Rexford Industrial Realty, Inc.

Ladies and gentlemen, thank you for standing by. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Rexford Industrial Realty Incorporated third quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you. And I would now like to turn the conference over to David Lanzer, General Counsel. You may begin.

We thank you for joining Rexford Investor's third quarter 2024 earnings conference call. In addition to the press release distributed yesterday after market closed, we posted a supplemental package and an investor presentation in the investor relations section on our website at rexfordindustrial.com. On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined by federal securities laws. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information about these risk factors, please review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future. Additionally, certain financial information presented on this call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP reconciliations and an explanation of why such non-GAAP financial measures are useful to investors. Today's conference call is hosted by Rexford Industrial's Co-Chief Executive Officer, Michael Frankel, Howard Schwimmer together with Chief Financial Officer Laura Clark. They will make some prepared remarks and then we will open the call for your questions. Now I turn the call over to Michael.

Thank you David and thank you everyone for joining Rexford Industrial's third quarter earnings call. I'll begin with a few remarks followed by Howard and Laura. To begin with we'd like to thank our Rexford team for your outstanding work delivering another strong quarter. Our team generated a 5.4% increase in FFO per share compared to the prior year quarter, which brings our FFO per share growth to 9.3% for the first nine months of the year compared to the prior year period. With our consolidated stabilized portfolio occupancy of 97.6% at quarter end, our infill Southern California tenant base continues to demonstrate resiliency driven by the mission critical nature of our infill locations fueled by regional consumption that remains stable and has continued to grow each year since 2021, driven by the nation's largest regional population and most diverse economy. With regard to general market conditions, increased levels of global unrest, uncertainty related to the presidential election, and an uncertain economic outlook continue to weigh on markets and business decision-making. Although our infill Southern California industrial market continues to demonstrate superior long-term tenant demand fundamentals, current leasing activity reflects some tenants taking longer to make decisions. Looking forward, as the economic and political environment stabilize, we believe our infill Southern California industrial markets favorable supply-demand backdrop inherently positions our market for future rent growth. Most importantly, our Rexford portfolio remains well positioned for favorable FFO for share and net asset value growth driven by the high quality of our properties and the substantial volume of value-add property repositioning and functional enhancements driving the accretive internal growth embedded within our in-place portfolio. By way of indication, assuming zero market rent growth, we currently project about 34% cash NOI growth embedded within our portfolio, realizable over the next three years. And with this, I'm very pleased to turn the call over to Howard.

Thank you, Michael, and thank you all for joining us today. Rexford ended the third quarter with solid operating results, a testament to our value creation business model. The Rexford portfolio continues to be favorably positioned relative to the overall infill market. We executed 1.6 million square feet of leases, driving 394,000 square feet of positive net absorption equal to positive 80 basis points, outperforming the overall market's negative 25 basis points of net absorption, according to CBRE. Leasing spreads in the quarter showed continued strength at 39% and 27% on a net effective and cash basis, respectively, in line with our prior quarter projections. Additionally, annual embedded rent steps in our executed leases averaged 3.9%. Excluding the lease-up of the 275,000 square foot DuPont repositioning project, rent steps averaged 4% in line with prior quarters year-to-date. With regard to market rents, we have seen taking rents for highly functional product comparable to the Rexford portfolio down approximately 2.5% sequentially and 7.5% year-over-year, reflecting continued normalization. following the extreme market rent growth during the pandemic of over 80% in aggregate within our infill markets. Turning to Rexford's investment activity, during the quarter, we completed $60 million of investments, and subsequent to quarter end, we closed an additional $70 million investment through an off-market transaction. In aggregate, these investments comprising 550,000 square feet are generating an initial yield of 5.8% and a projected unleveraged stabilized yield of 5.9% on total cost. Looking forward, we currently have approximately $200 million of investments under contract or accepted offer, which are subject to customary closing conditions. Moving to our capital recycling program, during the quarter, we disposed of one property bringing year-to-date disposition activity of $44 million generating a 12.8% weighted average unlevered IRR. In addition, we are negotiating on over $90 million of dispositions, which will be subject to customary closing conditions. During the third quarter, we recommenced and stabilized three repositioning and redevelopment projects, totaling approximately 325,000 square feet, representing a total investment of $99 million. These projects achieved a weighted average unlevered stabilized yield on total investment of 7.6%. Year to date, we have stabilized seven projects across 450,000 square feet, which achieved an 8.4% weighted average unlevered stabilized yield on total investment of $165 million. In the quarter, we also leased our 275,000 square foot DuPont property in the Inland Empire West which stabilized subsequent quarter end at a 5.5% yield. Importantly, I'd like to thank our Rexford team for your entrepreneurial efforts that continue to drive Rexford success. And with that, I'm pleased to turn the call over to Laura.

Thank you, Howard. Third quarter results were in line with expectations. FFO per share was 59 cents, representing 5.4% growth over the prior year quarter. Same property NOI growth on a net effective and cash basis was also in line with projections at 2.6% and 5.3% respectively, bringing year-to-date same property NOI growth to 4.7% on a net effective basis and 7.7% on a cash basis. Third quarter net effective same property NOI growth was driven by a positive 750 basis point contribution from base rent growth, primarily offset by a few items, including 320 basis points related primarily to lower straight line rent associated with an elevated level of early renewals last year, an 80 basis point impact from the timing of recoveries associated with higher seasonal utility expenses and property taxes, and a 70 basis point impact related to bad debt. While bad debt in the quarter was a healthy 30 basis points of revenue, The third quarter of 2023 included the positive reversal of a prior reserve, impacting the current quarter comp. In regard to the balance sheet, net debt to EBITDA is 4.7 times, near our long-term target leverage range of 4 to 4.5 times. During the quarter and subsequent to quarter end, we settled $220 million of outstanding forward equity related to our March equity offerings. and currently have $614 million of net forward proceeds remaining for settlement. In total, we have liquidity of approximately $1.7 billion, including $62 million in cash on hand and $995 million available under our revolving credit facility. We have no near-term debt maturities until mid-2026, assuming extension options. Turning to guidance. 2024 FFO per share guidance has been increased by one cent at the high and low end of the range to $2.33 to $2.35, representing 7% year-over-year earnings growth per share at the midpoint. Note that our guidance does not include future acquisitions, dispositions, or related funding that has not yet closed. 2024 same property NOI growth guidance is now 4.25 to 4.75% and 7 to 7.5% on a net effective and cash basis respectively, both within the range of our previous expectations, reduced 25 basis points at the midpoint. Drivers of our same property NOI growth range include the following expectations. First, 2024 average occupancy of 96.5, to 96.75% compared to our prior range of 96.5% to 97%. We expect fourth quarter occupancy to be impacted by a few known move outs included in our prior guidance, combined with the timing of lease commencement on vacant units that are now projected to commence in early 2025. Second, Full year leasing spreads in line with the prior quarter's forecast at 55% on a net effective basis and 40% on a cash basis. Third, concessions for the full year of approximately 1.75 months up from one and a half months, largely driven by three leases with longer durations signed in the third quarter. Finally, bad debt as a percentage of revenue in the 50 basis point area in line with year to date and historical averages. Our updated same property NOI growth guidance also includes the projected move out of LL Flooring, occupying 504,000 square feet at our Mission Boulevard property, who sold their business after recently filing for bankruptcy. We anticipate the tenant will vacate the building at the end of November. However, per our original redevelopment plan, we are currently in the entitlement process. While the vacate of this large space has an outsized impact on portfolio occupancy, the impact to NOI is relatively nominal due to the current estimated rental rate being approximately 250% below market. Other components of our increased FFO per share guidance range include a positive one cent per share contribution from 131 million of acquisition activity plus an incremental $0.01 per share contribution related to higher than expected occupancy in our non-same property pool, which represents approximately 27% of our total portfolio. The incremental NOI contribution from repositions and redevelopments is in line with our prior projections, and full-year G&A of $83 million is also unchanged. Looking forward over the next three years, we have an estimated $222 million of internal cash NOI growth embedded within the current portfolio, assuming no further acquisitions in today's market rents, and includes $91 million of incremental NOI from repositionings and redevelopments, $72 million from the portfolio cash marked market of 19% as we roll in-place rents to current market rates, $51 million from portfolio annual embedded rent steps averaging 3.7%, and $8 million from acquisitions closed in the quarter and subsequent to quarter ends. Together, this represents 34% growth in cash NOI over the next three years. Note that in the third quarter, we captured approximately 350 basis points of mark-to-market, realizing $13 million of incremental annualized NOI. Finally, I would like to quickly touch on the three-year FFO for Share outlook we spoke about at the beginning of the year. Based on the dynamic market environment and current conditions, as well as the inherent challenges with forecasting the timing of market inflection, we will be focusing on our annual guidance going forward, which we will provide when we report fourth quarter earnings in early February. Before I turn the call over for your questions, I want to recognize and thank our Rexford team. We are inspired daily by your passion and pursuit of excellence. Thank you for all you do to drive the success of Rexford.

Operator? And thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And your first question comes from the line of John Kim with BMO Capital Markets. Your line is open.

Thank you and good morning. I wanted to ask about the flow decision-making that a lot of your tenants you're talking to are having today. It seems like it's a common theme. What would you attribute this to in terms of our 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?

Hi, John. It's Michael. Thank you so much for joining us today. No, I think it's predominantly driven by factors that are not necessarily specific to the company, the tenant, or their industry or sector. really more driven by some of the macro concerns and general decision making around the economy. And I think we're seeing really short-term impacts by elevated levels of economic uncertainty, really driven in part by geopolitical unrest globally, uncertainty around the election. Interest rates still remain sort of an uncertainty as well. I think a lot of folks had hoped there'd be more certainty around interest rates at this point in time. And we're really seeing tenants make decisions or slow their decision making. Maybe it's kind of staying put. But we're also seeing, I think it's important to note this, underlying strength in the businesses of our typical tenants. You know, regional consumption remains stable, strong, and growing in Southern California. And frankly, our third Q leasing activity, and I'm sure the team will get into this later, reflects a performance that is essentially in line with our guidance set at the beginning of the year. So again, We're not really seeing any big surprises in the tenant base in terms of decision making in that respect. So I think really predominantly driven by macro factors. And in that sense, as those macro factors stabilize, we continue to see a favorable backdrop with regards to demand. Okay.

And then on your rents that you signed this quarter, it was at 1788 on a gap basis. 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 third quarter, how indicative of that is it versus rents that you will be signing for the remainder of the year into 2025? It would suggest market rents declining more than the 7.5% that you presented. And also, we're trying to figure out what the true market to market is on 2025 expirations.

Also, I'll just say the differential in rents is really more about the mix of leases. And I'll pass it to Laura with a little more detail on that in the rest of your question.

Hey, John. Thanks for your question. In terms of why Michael said it's true, it is about the mix of leasing. When we look at our full year guidance for net effective spreads as an example of 55% on an on a net effective basis and 40% on a cash basis is unchanged from our expectations last quarter. That does imply 40% net effective spreads and 25% cash spreads into the third and fourth quarter. You can see that our third quarter spreads came in right in line with our expectations at 39 and 27%. So as we look into the fourth quarter, you know we are we are expecting to generate similar spreads that we did this quarter and really what's driving that is the smaller spaces um you know are marked to market uh they're marked to market more more near term so i think on average the average size is 9 000 square feet an average term was three and a half years and laura do you have the uh expiring rent on 2025 expirations it's presumably lower than the 1510

in your supplement?

Yeah, we can follow up with you after the call. Okay.

Great. Thank you.

And your next question comes from the line of Jeff Spector with Bank of America. Your line is open.

Great. Thank you. One follow up from John's first question on the reason why, you know, 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 another reason and you accidentally left that off?

Hi, Jeff. Thanks so much for joining us. You know, I think that we do see that as a driver. It's probably less of a driver than for the big box product. And so it's probably why you don't hear us emphasizing as much. You know, we continue to see very high utility at our properties by our tenants. And we continue to hear of interest for more space. We're just seeing a delay in decision making. So I do think the dynamics are a bit different for our smaller tenant base within our infill markets as compared to the big box market, and that's probably why you hear us not emphasizing in the way that you do for the big box market.

Thank you. 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 rent forecast now, but I guess can you 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?

I think the 34% is a reference to our embedded and LI growth. I'm not sure. Can you clarify the question a little bit?

Sorry, I thought at the beginning you said the mark to market is 34%. It's on one of your slides. And 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.

Hey, Jeff, this is Laura. The 34% that you're referencing is the embedded NOI growth within our portfolio over the next three years. We have about $222 million of embedded NOI growth from repositions and redevelopments, mark-to-market, our embedded rent steps, as well as the acquisitions we closed in the quarter.

Okay, thank you. Appreciate that. And then my last, I just wanted to confirm, on the current redevs and lease-up redevs, I see some of that is, you know, coming online in the coming quarters. Any expectations on, you know, the lease? you know, on Lisa's sign? Any comments you could make?

Hi, Jeff. It's Howard. Well, obviously, we've already commented on the timeline for decision-making being a little slower than we've seen in the past. You know, that said, we are seeing reasonable amounts of activity on space, and we've made adjustments in terms of some of the lease-up timeframes in the redevelopment and repositionings Just, you know, some things are pushed out, you know, and on average, we push those out about two months. And half of it is related to construction delays and half of it really being related to leasing. But, you know, overall, you know, there is activity out there. And really, I'd echo a lot of the comments Michael made in terms of some of the reasons why the decisions are slower. But, you know, we're fairly optimistic in terms of turning some of that activity into some signed transactions into the latter part of the year and into early 2025. Great.

Thank you.

And your next question comes from the line of Craig Mailman with Citi. Your line is open.

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 you guys have underway or are going to start soon relative to that 7.8%? 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 timeframes?

Hi, Craig. It's Howard. You know, you can certainly refer to the supplemental that has all the data property by property in terms of projected yields. In terms of that specific property, as you recall from some of our prior comments, 275,000 feet in the Inland Empire West had been one of the softest segments of that market because of the oversupply of the product. And so rents, even when you just look around all the markets, rents declined probably, I'm going to say, the most for that kind of product because of the amount of vacancy that there is in it. So that's really more of a one-off in terms of the stabilized yield you see there on that particular asset.

Right. Yeah, no, I see the 6% unlevered yield in the deck. I was asked this question because I know the three-year roll forward that you guys pulled 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, you know, the reason for pulling that if, you know, 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?

Yeah, Craig, I think it's purely a function of timing because we are really excited about the embedded growth within the portfolio. And we're very, very well positioned to generate substantial growth over the near and long term. When we're looking at the forecast and when you look back to the initial outlook that we said at the beginning of the year, it was based on the market dynamics at that time. Since then, there has been continued economic uncertainty. So we believe it's prudent to push aside the forecast at this time. We're really focused on our 2025 growth. when we have better visibility and we'll provide those expectations when we report 4Q earnings. And the focus for us is executing on that significant embedded growth within the portfolio.

Okay, that's fair. Just a clarification on LO 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 the renev at 1601.

Yeah, Craig, I mean, we'll certainly put it on the market and see if we were able to get some short-term income in that space. It's not anticipated at this point in our guidance.

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

Hey, Craig, thanks again. It's Michael here. Thank you again so much for joining us today. And no, we're excited about any opportunities that you have that we might have in our pipeline. The only reason that they are in our pipeline is because we believe they're going to deliver substantial accretion relative to our steady state cost of capital, which would mean accretive to, on average, to the near-term impacts of the company as well as long-term. It doesn't mean from time to time we might not buy a vacant asset, but we're going to expect that we're going to get paid for that with a substantially higher stabilized yield. But in general, you're going to see us continue buying, on average, cash flowing assets with, in general, opportunities to create value that we believe are going to be accretive to the portfolio and to shareholders, both in the near and long term, on average.

Great. Thank you.

And your next question comes from the line of Nicholas Yuliko with Scotiabank. Your line is open.

Thanks. Hi, everyone. I just wanted to go back to the SAMHSA occupancy change in guidance. So in terms of the tenant move that you talked about, can you just quantify how big of an impact that was on the SAMHSA occupancy guidance?

Yeah, in terms of our SAMHSA occupancy guidance, we did reduce the midpoint by about 25 basis points. So, and we reduce the high end by about 25 basis points. In terms of the drivers, the two drivers, rent commencement timing on vacant units, we've pushed out projected commencement into early 25. That's about half of the drivers. Just given the overall leasing dynamics where tenants are delaying leasing decisions. and overall leasing negotiations are taking a little bit more time, we've pushed out that projected timing. I'll note that on really the 10 largest units that account for the majority of the change, we do have activity on about six of those units. So it's more of a function of expecting that commencement to be in one queue and not four queue. And then LL flooring is about 10 basis points.

Okay. Yeah. Thanks, Laura. So yeah, just following up on that. So it sounds like The the the piece that's being delayed to 2025, there's not anything specifically leased for that space. And there's a you know, there's a lease and there's a lease in place just not going to commence till next year. It's all sort of speculative leasing that is being delayed into occupancy for next year.

Yeah, it's just based on our expectations in terms of commencements and the activity we have in place in the paper that we're trading today.

Okay, thanks.

And your next question comes from the line of Nick Thoman with Baird. Your line is open.

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 since 2026 is kind of more larger leases that that would be greater spreads? Or like, how should we think about that dynamic?

Yeah, I'm certainly not going to speak to spreads for next year or 2026 at this point in time. I look forward to providing more, you know, more guidance around our spread expectations when we report fourth quarter earnings and put out 2025 guidance. You know, I think it's important to look at, you know, we have provided the portfolio net effective mark to market at 31% and our cash mark to market today is a strong 19% as well.

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?

Are you asking specifically about the product that we've delivered or the entirety of the pipeline, Nick?

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, just on 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?

Yeah, I mean, look, we provide our stabilization timing for every property within the pipeline. So we're going to see some impacts into 25, 26, and 27.

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?

Yeah, I mean, look, that's why we made the update that we did to some of the timing. And so that's, you know, our view and what we're seeing in the market today that's incorporated in our current projections around stabilization dates.

That's it for me. Thanks.

And your next question comes from the line of Mike Mueller with JP Morgan. Your line is open.

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?

Well, hi, Mike. It's Howard. I'll speak to the dispositions. We're not, because usually we are really more comfortable reporting as these happen. But we do, you know, this is I think of a larger amount of product that we are looking at and circling at the moment. So we're excited, uh, to be, you know, 44 million year to date and having the other 90 million plus that we're working on. But we, I think we'd be more comfortable giving you more information about that as, as we close the various transactions.

Yeah. Okay.

And, um, Oh, good.

Sorry, Laura. Yeah, I'll answer the second part of your question around how we're thinking about funding. I mean, we have a variety of, you know, we've got a pipeline of uses in which to fund. We have a pipeline of acquisitions of about 200 million. We also have about 75 million of additional repositioning and redevelopment to spend through the remainder of this year and about 200 million next year as well.

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

Yeah, it's really a number of properties. In San Diego in particular averaged about 15,000 square feet. There were two larger property move outs, roughly about 30 to 40,000 square feet. One of those actually in San Diego is already released at a 50% cash spread. And the other one we expect to release at about a 50% cash spread. In Ventura, it was made up of about seven properties averaging 26,000 square feet, driven by about two large move outs still around 40,000 square feet. Expect to release those at about a 30% cash spread. Got it.

Okay. Thank you. Yep.

And your next question comes from the line of Blaine Heck with Wells Fargo. Your line is open.

Great. Thanks. Good morning. Can you talk about AB98 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 know, 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 bill?

Hi, Blaine. It's Howard. Maybe just high level to start for the benefit of others listening. You know, AB 98 is really viewed more as state level zoning changes and primarily dealing with setback requirements near sensitive uses such as homes, schools, parks, etc., And it's really addressing this by buffer zones. Really most impactful to buildings that are logistics projects that are 250,000 feet and larger. Nominal impact to product below that, but certainly some. As far as impacts for Rexford, really no material risk to us for any of the projects right now we have in our pipeline. There's no impact at all for repositioning and renovating buildings unless you're going to add more than 20% to the size of the building. And that's a rare occurrence in terms of our repositioning. And really, to the latter part of your question, or the initial part of your question, I should say, this possibly does create more value in our 50 million square foot portfolio because of the challenges it does present But mostly these impacts are going to be seen throughout the larger big box markets out east.

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?

Blaine, that's a great question, and we look forward to providing same property NOI growth and guidance when we report fourth quarter earnings.

Fair enough. I guess, you know, is the LL flooring asset going to remain in the same circle?

OK, that's a good. Yeah, that's a good question. As you know, in terms of LL flooring, you know, we've this is a property and I'll just give a little bit more color here. I mean, this was a we had executed a short term lease with LL flooring. a rent that was 250% below market. We've been in the process of this redevelopment. We're actually currently in entitlements. We're very excited to deliver buildings to the market that really can't be replicated given the regulation that's in place in this particular municipality. So it's a great opportunity to create long-term value. And importantly, because of the low rent, the 250% below market rent, it's going to have an outsized impact on occupancy, but not necessarily on NOI because obviously of the below market rent. So all that being said, it is a redevelopment. And so we will most likely be moving it into the same property pool next year. I'm sorry, out.

Okay, great.

Yeah, that's not in.

It's already in. That's out of the pool. And then just to 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, you know, what's that input when you're evaluating value creation or accretion from deals?

Well, hey, Blaine, great to hear from you today. Thanks again for joining us. Michael here. We don't disclose how we perceive our cost of capital. I'll tell you that our expectations are that our acquisition activity on average is accretive to today's cost of capital.

Great. Thanks, Michael.

And your next question comes from the line of Vikram Malhotra with Mizuho. Your line is open.

Thanks for taking the question. I guess maybe a last nary same time. you'd sort of mentioned that this is sort of maybe the best time to acquire and 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, has that opportunity set just reduced given market conditions?

Hey, Vikram, thank you so much for joining us today. I appreciate it. We don't really see the opportunity side having shifted. Rexford's business model is predicated on a pretty unique market opportunity. Almost 2 billion square feet of product within Intel Southern California, over a billion square feet of it built prior to 1980, replete with opportunities to create value by buying a lot of these legacy assets, mostly with in-place cash flow and the ability to take them with nominal investment to a substantially higher level of cash flow per share. And that market opportunity continues. In fact, I think our access to that, our direct addressable market opportunity with respect as improving over time, that hasn't been said. We're going to be exceedingly judicious, careful, and conservative in terms of how we acquire and when we acquire. And I think, you know, this is certainly in a market environment where we're going to have heightened caution and scrutinize our investment opportunities that much more as we always do, frankly. So I think the key driver is Rexford in that respect in terms of governing the the pace at which we acquire. And I think it's the same posture we take at all phases of the cycle, but we're only going to focus on the very best opportunities for shareholders.

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 Could you give some more color? What specifically changed in the last three months for you to pull the guide?

I'll just add to Laura's comments briefly earlier. It's just that we're really good at industrial real estate in Southern California, creating value in our asset class. We're less good about prognosticating about two, three years out where the economy goes, where overall external factors may go that impact, at the end of the day, decision-making for our tenants. And so I think for us, we found it's just more prudent to focus on the business at hand, to provide the annual guidance that we have a history of providing, where we have more visibility and transparency into the tenant base. And it does not really reflect any long-term concerns about our infill Southern California market. In fact, I think the backdrop is very favorable for our business and our markets. And frankly, the health of our portfolio continues to be very healthy by all the metrics that you see uh, you know, predominantly high occupancy levels, exceedingly low, bad debt, et cetera. Um, so it doesn't really reflect concerns about our market or the tenant base. It's really more about, you know, focusing on what we do best, which is creating value in the real estate.

Okay. And then just last one, two numbers, uh, questions just, um, given sort of the high sublet volumes, uh, across the West coast or parts of SoCal, I should say, um, 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, can you give us a sense of where you think the near term rent spreads are trending? Thank you.

Yeah, sure. Hi, Vikram. It's Howard. In terms of subleasing, this past quarter, actually, the amount of subleasing occurring in our portfolio came down. It was equivalent to about 30 basis points of our occupied square feet, which was comparable to 60 basis points last quarter. And which is really more, I'd say overall in line with where our projection in terms of one quarter of 24. But to put some numbers around that, the amount of product in our portfolio that was actively on the market for sublease at the end of the second quarter was one and a half million square feet. And that's also declined. That's now down to 1.3 million square feet. So subleasing is always a good indication of what's happening and changes in the market. And so, you know, I think that's, you know, at the moment a bright spot in the market when you see those those numbers start coming in.

And then in regards to leasing spreads that we're seeing quarter to date really coming in at this point in line with our expectations, Our guidance implies spreads in the 40% net effective area and 25% cash area for 4Q.

And your next question comes from the line of Samir Khanan with Evercore ISI. Your line is open.

Good morning, everyone. Hey, Howard. I guess my question 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 it sequentially. I mean, are you seeing some improvements there, you know, getting sort of less bad as we think about the market bottoming or even stabilizing here?

Well, you know, our average product size in the market, the space size is 30,000 feet. So it's performing much differently than the broader market. And, you know, rent decline continues. In terms of that product size in the Inland Empire, you know, 50,000 feet and under, which is, you know, a lot of the space we have there and throughout the portfolio is actually, I'd say, slowed down in terms of, you know, where you're seeing any of the rent decline. And today it looks like it's happening, you know, more in some of the larger spaces as above 50, well above 100,000 square feet. So it's voting well, I'd say, in terms of how we see the market and really where the average size of 25,000 square feet in our portfolio lies.

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, you know, maybe the market rent growth or market rents start to bottom and you sequentially have 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's starting to stabilize or at least starting to get less fat?

Hey, Samira. Yeah, I can maybe provide a little bit more detail around what we saw in the quarter from a sub market and size performance, because it really is dependent on some market and size. In terms of the third quarter, we saw the smallest declines in rent in the San Fernando Valley, Orange County and San Diego markets. We saw accelerated declines in mid counties in the San Gabriel Valley. When you look at the market in terms of the size segments, our smaller spaces exhibited relative strength. spaces under 50,000 square feet, so less declines in market rents compared to those over 50,000 square feet.

Okay, thank you.

And Samir, I would just add one thing in terms of green shoots. You know, tenant behaviors, we look at overall tenant behaviors, and we don't see tenants, you know, really shedding space in our portfolio in any material way. And in fact, you know, they continue to lock in very high annualized contractual rent bumps in the leasing activity that we're executing. And I think that the lease bumps that we're signing today and through the last quarter are very good leading indicators in terms of tenant expectations and tenant health. And when we see them continue to lock in 3.9% to 4%, on average, annual rent escalators in the leasing activity, they're locking in for the next two, three, four, five years. I think the tenants are telling us that they expect to stay in the space, they expect to pay more rent, they value the space, they need the space, it's essential for their business. And so I think, you know, there are green shoots, but you probably have to look at some of the, holistically look at the tenant behaviors. Thank you.

And our next question comes from the line of Richard Anderson with Wedbush. Your line is open.

Thanks, Tim. 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? I mean, I just wonder, in your mind, is this a linear exercise where when we see something stop declining, then that's a pretty good sign that, you know, we're getting someplace or could this sort of be all over the map, you know, based again on tenant behaviors and, you know, the psychological exercise of trying to figure out where they're headed.

Hi, Richard. It's Michael. Thank you so much for joining us today. I think as much as we have tried to describe it, frankly, for the last year and a half or so, which was following, you know, the incredible acceleration and increase in rents we saw during the pandemic, that we expect to see some normalization, and that the normalization should, based on tenant behaviors we're observing, that the normalization should be some moderate rent declines, plus, minus, 1%, 2%, 3% sequentially, quarter over quarter. You might even see some gains in certain submarkets quarter over quarter, but not to expect anything really dramatic based on the tenant behaviors we continue to see. And when that ends and we finally see rent growth kick in more strongly. It's just hard to say. You know, it's very difficult to predict that sort of inflection point. But that having been said, you know, we're really comfortable with the backdrop. You know, tenant health in our portfolio continues to be extremely strong. And we do think it's a very favorable backdrop that portends well for market rent growth. Just hard to predict exactly when you start to see that inflection.

Okay, fair enough. And so, When you think about that dynamic, minus two to minus seven and a half, 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 it pencil? I'm just curious how you get comfortable redeveloping projects with the move down in market rents.

By the way, just to clarify that minus 2% plus or minus and then minus 7.5%, those aren't apples to apples. The minus 7.5% will be a year-over-year comparison, whereas the minus 1% or 2% would be a sequential change. So we're not seeing anything.

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 underwrite things.

So we take a granular bottoms-up approach on redevelopments, and we take a close look at where we think rents are for the given opportunity and space, and we really do take a bottoms-up approach, and we take into consideration where rents are today and where they're trending.

Okay. And apologies if I have that number wrong. I very might well have it wrong. Okay. What about space utilization irrespective of occupancy? Do you have a read on that and how that's competing with a need for more space from your tenants?

I think, as I mentioned earlier, we continue to see very high utilization among our tenants and their spaces within our portfolio. And again, that we think contributes favorably to the backdrop that we see, that it's more about decision making and less about fundamentals. And so, you know, again, we continue to see, you know, very favorable levels of utilization within the portfolio.

Okay. Last question. Status of the CFO?

That's a great question. We're making great progress, and we're going to let you all know as soon as we have a definitive answer. But we're super excited at the progress and super excited for the company and shareholders in that respect.

Okay. Wonderful. Thanks very much.

And your next question comes from the line of Brendan Lynch with Barclays. Your line is open.

Great. Thanks for taking my question. On LL Flooring, were they on the watch list? And more broadly, how many tenants are currently on the watch list?

Were they on the watch list? It was a bankruptcy, so it did hit our watch list. In terms of the overall watch list, it continues to be very consistent with what we've seen throughout the year. We have less than 10 tenants on the watch list, and really no changes in trends in terms of industry concentration. I mean, I'll note that our bad debt levels continue to be very low, very healthy. Year to date, we're at 50 basis points, and I'm projecting 50 basis points for the full year.

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 should think about what you're prioritizing when disposing of assets?

Hi, everyone. It's Howard. For the most part, they've been some multi-tenant type projects, very management intensive for our team and not much growth that we were projecting going forward. Small building that we just transacted on was $25,000, I think $25,000 and change. We did a light renovation and the equivalent cap rate to the projected rent on that versus the sale was very attractive. I believe it was in the low fours on a market rental rate. So, you know, they're typically assets where really there's no more value creation opportunity or sometimes, you know, it can have to do with, you know, the margin that we're achieving on an asset. Just there's some of the more intensive management or capital needs that we might be seeing coming up that we'd like to avoid because they're not going to produce any incremental value.

Great. Thank you for the call.

And that concludes our question and answer session. I will now turn the call back to management for closing remarks.

Well, we'd like to, on behalf of the company and our board of directors, we'd like to thank everybody for joining us today. We wish you a great rest of the quarter, happy holidays, and we look forward to reconnecting next quarter.

And ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.

Thank you for your participation. You may now disconnect.