Rexford Industrial Realty Inc Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: John Kim - BMO Capital Markets - Analyst : Thank you and good morning. I wanted to ask about the slow decision making that a lot of your tenants you're talking to you are having today. It seems like it's a common theme. What would you attribute this to in terms of are tenants pushing back on the higher rent levels versus uncertainty in the economy and the upcoming election? Or is it something else like the cost of holding inventory or automation or another reason?

Question: John Kim - BMO Capital Markets - Analyst : Okay. And then on your rents that you signed this quarter, it was at $17.88 on a GAAP basis. So I think it's kind of bounced around up and down this year. How indicative of the current rents or the rents you signed in the third quarter? How indicative of that is it versus rents that you will be signing for the remainder of the year and into 2025? It would suggest market rents declining more than 7.5% that you presented. And also, we're

Question: John Kim - BMO Capital Markets - Analyst : And do you have the expiring rent in 2025 expirations. It's presumably lower than the [$15.10] in your supplement.

Question: John Kim - BMO Capital Markets - Analyst : Okay. Great. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 5:00PM, REXR.N - Q3 2024 Rexford Industrial Realty Inc Earnings Call

Question: Jeff Spector - BofA Global Research - Analyst : Great. Thank you. One follow-up from John's first question on the reason why tenants are making slower decisions. There is a key difference, Michael, from what you said what we heard at our conference from some of your peers in our broker call. And maybe there is a key difference, whether it's your tenant size, your markets. I mean, we were hearing the main reason is a result of excess space. Tenants took too much space. I don't think you mentioned that. So are you making a clear difference here? Or is that just -- is that another reason and you accidently left that off?

Question: Jeff Spector - BofA Global Research - Analyst : And then, Michael, you also said the mark-to-market is 34%. That would assume market rent stays flat from here. I think you're not providing market forecast now, but I guess, can you provide a little bit more color on that comment, the 34%. Are you saying you do feel that at least market rents are stabilizing?

Question: Jeff Spector - BofA Global Research - Analyst : Sorry, I thought at the beginning, you said the mark-to-market is 34%. It's on one of your slides. And that's -- I assume that's based on today's market rent. And so I didn't know if you were implying like you think market rents are finally stabilizing for your product?

Question: Jeff Spector - BofA Global Research - Analyst : Okay. Thank you. I appreciate that. And then my last, I just want to confirm, on the current redevs and lease-up redevs, I see some of that is coming online in the coming quarters. Any expectations on the lease on leases signed? Any comments you could make? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 5:00PM, REXR.N - Q3 2024 Rexford Industrial Realty Inc Earnings Call

Question: Jeff Spector - BofA Global Research - Analyst : Great. Thank you.

Question: Craig Mailman - Citi - Analyst : Hey, good morning. Just want to circle back to the redevelopment pipeline here. I know you guys are saying that you've been kind of stabilizing projects in the kind of high 7% range, but then DuPont was sort of a 5.5% stabilized. How should we think about where yields or returns are coming on the redevelopments that you guys have underway or going to start soon relative to that 7%? I mean, was the 5.5% a one-off? Or is that more of where returns are going to trend given kind of higher construction costs and moderating rents and maybe elongated lease-up time frames?

Question: Craig Mailman - Citi - Analyst : Right. Yes. No, I see the 6% unlevered yield in the deck. I just -- I was asked this question because I know the three-year roll forward that you guys told this quarter was really predicated primarily on the redevelopment. I think it was 11% to 13% that you had talked about. And I was just trying to get at the reason for pulling that if you guys are continuing to start redevs, and it feels like you feel pretty good about your return expectations. Could you just talk a little bit more about the decision to pull that guidance here so quickly after you gave it?

Question: Craig Mailman - Citi - Analyst : Okay. That's fair. Just a clarification on LL Flooring, I know that it didn't last as long as you had hoped to get you through the planning stage or entitlement stage on that redevelopment. Do you anticipate doing a short-term lease there? Or should we just assume that that's going to be down until you guys start to redev at 1601?

Question: Craig Mailman - Citi - Analyst : Okay. And then just maybe one last one. You guys are still seeing on a good amount of cash to deploy. And what we're hearing is stabilized yields are coming down on acquisitions, particularly in good gateway markets. How do you guys kind of -- what's in the acquisition pipeline? I know you guys don't always buy stabilize, you're buying some value add, how do you feel the return opportunities are relative to maybe the cost of capital you raised the equity at earlier this year?

Question: Craig Mailman - Citi - Analyst : Great. Thank you.

Question: Nicholas Yulico - Scotiabank GBM - Analyst : Thanks. Hi, everyone. I just wanted to go back to the same-store occupancy change in guidance. So in terms of the tenant move out that you talked about, can you just quantify how big of an impact that was on the same-store occupancy guidance? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 5:00PM, REXR.N - Q3 2024 Rexford Industrial Realty Inc Earnings Call

Question: Nicholas Yulico - Scotiabank GBM - Analyst : Okay. Yeah. Thanks, Laura. So yes, just following up on that. So it sounds like the piece that's being delayed to 2025, there's not anything specifically leased for that space, and there's a lease and there's -- leasing places just not going to commence until next year. It's all sort of speculative leasing that is being delayed into the occupancy for next year?

Question: Nicholas Yulico - Scotiabank GBM - Analyst : Okay. Thanks.

Question: Nick Thillman - Robert W. Baird & Co., Inc. - Analyst : Hey. Good morning out there. Laura, I wanted to kind of touch on some of the leasing mix dynamics you kind of laid out on the smaller tenants having shorter lease terms, so you've kind of already converted that mark-to-market on that term. But maybe just looking at your schedule, like should we kind of view that as 2026 is kind of more larger leases that, that would be greater spreads? Or like how should we think about that dynamic?

Question: Nick Thillman - Robert W. Baird & Co., Inc. - Analyst : And then going -- pivoting back to kind of the repositioning redevelopment sort of bucket, like how much of that NOI flow through are we kind of expecting like? Is this we could capture half of it loaded into '25? Or is this more of a back half sort of weighted forecast? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 5:00PM, REXR.N - Q3 2024 Rexford Industrial Realty Inc Earnings Call

Question: Nick Thillman - Robert W. Baird & Co., Inc. - Analyst : I'm kind of asking on particularly like what's laid out for the 2027 roll forward, like what percentage of that -- I know you guys kind of give stabilization dates, but those kind of flow through, I guess, sounds like your internal modeling, like is it logical to see some of that upside in '25? Or are we thinking this is still going to continue to be pushed more '26, '27?

Question: Nick Thillman - Robert W. Baird & Co., Inc. - Analyst : So just you're pretty confident on those stabilization dates or anything in market dynamics have shifted in the last 90 days to make you sway one way or the other?

Question: Nick Thillman - Robert W. Baird & Co., Inc. - Analyst : That's it for me. Thanks.

Question: Mike Mueller - JPMorgan - Analyst : Yeah. Hi. I guess what are the attributes of the $90 million of dispositions that you're finalizing? And to the extent that you find acquisitions, how are you thinking today about, I guess, incremental dispositions versus pulling down the forward that you have in place?

Question: Mike Mueller - JPMorgan - Analyst : Yeah. Okay. And sorry, Laura.

Question: Mike Mueller - JPMorgan - Analyst : Got it. Okay. And maybe a last quick one. I think during the quarter, you had sequential occupancy decline of about 200 basis points, San Diego and Ventura. And any color there in terms of some of the moving parts?

Question: Mike Mueller - JPMorgan - Analyst : Got it. Okay. Thank you.

Question: Blaine Heck - Wells Fargo Securities, LLC - Analyst : Great. Thanks. Good morning. Can you talk about AB 98 and the impact on your portfolio? I guess, are there any planned redevelopments or repositioning projects that may not be possible to build out given the increased restrictions? And then on the other side, you expect this to result in better long-term rent growth? Could it actually push tenants into other markets? Just how are you thinking about the net effect of all of the aspects of that build? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 5:00PM, REXR.N - Q3 2024 Rexford Industrial Realty Inc Earnings Call

Question: Blaine Heck - Wells Fargo Securities, LLC - Analyst : Great. Thanks, Howard. Just following up on same-store and the decrease that seems to have been driven mainly by occupancy headwinds. I guess when you look at the timing of occupancy commencements on vacant space, which I think you mentioned earlier on in the call as being a little bit more delayed than expected, and then also movement of properties into and out of the same-store pool, I guess, how do you see same-store occupancy comps as we move into 2025? And how that could influence same-store NOI as we look forward?

Question: Blaine Heck - Wells Fargo Securities, LLC - Analyst : Fair enough. (laughter) I guess, is the LL Flooring asset going to remain in the same-store pool? That's the big one.

Question: Blaine Heck - Wells Fargo Securities, LLC - Analyst : Okay. Great. That's --

Question: Blaine Heck - Wells Fargo Securities, LLC - Analyst : Yeah. That's helpful. And then just a follow-up on some of the questions on your acquisition appetite. You guys talk about the steady-state cost of capital. Can you give us any color on where that steady-state cost-of-capital is? I guess just -- what's that input when you're evaluating value creation or accretion from deals?

Question: Blaine Heck - Wells Fargo Securities, LLC - Analyst : Great. Thanks, Michael.

Question: Vikram Malhotra - Mizuho Securities USA - Analyst : Thanks for taking the question. I guess maybe a [lost nearly] the same time, you sort of mentioned that this is sort of maybe the best time to acquire and it's going to -- you'll see why. And I'm just wondering, could you sort of maybe size the TAM for us today? Like what's the theoretical, whether it's pipeline or the full opportunity set for you to acquire at a stabilized yield of X, redevelop it and then get whatever 100, 200 basis points higher. I'm just wondering like has that opportunity set just reduced given market conditions?

Question: Vikram Malhotra - Mizuho Securities USA - Analyst : That's fair. I was hoping you could give a bit more color on the decision to kind of take away the three-year guide. I know you mentioned market dynamic, but I guess SoCal, or the West Coast has been challenged for a while. So what -- could you give some more color like what specifically changed in the last three months for you to pull the guide? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 5:00PM, REXR.N - Q3 2024 Rexford Industrial Realty Inc Earnings Call

Question: Vikram Malhotra - Mizuho Securities USA - Analyst : Okay. And then just last one, two numbers questions. Just given sort of the high sublet volumes across the West Coast or parts of SoCal, I should say, do you mind giving us like what percent of your portfolio is sublet, number one? And number two, just given all the leasing that you may have already done for the fourth quarter or probably even the first quarter, just can you give us a sense of where you think the near-term rent spreads are trending? Thank you.

Question: Samir Khanal - Evercore ISI - Analyst : Good morning, everyone. Hey, Howard, I guess my question around is around Inland Empire. The West was still down about 3%. But certainly, you saw a bit of an improvement from the prior quarter when you look at sequentially. I mean are you seeing some improvements there? Are you getting sort of less bad as we think about the market bottoming or even stabilizing here? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 5:00PM, REXR.N - Q3 2024 Rexford Industrial Realty Inc Earnings Call

Question: Samir Khanal - Evercore ISI - Analyst : And if you sort of step away from that Inland Empire, but just kind of look at the broader market in Southern Cal, I mean, are you seeing any sort of green shoots at this point where you start to say maybe the market rent growth or market rents start to bottom? I mean sequentially, you've seen them come down. As we think about 2025, is there any sort of green shoots you're seeing in the horizon to make us kind of feel like that market is starting to stabilize or at least starting to get less bad?

Question: Samir Khanal - Evercore ISI - Analyst : Okay. Thank you.

Question: Samir Khanal - Evercore ISI - Analyst : Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 5:00PM, REXR.N - Q3 2024 Rexford Industrial Realty Inc Earnings Call

Question: Richard Anderson - Wedbush Securities Inc. - Analyst : Thanks, team. Good morning. So just a comment on perhaps the linearity or lack thereof, of market rent changes. You mentioned 7.5% down year-over-year this quarter. The number was down 2% in the first quarter. What happens if next quarter, it's like 7.5% again? Like I mean I just wondered, in your mind, is this a linear exercise where when we see something stop declining, then that's a pretty good sign that we're getting some place? Or could this sort of be all over the map based again on tenant behaviors and the psychological exercise of trying to figure out where they're headed?

Question: Richard Anderson - Wedbush Securities Inc. - Analyst : Okay. Fair enough. And so when you think about that dynamic, minus 2% to minus 7.5% and wherever it may go from here, how is it that you underwrite the next redevelopment and repositioning project relative to where you expect market rents to be? Are you haircutting that even more to make a pencil? I'm just curious how you get comfortable redeveloping projects with the movement down in market rents.

Question: Richard Anderson - Wedbush Securities Inc. - Analyst : No, I think that's -- unless I'm reading it wrong, it was minus 2% down in the first quarter of this year on an apples-to-apples basis. I believe I see that, right, but perhaps I'm wrong. But at any rate, the question still applies on how you under redevelopments in this current environment?

Question: Richard Anderson - Wedbush Securities Inc. - Analyst : Okay. And apologies if I have that number wrong. I very might well have it wrong. What about space utilization irrespective of occupancy? Do you have a read on that, and what -- how that's competing with a need for more space from your tenants?

Question: Richard Anderson - Wedbush Securities Inc. - Analyst : Okay. Last question, status of the CFO hire?

Question: Richard Anderson - Wedbush Securities Inc. - Analyst : Okay, wonderful. Thanks very much.

Question: Brendan Lynch - Barclays - Analyst : Great. Thanks for taking my question. On LL Flooring, where are they on the watch list? And more broadly, how many tenants are currently on the watch list?

Question: Brendan Lynch - Barclays - Analyst : Great. Thanks. That's helpful. And then on the dispositions, I know you don't want to speak too much about the $90 million that could be coming, but can you discuss the characteristics of the assets you have sold year-to-date and how we think -- how we should think about what you're prioritizing when disposing of assets? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 17, 2024 / 5:00PM, REXR.N - Q3 2024 Rexford Industrial Realty Inc Earnings Call

Question: Brendan Lynch - Barclays - Analyst : Great. Thank you for the color.