Good morning, and welcome to Rexford Industrial's Second Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Mikayla Lynch, Director of Investor Relations and Capital Markets. Please go ahead. Mikayla

Thank you, and welcome to Rexford Industrial's Second Quarter 2025 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 federal securities laws, which are based on certain assumptions and subject to risks and uncertainties outlined in our 10-K 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-GAAP financial measures on today's call. Our earnings presentation and supplemental package provide GAAP reconciliations as well as an explanation of why these measures are useful to investors. Joining me today are our Chief Operating Officer, Laura Clark; and Chief Financial Officer, Mike Fitzmaurice; our co-CEOs, Michael Frankel and Howard Schwimmer will join us for the Q&A session following prepared remarks. It's my pleasure to now introduce Laura Clark. Laura?

Thank you, Mikayla, and thank you all for joining us today. I'd like to start by thanking our Rexford team for your exceptional work and for delivering strong second quarter results, in line with our expectations. In the quarter, we executed 1.7 million square feet of leases, including lease up of 4 repositioning and redevelopment projects. Net effective and cash leasing spreads for comparable leases were in line with expectations at 21% and 8%, respectively. Embedded rent steps in our executed leases averaged 3.7% up 10 basis points from last quarter. Healthy tenant retention and new leasing activity drove increased same-property occupancy and positive net absorption in the quarter. We ended the quarter with same property occupancy at 96.1%, an increase of 40 basis points sequentially and net absorption was a positive 220,000 square feet. Additionally, the strength of our tenant base and the critical nature of our infill locations was reflected in de minimis levels of bad debt in the quarter at only 6 basis points of revenue. In regard to the current market environment, while leasing activity remains steady and tenant health continues to be solid, macroeconomic and tariff uncertainty are still impacting some tenant decision-making. This is putting some pressure on overall demand, impacting rent levels and lease-up time frames. In the quarter, market rents across Rexford's portfolio declined approximately 3.5% sequentially and 12.8% year-over-year. Despite these market dynamics, our portfolio continues to exhibit relative strength when compared to the broader market. The standout quality of our portfolio and the operational excellence of our team is positioning us to capture incremental demand in the near and long term. By way of example, we continue to execute on the lease-up of repositioning and redevelopment projects, unlocking significant embedded growth. In the quarter and subsequent to quarter end, we executed 520,000 square feet of leases out of repositioning and redevelopment projects, which includes Turnbull Canyon Road in the San Gabriel Valley, Balboa Avenue in San Diego and Coronado Street in North Orange County. This brings total year-to-date repositioning and redevelopment lease-up activity to over 900,000 square feet, representing over $16 million of annualized NOI. Year-to-date, we have stabilized 7 repositioning and redevelopment projects achieving a 7.4% unlevered stabilized yield on total investment. In addition, further demonstrating the demand for our highly functional and superior quality portfolio, we currently have leasing activity on approximately 80% of our vacant spaces. This is consistent with prior quarter and up significantly when compared to a year ago when activity on our vacant spaces was about 60%. In regard to transaction activity, we sold 2 properties totaling $82 million, bringing year-to-date dispositions to $134 million at a weighted average cap rate in the low 4% range achieving an unlevered IRR of 11.9%. Looking forward, we have approximately $54 million of dispositions under contract or accepted offer, which are subject to customary closing conditions. Separately, while we have no acquisitions under contract or accepted offer today, we are actively pursuing a range of potential near-term opportunities to accretively recycle disposition proceeds. In closing, over the long term, we remain confident that our irreplaceable infill Southern California portfolio will continue to benefit from persistent and growing supply constraints coupled with demand from the nation's largest regional zone of consumption and 11th largest economy in the world. These superior long-term fundamentals are the foundation of our value creation business model that drives shareholder value. And with that, I'll turn the call over to Fitz.

Thanks, Laura, and thank you all for joining us. Second quarter results were in line with our expectations. Core FFO was $0.59 per share, representing a $0.01 increase over the prior quarter when excluding onetime termination revenue that was recognized in the first quarter. The key driver for the increase was lower bad debt expense demonstrating our strong tenant health. We are reaffirming our full year 2025 core FFO outlook of $2.37 to $2.41 per share. Compared to the prior quarter, we now expect lower interest expense due to achieving a more favorable interest rate on our $400 million term loan and higher capitalized interest, offset by some delays in rent commencements. Our remaining underlying assumptions are unchanged. I'd like to take a moment to highlight the embedded growth opportunity within our portfolio, which continues to be substantial, totaling $195 million of incremental cash NOI, representing growth of 28%. Contractual rent steps are expected to generate approximately $105 million of incremental NOI, providing a steady and predictable source of growth. Our repositioning and redevelopment projects in process or in lease-up, are projected to contribute an additional $70 million of incremental NOI, reflecting our value creation strategy. In addition, this does not capture the upside embedded in our future pipeline, which totals over 3 million square feet. And lastly, today, our cash mark-to-market for our portfolio stands at 3%, contributing about $20 million of incremental NOI to our embedded growth profile. Turning to the balance sheet. We ended the quarter with over $1.8 billion of liquidity, including $560 million of cash and a low leverage balance sheet with net debt to EBITDA of 4x. We continue to prioritize allocating capital toward our repositioning and redevelopment projects and opportunities to recycle capital into accretive acquisitions that meet our underwriting criteria. During the quarter, we successfully closed the recast of our credit facility, extending duration, increasing capacity and reducing interest expense. Overall, our balance sheet continues to provide flexibility to execute on our strategy and to create long-term value. In closing, a big thank you to team Rexford. The teamwork, standard of excellence and commitment continue to be the foundation of our success. And with that, I'll turn the call back to the operator and open the line for questions.

[Operator Instructions] I will now turn the call back over to Mikayla Lynch for our first question.

Thanks Julianne. Our first question comes from Craig Mailman at Citi.

Laura or Fitz, maybe I just want to go over Page 30 on your stuff, you guys are giving better disclosure about potential future repositioning and redevelopment starts. And if you annualize the quarterly NOI you have in there, it's somewhere between $30 million and $32 million of potential NOI that's going to come offline by the end of '26. Can you just talk about with maybe some of the slower lease-up of projects under construction today? Like should we think about that as being a pretty firm plan as we get to the end of '26 or what kind of variability could that be with some of that pushed into '27 or some of the '25 pushed into '26?

Yes. Look, look, I think that pipeline is somewhat fluid. It has changed quarter-to-quarter. But the biggest driver in that pipeline today is the Hertz asset, which we expect that will expire that lease in the first quarter of March. And that has about $8.6 million of ABR. From an NOI perspective, it's about $9 million or so. So that's going to have a significant impact of rent coming offline next year. Now in terms of our plan for Hertz, Laura, if you want to touch on what the plan is there.

Yes, absolutely. I think just as a reminder on the Hertz asset, in particular, this is an irreplaceable location. It's adjacent to LAX. We acquired this property from Hertz back in 2023. This was a sale leaseback. Hertz is moving to a centralized rental car facility at LAX when that facility is complete. So it currently expires in March of '26. We're ready to start development. We're going to be able to deliver 400,000 square foot building there. It will be 1 of 1 in the market, and we're really excited about being able to move forward with that value creation.

Our next question comes from Samir Khanal at Bank of America.

I guess, Mike, just -- help us understand how you think about that 3% cash mark-to-market going forward? Just trying to understand what your view on that, sort of how that will trend over the next few quarters and what that impact could be on sort of the cash same- store growth going forward?

Samir, this is Laura. Thanks for your question. Yes, in terms of the mark-to-market, currently, as you mentioned, the cash mark-to- market sits at 3%. And the cadence of what that mark-to-market looks like over the next few quarters, is going to depend on a number of factors, including market rent growth. I think it's really important, though, to remember that only about 15% of our portfolio rolls annually. So future leasing spreads and how that's going to impact and flow down through same property is going to be driven by the mix of units and properties that are rolling. The other thing to note is that Rexford's growth is not dependent upon mark-to-market. I think that's the most important thing to note. We have significant embedded growth within the portfolio irrespective of what happens with the mark-to-market. We have $70 million of incremental NOI embedded in the portfolio from our repositioning and redevelopments that are in process or lease-up today. And we also have strong growth from contractual embedded rent steps, which currently sit at 3.7% in the portfolio.

Our next question comes from Blaine Heck at Wells Fargo.

With respect to capital allocation, thus far, you've taken a more measured approach to acquisitions. In your commentary, it sounds like you might be more open to them. So I guess, are you seeing opportunities to invest at much higher cap rates than you have in the past? Or what's driving that increased appetite given that your cost of capital hasn't seemingly changed for the better. And it does seem like there's a clear opportunity to buy back shares at a much lower basis than where you issued on the forward. I guess, is that something you'd consider rather than the acquisition?

Blaine, thanks for your question. In terms of capital allocation, our principles remain unchanged and intact. We're focused on allocating capital where we can drive cash flow accretion and net asset value. As we think about the various places that we can allocate capital, certainly repositioning, redevelopment continues to be a very attractive investment. It's allowing us to achieve double-digit incremental returns, while we position properties to add value over the long term. As we think about acquisitions, we're continuing to evaluate acquisition opportunities that meet very stringent underwriting criteria. We are looking at opportunities where we can recycle cap, we can recycle disposition proceeds at higher yields, and that will also drive accretion, increase the quality of our portfolio and our cash flows. As a reminder, we've sold about $134 million of dispositions to date. We have $54 million under contract or accepted offer to date. And we -- and those are -- and the disposition cap rate on those is in the low 4% range. So this gives us an attractive source of capital for both repositioning and redevelopments as well as acquisitions.

Our next question comes from Greg McGinniss from Scotiabank.

I was hoping you could touch on the delays in rent commencements on the repo, repositioning redevelopment front, kind of what you guys are assuming today and what's giving you confidence in achieving the new target or the new assumption given the fact that you had the 80% interest this quarter, same as last quarter, but kind of leasing not getting across the finish line.

Greg, thanks for your question. Yes, we actually feel good about the progress that we've made in terms of repositioning and redevelopment to date. As I mentioned in my prepared remarks, we've leased about 900,000 square feet. That leaves us with about 1.5 million square feet remaining through the end of the year. Our assumptions around rate commencement have been and continue to be very late in the year there. We have pushed out lease up timing a bit by about 1 month on average that's driven by the current market dynamics. But we do have activity on 80% of that 1.5 million square feet. And based on where we're seeing activity levels today, what we were able to execute in late June and into July, we feel really comfortable with our projections at this time.

Yes. I would echo those same sentiments. In an extreme case, Greg, if we didn't sign them, 1.5 million square feet, it'll only be an unfavorable $0.01 impact for our guide.

Our next question comes from Nick Thillman from Baird.

Maybe I wanted to touch on kind of just tenant behavior. If you're seeing any sort of shift on whether it be like lease terms on length of term that people are doing or maybe even just when they're approaching sort of renewal activity, like -- are they taking longer to get back to you, any sort of change in behavior there that you guys have noticed over the last 60 to 90 days, that would be helpful.

Yes. Thanks for your question, Nick. In terms of lease term, now, lease terms held pretty steady in the 4- to 5-year range on average for Rexford, which is consistent with prior years. In terms of renewals, we've had really strong renewal activity. Tenants are coming to us a bit earlier in terms of the renewals. It's interesting that we've seen a bit of a trend and an acceleration in early renewals and early renewals means those spaces that we are renewing that 6 months or earlier than their expiration. Just to put some numbers around that, year-to-date, early renewals stood at about 1.1 million square feet. If you look at the back half of last year. So third and fourth quarter of last year, we did about 600,000 square feet of early renewals. So essentially double. I think that -- what that's telling us is tenants need their space. They need to lock in that space, and I think it's a good indication of the strength of the businesses. and they're thinking long term about their strategy and need to serve the infill markets.

Our next question comes from Omotayo Okusanya from Deutsche Bank. Looks like we lost Tayo. Apologies for that. Our next question comes from Michael Griffin from Evercore ISI.

I realize that sort of market rent growth was down both sequentially and year-over-year, but I'm wondering if we can dig into that a little bit more. And maybe April was an outlier to the downside and things got better in May and June. I don't know if there are any numbers you can quantify or put around it. I'm just trying to get a sense of were things improving sequentially during the quarter? Or was it just all kind of impacted negatively on a year-over-year basis kind of agnostic of the month?

Yes. I mean, I think it's tough to look at week-over-week or month-over-month changes in terms of market rents. So -- but we did see a decline in market rents sequentially and year-over-year. I do think it's important to remember what happened in the quarter. We started the quarter on April 2 with sweeping tariffs were announced and throughout the quarter, there was tremendous volatility around tariff policy and when an expected resolution would occur. So I think that certainly impacted, as we mentioned, some tenants decision-making was paused or delayed. And that has impacted market rents in the quarter. That said, we continue to execute leases, tenants are making decisions and we've made great progress on the repo redevelopment lease up. I will note that I think in today's environment, it's important to indicate where we're focused. We're focused on capturing demand and occupancy. And in some cases, that has also impacted rent levels.

Our next question comes from Mike Mueller from JPMorgan.

I think you mentioned a low 4s cap rate on recent asset sales. Just curious, like, how is that influenced if at all, by user purchases? And then just if you're thinking of your comparable property with an at-market rent. What do you see as the ban to cap rates today?

Mike, it's Howard. Good to hear your voice. And clearly, we've really tried to sell assets and capitalize on some opportunities to achieve premium values. And the user side of that is very important, and several of our transactions have been user sales in the quarter. We sold 1 property in Orange County that was a company that was actually thinking forward. They're going to convert a site to battery storage and bought it, I think, at the equivalent on that deal, it was about 3.5% cap rate, and there was a bit of term left and a few options for the tenant to extend but an irreplaceable site that they paid the premium for. And in terms of cap rates in the overall market, you asked about ad market leasing. They're still in the 5% zone, plus or minus, in terms of cap rates.

Our next question comes from Omotayo Okusanya from Deutsche Bank.

Sorry about that earlier. A quick question about occupancy. So at the end of 2Q, average occupancy was at 95.9%, guidance is 95.5% to 96%. Just kind of curious, the back half of the year, why you don't expect occupancy to increase from current levels? Are there any additional kind of fallouts, any kind of issues with bad debt, just kind of curious why the occupancy outlook is not a little bit higher given where you are at 2Q?

Sure. Thanks for the question, Tayo, and correct. So we ended the second quarter at 96.1%. And we do expect some deceleration in the second half of the year. And our guide, again, is 95.5% to 96%. The driver of the deceleration is really planned move-outs within our same property portfolio. So it was expected in part of our guide from the initial guidance to now. And as far as bad debt goes in terms of what we should expect in the second half of the year. It's a bit structural. Last year for the second half of 2024. We had a very low bad debt of about $1 million or so. And we have kept our reserve at about the same level for the second half of this year at about 70 basis points. So it's $1 million versus $4 million. So that's also some of the deceleration that you could see in same-property NOI as well.

Our next question comes from Brendan Lynch from Barclays.

Having leasing activity on 80% of your vacant properties. I understand this is up from 65% a year ago. Maybe you could disaggregate that increase from tenants that are just taking a longer time to make decisions versus an actual increase in demand? And maybe any color that you could provide around that in terms of like conversion that you've had...

Can you repeat the end of your question, Brendan, you cut out.

Yes. Sorry about that. Just any details on conversion rates in the past?

Yes, absolutely. Yes. So we have activity on about 80% of our vacant spaces today. When you think about conversion levels, we can use -- let's use a repositioning redevelopment from last quarter as an example. So if we look at where we had activity last quarter on repositioning redevelopments. About 2/3 of that activity has either leased or is still in negotiations, and we expect to convert to leasing. And we also executed a couple of leases on repositioning redevelopments last quarter that had no activity actually when we reported last quarter. So overall, conversion is taking a bit more time as indicated by some longer lease-up assumptions. But what we're seeing is as the majority of our activity is converting or expected to convert into executed leases.

Our next question comes from John Kim at BMO.

This quarter, you've taken on redevelopment yield expectations by 50 basis points at the midpoint. And I was wondering if that was driven mostly by the change in rent expectations and what the new -- or what your hurdle rate is for new redevelopments?

The driver behind that was a mix issue. We had 2 projects that stabilized during the quarter, Turnbull which was a 9.2% stabilized yield and also Via Burton, which is a redevelopment that was at a 6% yield. And then we added 3 projects, Cabot, Figueroa and Van Nuys, one of our redevelopments. And those were a bit lower yields. But in terms of the incremental yields that we're experiencing on the products that we stabilize year-to-date, which is about 7% or so, we're at 19% on an incremental return basis. And that's why, as Laura noted earlier, in terms of our priorities for capital allocation, that's where highest risk-adjusted return today, and that's where you're seeing a lot a lot of those dollars in our balance sheet continue to be deployed in those opportunities.

Our next question comes from Vikram Malhotra from Mizuho.

I guess I want to clarify something. I had a question. So the move-in -- the flow of dollars coming in and out from the development pipeline. You had outlined $15 million coming out $15 million going in. I just want to focus on the dollars going out the $15 million based on what you've done so far into next -- and in the second half. It seems like there's more than $15 million, if you could clarify that? And if you add up sort of the planned redevelopments for later in '25 and '26, it seems like, on my math, it's like $45 million or plus of coming out over the next 1.5 years coupled with sort of negative rent spreads likely and just a higher vacancy across the market. I mean it just seems like the growth setup for '26 is a lot lower than we're expecting. If you could just help us think through that.

Yes. At this point, I think, we're ready to comment on '26. But for 2025, Vikram, we had messaged from the start of the year that we're going to have about $15 million of NOI come off-line for 2025 starts. That is still consistent today. It's actually a little bit down from last quarter. It's right around $13 million as we execute on a couple of short-term renewals. In terms of what is going to come offline in 2026. We put some new disclosure out there to give you some guideposts on what those 2026 starts could potentially look like and also some guideposts around costs. I would tell you that the pool is fluid. We have a strategic plan for every single 1 of our assets. And sometimes it's multiple plans where we could release as is or we can reposition and redevelop. So that future pipeline is somewhat fluid. It is largely driven by the Hertz lease that we mentioned earlier when we were talking to Craig about it. So it's too early to tell you what exactly is going to come offline. But at this point, we're okay giving you at least guideposts. And as we move throughout the rest of this year, we will continue to give you more guidance around what comes offline next year, including what the capitalized interest impact could be.

Our last question comes from Craig Mailman at Citi.

Just want to go back to the commentary, maybe a couple of follow-ups here in my 1 question. Laura, on the 80% kind of activity. Is any of that double counting like 1 tenant looking at 3 of your spaces? Or is it all unique kind of unique interest in each asset? And then also, you had mentioned L.A. is a little bit spotty with pockets of weakness on demand and rents versus others that aren't. Could you kind of bucket your portfolio. I don't know if you guys look at like percent of NOI or percent of square feet, that's maybe in like strongest submarkets, kind of moderate strength submarket to them, the below-average submarkets as we think about just L.A. in general, given your SoCal exposures kind of more broad than some others?

Yes, Craig, thanks for the follow-up questions. In terms of your first question around the 80%, yes, that's all unique. We're not double counting interest if we have a tenant that's looking at a few spaces. So that's all a unique interest. In terms of kind of more color around markets and performance, a few comments there. What we are seeing generally across all submarkets with -- and infill Southern California is in our smaller spaces. I'd say, spaces less than 50,000 square feet continue to be relatively stable in the market. We continue to see solid demand there and rent levels have been the strongest in those spaces that are 50,000 square feet or smaller. That's great for Rexford, by the way. Our average tenant size is 26,000 square feet in the portfolio. And so I think it just speaks to the quality and functionality of our space in the market. I'd say that where we're just diving into a few of the submarkets. When we're looking at submarkets, I think you also have to look at the size of spaces within those submarkets. But a couple of submarkets where I'd say we're seeing some pockets of weaknesses where you've got some more supply. So I'd say in the Mid-Counties market, the supply of -- the supply in the kind of 100,000 to 200,000 square foot range is elevated. And so there's some weakness. That being said, we had some leasing activity in that submarket in that size range this quarter. So seeing some more interest there. Other pockets of weakness, potentially some Central L.A. and North Orange County. But again, we're seeing some increases in overall activity as we got to the end of the quarter. So I'd say that those are generally what we're seeing from a market perspective. Michael?

Yes. Craig, it's great to hear you today. It's Michael here. And I'd just like to add and answer your question. Consistent with our strategy, upwards of 75% of our portfolio is generally positioned within Greater L.A., Orange and the Ontario submarkets, the Orange County and Ontario submarkets. And over time, we'll find that those are tremendous markets. And what we're seeing more recently as you roll through the different submarkets throughout Southern California, is the different submarkets are adjusting in different -- in their own time frames. And so they're not all adjusting equally to the post-pandemic rent increase and all the uncertainty that has resulted post pandemic. And we're just continuing to see some of that adjustment, but it's not at the same time across all submarkets. And I think that -- we're seeing that variability today. But the markets where Rexford is present. Our strategy is to own the best locations within the strongest infill market in the country, possibly the world and to substantially outcompete by having the highest quality product in those submarkets. And so I think that we are well positioned in terms of relative strength of the submarkets and over time, I believe that's going to prove itself out.

This will conclude today's Q&A session. I would like to turn the call over to Laura Clark for closing remarks.

Thanks, Mikayla. In closing, Rexford's differentiated portfolio and entrepreneurial team drove solid second quarter results. Our irreplaceable infill portfolio, substantial embedded NOI growth and value creation strategy position us to deliver significant shareholder value. Thank you all again for joining us today.

This concludes Rexford Industrial's Second Quarter 2025 Earnings Call. You may now disconnect.