it's off a very cyclical market.
Yeah, that's correct.
Yep.
The market overall increased almost 80%, and the escalations
500%.
The escalations at that point in time were north of 4%, many 4.5%, and in some cases, even 5%.
That compounds since 2021, 2022, and 2023. That's why we're having the roll off that we expect. Look, time is the best gift we can give ourselves in just getting through this and getting through this reset. We're getting there. The market's getting better. 12 months ago, sitting in front of you guys, we were in worse moods. We're in much better moods today given the market fundamentals, the way we're allocating capital, leadership changes. It's been great.
Yeah. I mean, and look, we've said this a lot, we're controlling what we can control. There's structural headwinds. We're bettering the portfolio. This $2 billion portfolio realignment is about bettering future growth. We're positioning the balance sheet better than ever. We're driving operational efficiencies. We've reduced G&A by $25 million. We've continued to reduce G&A this year. So we're doing all the things that we can control today that we believe are positioning this business for long-term growth as we move forward.
Maybe talk about the. Then, Laura, you touched on the disposition, right? The $1.2 billion. Talk a little bit about pricing, the timing, and the size relative to your expectation. Also, how to think about the use of proceeds, right? Given that we talked about share repurchase at one point, but given where your stock trades today, how attractive is that?
Yeah. Let me talk a bit about the overall $2 billion. I can touch on pricing, then I will let you talk about proceeds. I think it is important to take a step back and how did we, and why did we curate this $2 billion portfolio that we have deemed non-core that we want to sell? Number one is it started with the real estate. Our goal, our objective is to produce highest relative TSR for all of you, total shareholder return. How do we do that? We do that by driving outsized cash flow per share growth. We do that by owning product that is differentiated in the market. We do that by owning the best real estate in the market, real estate that is differentiated, in many ways, in real estate where we are able to execute our value creation business model.
That was the framework in which we identified the $2 billion of assets. So these assets do not align with that framework. Competitive set is higher. They are not as differentiated, maybe more commodity-like product in the market. There are headwinds ahead for those assets. Over the long term, those are assets that we did not believe will allow us to achieve outsized cash flow per share growth. So that is how we circled those assets and identified those. Then we moved forward. We marketed the portfolio, and we had a number of institutional buyers interested, and a large percentage of that $2 billion. As I mentioned, we are executing $1.2 billion of the portfolio with EQT Real Estate. We have already closed on $300 million, so we have got another $500 million to go.
I would say that we are in various stages of the disposition process with that $500 million, and expect to be mostly complete with that other bucket by the end of the year. So we are excited about how it is going to position the business going forward. From a pricing perspective, we will just speak to the $1.2 billion transaction with EQT Real Estate. Those assets generally were above market, about 27% above market. Certainly outsized compared to our overall portfolio. WALT was shorter, so more near term vacancy risk. So when we look at that portfolio overall, the 2027 cash NOI yield was about 5.5%. So we are excited about the opportunity to execute on this transaction. Before I turn it to Mike Fitzmaurice for some comments on use of proceeds.
I also think when you look at the amount of institutional capital that's flowing back into the market and the demand that we had for this portfolio and other assets that we have on the market we're selling, I think that's a great look-through in terms of how others are thinking about the market, the current state of the market, and their desire to grow a footprint long term in Southern California. I'll let you talk about use of proceeds.
Yeah, sure. In terms of deployment, as I mentioned earlier, we're going to prioritize debt. We got about $1 billion of debt maturing in 2027. That's the opportunity set in front of us today. We can get at about half that, around $500 million here in the third quarter. We can prepay it. It's open at par or has a de minimis prepayment penalty. The remaining $575 million comes due in March of next year. That's in connection with our $575 million convertible notes that mature. The remaining $700 million or so, we're going to be opportunistic with. I think we've shown a track record on the share repurchases over the last 12 months or so. We've bought about $550 million to date. The zone has been between $35 and $40 a share. That's a spot yield of about 6%-6.5%.
Still pretty attractive relative to other places we can put the cash. Look, we're going to be aggressive on putting the cash to work if it makes sense. For example, EQT Real Estate waived due diligence in mid-August. At that point, we've had pretty good conviction and confidence that we're going to execute on that portfolio. We've been trading between $35 and $40, so we've been taking advantage of the share repurchases even during that time because that's the $1.25 billion reloader that gives us the opportunity to go ahead and do that. We're ahead on that to a certain degree. As we move forward, it's going to be a great position we're going to be in with 3.5x on a net debt to EBITDA basis.
We'll just have the firepower to redeploy towards the highest risk-adjusted return that we've been doing for the last 12-18 months.
As you negotiate the other $500 million that is left, in terms of the asset sales, has anything changed here given? You look at where rates are. What is the early indication in terms of buyer interest or pricing? Anything that you can share?
I would say, generally speaking, pricing, when I look at the $500 million collectively, is probably going to be right in line with that 5.5% that we have transacted on to date. Where we can transact on user sales, we will, and we are able to achieve higher valuation on those. But net, probably in that 5.5% range on a stabilized basis. I think that is strong indication, again, in the market in terms of the demand. I would say buyer pool is pretty deep. And we are watching closely in terms of are rates having an impact on overall pricing, and we are not seeing that flow through yet.
I think there is a couple reasons we are not seeing that flow through. Number one, when you have a pretty deep pool of demand for assets, that can certainly keep cap rates down, push pricing up. The other thing I think is underwriting assumptions. As the activity picks up in the market, I think people get more comfortable with their underwriting assumptions, lease-up assumptions, market rent assumptions. When you put all those together, I think that that is helping keep cap rates around our expectations, even in this rising rate environment.
Can I just ask a quick question?
Yeah.
As we are identifying the $2 billion, right? I have to assume that when we looked at the portfolio, there was a bucket of we are not going to sell, there was a bucket of we are definitely going to sell, and then there was the stuff in the middle. Can you just talk about how big the gray bucket was, and did we lean towards more, less? I know it is pretty hard to generalize, but.
Yeah. I would say we leaned towards more. The gray bucket was not that big, is what I would say. Look, I think that's a really important. I'm glad you asked the question, Tim, because I think it's a really important point. Look, we believe that capital recycling in the programmatic capital recycling program, is a really important part of any great capital allocation strategy. Going forward, you're going to see us recycle capital on a programmatic basis, 1%-3% of assets annually. We'll evaluate that on an opportunistic basis. That's going to be part of the DNA as we move forward. Said another way, there's not another billion dollars of assets that we look to go and sell next year or the next. It's going to be much more programmatic as part of any great capital recycling framework.
I know we've got a couple of minutes here, but in terms of. Again, I'm not asking for earnings growth in the Bank of America sphere and so forth. Help us understand kind of the swing factors to consider for 2027. There's clearly a lot of things going on here. As of FFO, we found the floor to sort of have FFO at this point as we think about it.
Yeah, look, I think 2027 potentially could be that floor, right? I think we'll share more updates in our third quarter call and into fourth quarter. Like I mentioned earlier, the biggest swing factors today are occupancy. We're at 90%. We feel like this portfolio can get to 94%, 95%. For every percent increase in occupancy, it's about $0.03 , $0.03-$0.04 of FFO per share. Again, if we continue to see positive net absorption and market rent begin to flatten and to moderate, occupancy could be a key driver in 2027 and 2028. It really comes from the repositioning and development pipeline that I mentioned earlier of about $60 million of NOI. Then again, we're going to have about a billion of dry powder with our net debt getting down to the mid-threes.
If we can push forward on both those levers, I think you'll see better growth than maybe expected by the Street in 2027 and 2028. Again, a lot depends on the market fundamentals. It's got to be fully squared or back—
Yeah.
—to make those comments true.
Yep.
I know we've got a couple rapid-fire questions here. So one, if long-term rates stay higher for longer, which has the biggest impact on your sector? The higher refinancing costs, lower transaction activity, or less new supply?
Less new supply.
Okay, number two, over the next three years, will third-party capital become a more important source of growth for public REITs than balance sheet capital, yes or no?
Yes.
And number three, for your sector, will same store NOI growth in 2027, next year, be higher, the same, or lower than this year?
I'm going to go with the same.
Okay.
Thank you. Thank you all for joining us today.