Rexford Industrial Realty (REXR) Q3 2026 earnings call transcript

Thank you, and welcome to Rexford Industrial's 3rd 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 securities laws, which are based on certain assumptions and subject to risks and uncertainties outlined under 10K 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-GAP financial measures on today's call. Earnings presentation and supplemental package provided GAP reconciliations as well as an explanation of why these measures are useful to investors. Joining me today are Rexford CEO, Laura Clark, together with our COO, John Nejas, and our CFO Mike Fitzmorris. 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 accelerated occupancy increase meaningfully. We took a transformative step in our portfolio realignment, and we redeployed capital with discipline. Together, these actions strengthened Rexford, fortified our balance sheet, and drove our third consecutive increase in core FFO per share guidance.

That strong execution is being reinforced by continued improvement and fundamentals across the infill Southern California industrial market. The market recorded its second consecutive quarter of positive net absorption, driven by rising tenant demand.

Market rents also showed early signs of stabilization, posting marginal growth during the quarter and marking the first quarterly increase since 2023. We recognize that recoveries are rarely linear, but the direction of the market is encouraging, and we are seeing that improvement translate directly into our business.

During the quarter, we executed more than 3.7 million square feet of leasing, our second highest quarter of leasing ever. Leasing momentum was broad based, including 600,000 square feet of repositioning and development leasing in the third quarter alone, which will generate meaningful cash flow growth as these leases commence.

Same property occupancy increased by 200 basis points sequentially, as Rexford continues to outpace the broader market. That outperformance reflects the quality functionality and competitive positioning of our infill product, amplified by the expertise of our vertically integrated team.

The strength of the leasing activity we are seeing today reflects the compelling fundamentals that underpin the Southern California industrial market. With more than 20 million consumers and an economy ranked as the 11th largest in the world, the region combines a diverse demand base with irreplaceable infrastructure. In addition, new supply remains near multi decade lows, while increasing restricted regulatory requirements further limit future development.

We believe the depth and durability of demand combined with substantial structural supply constraints create a powerful foundation for long term growth. Against this backdrop, we are concentrating our portfolio and the assets best positioned to capitalize on these dynamics and deliver durable growth over time. This quarter, we advanced our $2 billion portfolio realignment initiative with a $1.2 billion portfolio sale, the largest transaction in Rexford's history.

We executed with conviction and speed, completing a competitive process that generated strong buyer interest and attractive pricing. Including this transaction, we have completed $1.5 billion of dispositions here to date, representing substantial progress towards our portfolio realignment objective. We have acted decisively to capitalize on a unique window to realign our portfolio, prioritizing assets we believe offer the strongest long term growth and shareholder value creation, while expanding our financial flexibility and capacity to act.

Looking ahead, we have $500 million of dispositions remaining under our portfolio realignment initiative, with the majority expected to be under contract or complete by year end. We continue to see buyer demand across our markets supported by the depth of private capital seeking exposure to Southern California. While recent increases in treasury rates are impacting the cost of capital for certain buyers and bringing more selectivity to the transaction market, engagement around the remaining disposition assets remains constructive.

We will continue to evaluate each sale based on the underlying risk profile and forward return potential, as well as the relative value of the planned use of proceeds.

I also want to highlight the significant progress we have made in driving greater operational rigor across the business. We have been deliberate in prioritizing occupancy and leasing, as well as improving efficiency across our cost structure. The results are tangible, strong leasing activity alongside a 30% year over year reduction in GNA. We will continue to apply that focus across the business as we pursue additional efficiencies.

In summary, this year has been defined by execution and decisive action. We set clear priorities and we are delivering on our commitments. Today, Rexford is stronger and more focused with significantly greater financial flexibility than we had at the beginning of the year. The same rigor we have brought to our operations portfolio and capital allocation will continue to guide our decisions as we move forward with one objective, driving long term per share value creation for our shareholders.

Finally, I want to thank the entire Rexford team, completing the largest transaction in our company's history, while continuing to deliver strong operating performance reflects the extraordinary commitment and talent of this team. I am energized by the focus and dedication they bring every day. John.

Thank you, Laura, and good morning, everyone. During the third quarter, we executed 3.7 million square feet of lease transactions across our portfolio, reflecting our continued focus on driving occupancy and capturing demand across our infill markets. Supported by strong underlying tenant health and better than expected leasing execution, approximately 87% of expiring space was either renewed or backfilled, driving a 200 basis point increase in same property occupancy quarter over quarter.

Turning to the broader market, we also saw encouraging signs that fundamentals are continuing to improve. While the recovery remains disproportionate across submarkets, size ranges and product types, the third quarter represented another step in the right direction with overall positive net absorption and improving leasing activity extending into areas that had previously been slower to build momentum.

Orange County is a good example. We're seeing that trend play out in mid counties and San Gabriel Valley as well, with functional class B product continuing to lease well and demand for class A product gaining traction. In the South Bay activity was driven by logistics alongside continued demand from advanced manufacturing aerospace users seeking higher quality space with critical infrastructure. Logistics also led activity in the IE West, most notably in spaces between 100,000 and 250,000 square feet.

In the San Fernando Valley, activity remained healthy for functional class B product, particularly in spaces under 100,000 square feet, with more limited demand for class A space.

While demand drivers vary across industries and user types and many tenants remain focused on rationalizing their space needs, demand is increasingly gravitating towards highly functional in fill space, which aligns well with the type of product that defines the rexford portfolio. We saw that reflected in our repositioning and development projects, where we executed approximately 600,000 square feet of leases during the quarter that will contribute more than $14 million of annualized and I once commenced.

Our value creation platform remains a key differentiator for rexford. Through repositioning, we deliver upgraded power and fire suppression systems, efficient loading and upscaled offices that strike an effective balance between must have functionality and price. While our newly developed product offers best in class design features that maximize operating efficiencies and deliver the high quality environment that resonates with class A tenants.

Turning to capital allocation during the quarter, we completed $1.3 billion of dispositions, including the $1.2 billion sale of a 5.2 million square foot portfolio. These 22 properties embodied many of the non strategic characteristics we identified through the asset level review conducted as part of our portfolio realignment, including greater exposure to competitive supply and more limited growth potential. At closing, the portfolio had a weighted average remaining lease term of 2.7 years and in place rents nearly 30% above market, resulting in an estimated 2027 cash and a light yield of approximately 5.5%. Beyond the portfolio transaction, we completed three additional dispositions during the quarter, all to owner users generating premium pricing.

To close, our team remains intently focused on market cues, and we are making disciplined and strategic decisions to drive performance across the business. We have more work to do, and I'm proud of the rexford team, what we are accomplishing and how we're doing it. Our results and the strengthening fundamentals we see in the info Southern California market reinforce our confidence in the competitive position of the portfolio and the long term opportunity ahead.

I'll now turn the call over to Fitz.

Thanks, Lauren, John, and good morning, everyone. This was a defining quarter for capital allocation. We use proceeds from our portfolio realignment to both reduce debt and buyback stock. On the debt side, leverage came down three quarters of return to 3.8 times, and we've already repaid 425 million of our 1 billion of 2027 maturities with plans to pay off the rest without refinancing at today's rates. At the same time, we bought back 709 million of stock this year at prices well below what we believe rexford is worth.

Together, these actions leave us a stronger company than we were just 90 days ago, with less leverage, more flexibility, and a higher outlook for the year. Let me walk you through how we got there. It starts with a portfolio realignment. It has improved both the quality of our cash flows and our long term setup. By completing 1.5 billion of dispositions here today, we removed headwinds to our growth and reduced our future capital needs.

The timing of the transaction also mattered. These sales closed ahead of the recent rise in treasury rates and are funding the payoff of our 2027 maturities. We've already repaid 425 million and expect to repay the remaining 575 million at maturity in March. Eliminating the need to refinance 1 billion of debt at today's rates roughly six and a quarter.

And after March, our next meaningful debt maturity isn't until June 2028. We also remained opportunistic on share buybacks. During and after the third quarter, we bought back 409 million of stock. That's an implied yield in the mid 6% range on a portfolio we believe is worth well more than where our stock trades. That compares favorably with a roughly 5.5% yield on the assets we sold.

Step back and the scale becomes clear. Since the second quarter of last year, we've bought back nearly 1 billion of stock, about 10% of our shares outstanding. And we've done so while reducing leverage. These buybacks are created to both core FFO and NAV per share, a lasting benefit to our shareholders. We ended the quarter with 1.7 billion of liquidity and remain on track to reach approximately three and a half times net debt to EBITDA by year end.

That's a balance sheet built for opportunity. With that context, let me turn to the quarter results. Core FFO with 60 cents per share, consistent with a third quarter of last year. The favorable impact of Catholic recycling activities and lower G&A expense was offset by lower same property and Y and lower interest income. Compared with last quarter, poor FFO per share declined three cents.

The decline primarily reflects time in a redeploying proceeds from our portfolio re-alignment, partially offset by lower interest expense and the accretion from share buybacks.

Now to guidance with the momentum continues, we are raising the midpoint of our full year core FFO per share guidance by two cents to a range of $2.41 to $2.44 driven by better than expected leasing activity and lower full year bad debt that we previously assumed. Those same drivers are behind the 75 basis point increase in our same property and Y growth outlook at the midpoint on both a net effective and cash basis. We are also raising our average same property occupancy outlook by 40 basis points at the midpoint to 95.9%.

Before we turn to questions, here is the one thing we want you to walk away with. Every capital allocation decision we made this year was measured against one test. Does it create shareholder value on a per share basis?

Selling assets with limited long-term growth potential, retiring debt rather than refinancing it at higher rates, and buying back stock below what we believe ruptured is worth all past that test. Together, those actions have lowered our leverage, increased our financial flexibility, and gives us the capacity to act as opportunities emerge. That discipline guides every decision we make, and it's why we are so confident and where Rexford is headed.

Finally, I want to thank everyone here at Rexford. This quarter is what one team with one goal looks like. I see it, and I'm grateful to work alongside every one of you. And with that, I'll turn the call back to the operator and open the line for questions.

Thanks.

Good morning, Blake. This is Fitz. Look, we continue to be very clear-eyed and direct on our expectations for releasing spreads over the next couple of years as we work through leases that were signed at the peak in 22 and 23. So over the next couple of years, we do expect cash releasing spreads to average and the negative load to mid-teens area.

That is about a 200 basis point improvement, though, better than if we hadn't sold our nine core assets.

Hey, Craig, thanks so much for joining us today. You know, our focus is at this point in time is going to be a continued execution of the strategic priorities that we have in front of us. Since we laid out those priorities in November, we have executed swiftly and decisively. And what you've seen and will continue to see is that we won't sit idle.

We're going to control what we can control and we believe that that's going to improve our growth prospects as the market continues to inflect. So we are focusing on the completion of our portfolio realignment. It is truly transforming this company. We are going to allocate that capital to the highest risk, risk adjusted returns as we move forward. We are going to execute on the high yielding internal repositioning and developments that we have within our portfolio. We're going to continue to prioritize, prioritize occupancy as that's going to drive leasing execution and revenue. And lastly, we're going to continue to optimize the efficiencies across the operations as we've been doing.

We look forward to providing an outlook on in our focus areas around 2027 and beyond when we report earnings next quarter.

Yes, I'm very good morning. I appreciate the question. Look, the setup is better than this year's headline numbers suggest number one. And then the lever, the main lever that we're pulling here for next year and we'll continue to pull his occupancy. Same property occupancy ended the third quarter to about 97%. You know, our above our 2026 average outlook of about 96%. So we entered 2027 at a higher run rate.

Rent steps, we continue to sign leases with about three and a half percent annual increases and look the pools cleaner. We sold many of the assets facing in the steepest rent resets. So we do believe same property and all I could accelerate for today.

Yeah, hi, Griff. Overall, our leasing activity was driven most heavily by light manufacturing and advanced manufacturing, which made up about a third overall leasing activity this quarter with another third coming from logistics, you know, distribution and warehouse. And then the remaining third was really diversified amongst construction and building material related uses apparel, food and beverage, health care, and a little bit of entertainment, particularly in the San Fernando Valley.

The biggest change quarter over quarter that we've observed is really focused around this theme of class A demand. And as I mentioned the prepared remarks, that has been captured not only in our repositioning and development pipeline projects, but also just in the portfolio where we have plenty of class A buildings. The largest occupiers of class A has been around advanced manufacturing and logistics specifically.

That's a trend that we saw within the Rexford portfolio as well as the broader market. Advanced manufacturing in the South Bay has continued to be strong, and we have seen a few examples of those types of requirements spilling over to other markets. One great example is 9615 Norwalk, which is a building that we leased from our development platform.

That was leased to an advanced manufacturer who wanted more of a centralized location because they're a parts distributor, but manufacturing on site. And so we're encouraged that there's some of that demand that is going to show up in other markets. But again, most of it is largely concentrated in the South Bay, particularly the coastal portions of the South Bay market.

For the last part of your question, I think what we've seen throughout this year is the demand and the decision making kind of comes in waves. Going back to the beginning of the year, it started off a bit slow and then it picked up towards the end of the first quarter. And then there were some lulls and surges in demand as we've gotten to this point.

So certainly coming off of a high point in activity, tenants are more decisive in terms of making decisions, but this, this increase in activity that we're capturing is also reflective of how we're prioritizing occupancy, which is not just around lease rate and term negotiation. Our strategy is to resource these deals with all of the vertically integrated components that we have across our operating teams that allows us to move through negotiations more quickly and capture the fact that tenants are increasingly focused on making decisions.

Look, yeah, I can answer both from a same property perspective and a total portfolio perspective for same property. We believe we can get to 97 98 fully stabilized over the next couple of years, as long as we have the market score later back. And then from a total portfolio occupancy today, we're at about 91%. We believe is a portfolio can get to 94 95% again with the market square later back. So significant upside there. Obviously, a lot of that is going to be driven by the redevelopment or I'm sorry, development and reposition pipeline. We've made a lot of stride this quarter with 600,000 square feet sign. So great momentum there. We got another 40 million or so of N. O. I. tied to what's in a lease up and under construction.

So excited about the prospects there.

Yeah, thanks so much for your question. So we're seeing good demand across the assets that we're selling and pricing continues to meet our expectations and the objectives that we outlined as part of the portfolio realignment. And our increased disposition guidance is corner reflects our confidence and overall execution there. In aggregate, we expect that pricing for the remaining assets will be roughly in line with the $1.2 billion transaction where we achieve 2027 cash and OI yields in the 5.5% area.

Although the market has experienced some movement and cap rates from the latest increase in interest rates, pricing and demand across the market is highly dependent on a number of factors, including investor profile, product type and quality. So we've been incredibly disciplined in our execution to date, achieving pricing that allows us to drive NAB and FFO per share accretion. And we're going to continue to execute with that overall objective as we move forward.

Yeah, our portfolio realignment objective was about owning the right real estate and the right markets that are going to drive long term growth at Rexford. So it was, we made these decisions at the asset level. These were real estate decisions. And it was about focusing on enhancing the quality of the portfolio, the durability of our cash flows at the same time, improving our balance sheet and deploying that capital where we see the highest risk adjusted returns. And we had incredible success in executing on that realignment to date, and we see good visibility to continue and complete that realignment largely by the end of this year.

And that discipline around capital allocation is going to continue as we move forward as we've taken advantage of this unique moment in time.

In rage, good morning, this is Fitz. In terms of the same property occupancy, sequential increase that we experienced about 200 basis points, a quarter or quarter, I had nothing to do with the asset sales, everything to do with the leasing progress that we've made, you know, broadly speaking, it was due to the 3.7 million square feet sign, the 87% of tenants that we retain, plus we had leasing pulled forward from the fourth quarter to the third quarter. We had two large inland empire tenants, about 415,000 square feet combined took occupancy in early September.

Thank you, Greg. Please go ahead.

Yeah, hi, Greg. Our strategy there remains the same. We've long been focused on the unique nature of that asset and what it's going to deliver in the market in terms of differentiated product.

Our strategies to continue on basically as we've set out to, and that building is well set up to cater to not only the advanced manufacturing demand that we're seeing in the South Bay market, but also to just the. The rest of the course of industrial users that can benefit from having a significant facility in close proximity to LEX and the West LA neighborhoods that are north of there.

So we're pretty excited about that one. That project is going to start here next month. And we look forward to delivering it into a market that continues to form pretty well.

Yeah, hi, John. So our concessions were up slightly this quarter as compared to last quarter. That was largely driven by an increased overall walt in the leasing and the leasing that we executed during the quarter. And that was particularly driven by some new deals that had longer term. We're still seeing about one month of free rent on average. And on average, we are still seeing five year deals and in some cases we're executing leases of the shorter term, where we think there's a strategic reason to do so.

So the uptick that you're seeing is driven by some deals that were executing the quarter a bit longer term, particularly on the new side. On renewals, we actually had a slight reduction in terms of concessions on average based on the mix of deals that was flowing through.

Yeah, hi Vince. The pipelines generally reflective of what we see commencing in the future. We're going to be pretty selective about where we undertake development, starting with our capital allocation thresholds, solving for the appropriate spreads over stabilized cap rate and considering cost capital. And we expect in general development in the market to be more limited in terms of opportunity going forward because of the increasing regulation that has really materially changed the ability to add new supply. So we'll navigate through that to the extent we find opportunities to add to our development pipeline will do so. But it's also going to be product that we're pretty excited about to deliver into our operating portfolio. And so it's going to have to be stuff that material increases the competitive, the competitive landscape.

I would say the stuff that you see on the portfolio today fits into that exactly. We're pretty excited to start 9000 airport, as I just mentioned, as well as the other projects that are going to start over the next few months.

Okay, Dave, I'll just jump in here. Just to speak about what we're seeing today in the fourth quarter, I would say that we're experiencing sustained level of tenant activity similar similar to what we've seen in the third quarter. And that activity continues on the remaining repositioning development projects that we have in lease up, including some projects that are under construction or in the future pipeline.

Hi, thank you for joining us today. So our strategy around deployment aligns with our capital allocation framework that we've been executing around all year. The execution of our portfolio alignment has put us in an incredibly favorable position. Not only have we increased the quality of our portfolio and cash flow, but we've also been able to deliver the balance sheet and increase liquidity.

So that certainly positions rex for to execute on compelling opportunities as they arise today. The most compelling uses of capital outside of delivering the balance sheet are show repurchases when we see that disconnect between public market value and intrinsic value and also our high yielding internal repositioning and development opportunities. So the key for us is we're going to stay disciplined. We're going to be patient and we're going to allocate capital where it creates the most long term shareholder value. In regards to acquisitions, they remain an important part of Rexford's long term value creation strategy, but they have to compete with every other use of capital and today other uses of capital are more compelling.

So we will consider acquisitions when the real estate number one aligns with our strategy and number two, the expected return is superior to the alternatives. We can afford to be patient and you're going to see us continue to do that.