Earnings Call Transcript - REXR Q2 2024

Operator, Operator

Thank you for standing by. My name is Mandeep, and I will be your operator today. At this time, I'd like to welcome everyone to the Rexford Industrial Realty, Inc., Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to David Lanzer, General Counsel. You may begin.

David Lanzer, General Counsel

Thank you for joining Rexford Industrial's second quarter 2024 earnings conference call. In addition to the press release distributed yesterday after the market closed, we posted a supplemental package and 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 Officers, Michael Frankel and 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.

Michael Frankel, Co-CEO

Thank you, David, and welcome everyone to Rexford Industrial's second quarter earnings call. I'll begin with a few remarks, followed by Howard, who will provide market and operational detail, then Laura will provide our financial results and outlook. I'd like to begin by thanking our Rexford team for your strong results, demonstrating the strength of our Rexford platform and the resilience of our infill Southern California industrial market. As a reminder, we are the only industrial REIT focused exclusively on investing principally in smaller and medium-sized spaces within infill Southern California, where we find superior tenant demand fundamentals and substantial opportunities to add value. With our portfolio's average space size equal to 26,000 square feet, we operate in a fundamentally different segment of the market as compared to the big-box market comprised of buildings in the 250,000 to over 1 million square foot range. Our segment of the market is a much larger portion of the market, is a much higher barrier segment of the market, and our target infill tenant base has proven to be more stable through cycles as compared to the big-box market within Southern California. Turning to our second quarter performance, we are pleased with the team's strong operating results, which continue to track the expectations we set earlier this year. On the leasing front, the team completed 2.3 million square feet of leasing activity, generating leasing spreads of 68% on a net effective basis and 49% on a cash basis. We generated 400,000 square feet of positive net absorption to end the quarter with our same-property portfolio occupancy up 70 basis points to 97.3%. Our second quarter consolidated net operating income was up 21% and our FFO per share was up 11% compared to the prior year quarter. Net operating margins were up 50 basis points to 77.7% compared to the prior year quarter, demonstrating the quality of our growth through increased operating leverage. As expected, our infill industrial markets continue to normalize from the pandemic era levels of frenzied demand, which continues to be impacted by persistently high interest rates and uncertain domestic political environment and ongoing global unrest. Despite these macroeconomic factors, our infill Southern California industrial markets continue to demonstrate relative resilience, supported by the strongest underlying long-term supply/demand fundamentals of any major industrial market in the nation. Drilling down into our segment of the infill Southern California industrial market, we continue to see a distinct bifurcation in relative performance in favor of higher quality, highly functional, small to medium-sized spaces compared to the older vintage, less functional product that makes up the vast majority of our 1.8 billion square foot infill market. The long-term outlook for our infill Southern California market remains very positive due to a virtually incurable long-term supply/demand imbalance. The near-term outlook for market rents may continue to reflect a nominal level of volatility. However, we believe the foundation for market rent growth is inherent within our markets. Our tenants are indicating through their behaviors that they expect to pay higher rents in the future. They are expressing these expectations through their proactive renewal activity and through the average compounding 4% annual contractual rental rate increases we are embedding within our leases. The relative resilience and superior performance of the Rexford portfolio reflects our differentiated business model and market opportunity focused on value creation. The single greatest driver of our growth over time is generated through our value-add modernization, repositioning, and redevelopment of vintage and underutilized properties within Southern California. With over 1 billion square feet of product built prior to 1980 within our target infill market, we benefit from an almost limitless palette of opportunities to drive value creation into the foreseeable future by substantially increasing the cash flow generating capacity of these properties through physical improvements that are not reliant upon market rent growth to create value. Rexford's forward internal growth opportunity is also substantial and reflects the balance and strength of our business model. Over just the next three years, we expect cash NOI to increase by $229 million or 35%, driven most significantly by our value-add property improvements, repositioning, and redevelopment. Importantly, this assumes today's rents and no future acquisitions. With that, I'd like to thank the Rexford team once again for your sector-leading results, driven by our entrepreneurial passion for creating value. Lastly, I'm pleased to acknowledge that Howard and I just completed our 20th anniversary as partners growing Rexford together. Howard, it continues to be a true privilege and great fun to work with you and the entire Rexford team, and I couldn't be more excited about the next phase of Rexford's growth. And with that, I'm pleased to turn the call over to Howard.

Howard Schwimmer, Co-CEO

Thank you all for being here today, and thank you, Michael. This journey has been incredible, and I am very excited about Rexford's future growth. Rexford achieved strong operating results in the second quarter, thanks to the ongoing strength of our high-quality portfolio and the excellent execution by our entrepreneurial team. As Michael pointed out, we are witnessing a divergence in performance between higher-quality properties and the older, less functional ones that dominate our extensive infill Southern California market. It's important to remember that our value creation strategy focuses on transforming those older properties into the most functional and highest-quality assets within their submarkets. These modernization and functional upgrades significantly enhance the utility and per square foot value of our spaces for tenants, enabling Rexford to remain competitive throughout all economic cycles. The relative performance of our portfolio compared to the market is impressive. For instance, our 400,000 square feet of positive net absorption represents 80 basis points of our total square footage, while the market observed only 10 basis points of positive net absorption, according to CBRE. This positive net absorption led to a 70 basis point increase in our same-property occupancy, concluding the quarter at 2.7% vacancy, which is better than the overall infill market vacancy of 3.9%, also according to CBRE. Another positive indicator is our strong renewal demand in the second quarter, with net effective rent spreads of 79% and cash spreads of 58%. This resulted in a robust second quarter retention and backfill rate of 80%. In terms of general market conditions within infill Southern California, second quarter leasing activity was strongest in the 10,000 to 100,000 square foot segment, which increased by 24% compared to the previous quarter according to CBRE. Approximately 60% of Rexford's annual base rent originates from spaces under 100,000 square feet. Given our average lease size of around 18,000 square feet in the second quarter, our unique assets are well-positioned for the strongest demand segment in the market, a direct outcome of our strategic, value-driven business model. Regarding rent levels, we are observing fluctuations across submarkets and size ranges, with rents for highly functional products similar to our Rexford assets declining by about 2% sequentially. Year-over-year, rents for high-quality products comparable to our portfolio are up approximately 4.5%, which is favorable compared to the overall infill market. This relatively strong performance of well-located, highly functional products makes sense, as we have noticed that the majority of vacancies causing negative absorption in the market usually consist of lower-quality, older vintage, or obsolete products. Although some volatility is expected in the near term, the current supply and demand backdrop appears to maintain existing rent levels within a tight range and lays the groundwork for potential future growth. This positive environment is further enhanced by the fact that significantly increasing net supply within our markets is nearly impossible. New construction of products in our size range is virtually nonexistent and is projected to remain minimal. Any new construction within our size range generally replaces older products rather than adding to net supply. Turning to Rexford's investment activity during the quarter, we completed $170 million in investments, covering about 500,000 square feet and generating an initial yield of 5.8%, with a projected unlevered stabilized yield of 6.1% on total costs. Looking ahead, we currently have approximately $160 million in investments under contract or accepted offers, which are subject to customary closing conditions. In our capital recycling program, we sold four properties for a total of $37 million, resulting in a weighted average unlevered internal rate of return of 12.9%. We also have over $20 million in dispositions currently under contract or accepted offers, which are also subject to customary closing conditions. During the quarter and after its conclusion, we leased four repositioning and redevelopment projects totaling about 380,000 square feet across the Orange County, San Gabriel Valley, and South Bay submarkets, and these are expected to stabilize with a combined 8.8% unlevered yield. We stabilized two projects with rent commencement in the second quarter, totaling around 85,000 square feet with a total investment of $54 million, generating a weighted average unlevered stabilized yield of 9.5%. Looking forward, we have 4.2 million square feet of value-add repositioning and redevelopment projects either in process or projected to begin within the next 18 months, with remaining incremental spending expected to be around $340 million, which we anticipate will yield a 6% unlevered stabilized yield on total investment. Finally, I want to thank our Rexford team for their dedication in producing another strong quarter of results. Now, I am pleased to hand the call over to Laura.

Laura Clark, CFO

Thank you, Howard, and thank you all for joining us today. Second quarter results were strong with FFO in the quarter of $0.60 per share, reflecting 11% year-over-year earnings growth. Same-property NOI growth was 6% on a net effective basis and 9.1% on a cash basis, driven by strong leasing spreads executed over the trailing 12 months of 61% and 43% on a net effective and cash basis, respectively. Our tenant base continues to exhibit strength and resiliency as represented by continued nominal levels of bad debt as a percent of revenue at 30 basis points in the quarter. Moving to the balance sheet. Our low leverage balance sheet strategically positions Rexford, allowing us to be opportunistic recycled and to selectively capitalize on accretive opportunities that deliver earnings per share growth and net asset value appreciation. At the end of the second quarter, net debt to EBITDA was 4.6 times near our long-term target leverage range of 4 times to 4.5 times. We currently have nearly $2 billion of total liquidity, comprised of approximately $830 million from forward equity proceeds available for settlement, $126 million of cash on hand, and our $1 billion revolving credit facility. We have no near-term debt maturities until mid-2026 assuming extension options. Rexford's differentiated business model is positioned to continue to deliver near and long-term outsized NOI growth, with $229 million of incremental cash NOI growth embedded within our in-place portfolio realizable over the next three years and irrespective of market growth. The largest component of our embedded growth is generated from our value-add repositioning and redevelopment, which is expected to deliver $95 million of incremental NOI. The mark-to-market of our below-market leases to current market rates is currently 38% on a net effective basis and 26% on a cash basis and is projected to generate another $82 million. In addition, the average annual embedded rent steps of 3.7% for the total portfolio, which is up 10 basis points compared to the prior quarter, is estimated to contribute $47 million. Accretion from second-quarter investments is expected to deliver an additional $5 million. Together, cash NOI is projected to grow to $886 million over the next three years, equal to 35% internal NOI growth. Note that this strong embedded growth assumes today's market rents and no future acquisitions. Turning to guidance. Our 2024 FFO per share guidance range has been increased by $0.01 at the low end of the range and is now $2.32 to $2.34, representing 6% to 7% year-over-year earnings per share growth. Note that our guidance range does not include future acquisitions, dispositions, or related funding that is not yet closed. Full year 2024 same-property cash and net effective NOI growth is estimated to be 7% to 8% and 4.25% to 5.25% respectively. This remains in line with the expectations we laid out at the beginning of the year. Other components of 2024 guidance projections include average same-property occupancy of 96.5% to 97%, in line with our prior projections. Guidance does imply a deceleration in occupancy in the second half of the year. This was contemplated in our initial guidance as we have a few expected move-outs in the third and fourth quarters. Full year net effective and cash leasing spreads are now estimated in the 55% and 40% area, respectively, excluding the large tire lease extension we executed in the first quarter. When compared to the prior quarter, the decrease in leasing spreads is primarily driven by the change in the mix of leases we expect to execute in the second half. Concessions for the full year are projected to be in the one and a half month areas, consistent with our prior forecast. While concessions year-to-date are slightly above our full year estimates, the leases we expect to execute in the second half of the year are projected to have lower concessions driven by the composition of new and renewal leases, term length, and specific submarkets. Full year bad debt as a percentage of revenue is unchanged at 40 to 50 basis points. Lastly, the full year incremental FFO per share contribution from repositioning and redevelopment is $0.01 lower than the prior quarter estimates. Rate commencement timing has been pushed by an average of one month with some properties outperforming, reflecting faster lease-up and a few properties where rent commencement was pushed out by construction delays, mainly associated with municipal and utility approvals as well as expectations around the timing of lease-up. Looking forward, the incremental NOI contribution from repositioning and redevelopment projected over the next three years is in line with our prior quarter projections at $95 million. Finally, I would like to thank our Rexford team for your relentless pursuit of excellence that drives the success of Rexford today and into our exciting future ahead. We now welcome your questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Your first question comes from the line of Craig Mailman with Citi. Please go ahead.

Nick Joseph, Analyst

Hey, it's actually Nick Joseph here with Craig. I guess, just maybe first on external growth. I was hoping you could touch on the appetite for acquisitions today and what type of opportunities that you're seeing?

Michael Frankel, Co-CEO

Hey Nick, it's Michael. Thanks so much for joining us today. Great question. Look, our appetite for acquisitions is as it's always been in the sense that we look for quality of acquisitions, we look for appropriate yield profiles, we look for investments to deliver the quality of products, and the cash flow per share growth that we feel is going to be accretive to the portfolio on a near and long-term basis, and that's going to contribute strongly to NAV growth. Again, we don't put volume targets out there internally or externally for the very reason that we're solely focused on quality.

Nick Joseph, Analyst

Thanks. And then I guess just on the announcement in June on looking for a CFO. I was hoping to get an update on the timing there and kind of the opportunity for the newly created COO position?

Michael Frankel, Co-CEO

Yes, it's a great question, and we couldn't be more excited about the opportunity for the company. First, to elevate Laura to the Chief Operating Officer role. As you mentioned, we're in process searching for a CFO replacement. Laura has created some big shoes to fill. We're very pleasantly surprised in the early stages of that recruiting effort to see some fantastic candidates. But we're looking to recruit the best athlete on the planet. So, it's hard to predict how long that will take, but we're seeing great progress.

Nick Joseph, Analyst

Thanks. And then just on the COO opportunity and how that will add to the organization?

Michael Frankel, Co-CEO

Yes, we see a range of opportunities in the company. First of all, Laura, we've talked about this, I think, before as well. But Laura plays a pretty broad role as a CFO, probably a little more broad than your typical CFO, generally speaking. We see this as a natural extension of the impact that Laura is able to make in the company. As we grow, today, we're about 50 million square feet with a significant opportunity ahead of us for additional growth. We see a lot of opportunity to drive operating leverage, to drive further efficiencies in the business, and to become just better at what we do.

Nick Joseph, Analyst

Thank you guys.

John Kim, Analyst

Thank you. Good morning. I wanted to ask about the occupancy guidance. I know Laura, you touched upon it a little bit with some of the move-outs expected in the second half of the year. But how should we be modeling the 50 basis point decline? Will it be kind of even throughout the next couple of quarters or will that possibly end the year below the 96.5%?

Laura Clark, CFO

Hey John, thank you so much for joining us today. In terms of occupancy, we don't provide a quarterly occupancy rate. However, I can mention that the move-outs are expected to occur later in the third quarter and into the fourth quarter.

John Kim, Analyst

Okay. And similar question on the uncommenced leases. I think it's like $8 million of ABR, which is a little bit over 1%. Are these going to be commenced in 2024 or thereafter?

Laura Clark, CFO

It certainly varies and the commencement of those is included within our current guidance.

John Kim, Analyst

Got it. I know you don't provide the annual mark-to-market by year, but the last time you did provide it, the peak years of the mark-to-market on expiration were this year and 2026, and I'm wondering if that's still the case, I know you've done some acquisitions since then?

Laura Clark, CFO

We have a significant amount of mark-to-market still present in the portfolio. This quarter, we managed to capture $13 million of that, and we anticipate capturing another $82 million of net operating income over the next three years as we convert low market rents to market rates. This process will take place over the coming years, and we will not provide guidance on the mark-to-market on a yearly basis moving forward.

Blaine Heck, Analyst

Great. Thanks. Michael, I think you talked about near-term nominal volatility in market rents that's expected to continue. So, I just wanted to get yours and maybe Howard's view on what the catalyst or catalysts might be to see rent growth inflect from the flat to negative growth we've seen for several quarters now? And any thoughts on kind of potential timing from your standpoint?

Michael Frankel, Co-CEO

Thank you for being here today, Blaine. That's a very good question. It's one of the challenges we face regarding timing. However, we're confident that there is significant potential for rent growth in our markets. The underlying fundamentals are incredibly strong. In some respects, the market is performing even better than in 2019, especially when we examine the rent increases included in our leases. The proactive renewal efforts within our tenant base and the diversity of demand we are seeing still reflect a high level of e-commerce activity in our leasing. We are observing broad-based demand from various sectors, including consumer products, household goods, distributors, and even a resurgence in apparel, aerospace, and pharmaceuticals. These are all encouraging signs, but predicting when we'll see consistent growth remains challenging.

Blaine Heck, Analyst

Okay, great. That's helpful. And I think you alluded to this, but obviously, discussions around the election and potential impacts of new legislation in each scenario have been picking up. With respect to industrial, a lot of the conversation has been focused on potential impacts from increased tariffs. I just wanted to get your thoughts on that subject and whether you guys have any concerns on the potential impact to demand in the Southern California market?

Michael Frankel, Co-CEO

Well, we've probably seen a slight uptick in interest from some of the Asian importers who are more aggressively looking for space within infill Southern California in anticipation of the possibility of higher tariffs for their goods coming overseas. They're looking maybe for some more manufacturing domestically and from other locations like Mexico. We do see some early indications of that, which is incrementally favorable for us actually. Historically, when we saw tariffs established, we really didn't see any negative impact on demand in our markets.

Mike Mueller, Analyst

Yes, hi. I was wondering, can you talk a little bit about the bid/ask spreads that you're seeing in the market for acquisitions? And I apologize if I missed it, but for your pipeline of transactions that are under contract, what's the mix of off-market opportunities in there?

Howard Schwimmer, Co-CEO

Yes, Mike, it's Howard. Good to hear your voice. On the latter part of your question, we really don't distinguish between on and off-market in terms of the pipeline. For the year, over 90% of our transactions that we've closed have been off-market or lightly marketed. That's significantly above prior years. And then as far as bid/ask spread, yes, it's still out there. We've obviously had success in closing transactions. But overall, if you look to the market, the transaction volume has been fairly light, which seems to indicate that there still is some significance in terms of that bid/ask spread.

Samir Khanal, Analyst

Good morning Howard and Michael. Regarding market rent growth, I understand you don't give an annual forecast, but considering the Inland Empire West, it seems to have worsened this quarter. I'm trying to grasp the dynamics you’re observing on the ground there. Do you feel we are nearing the bottom and possibly beginning to turn a corner? I'd like to know more about your observations in that area.

Michael Frankel, Co-CEO

Hi Samir, it's Michael. Thank you so much again for the question and for joining us today. That's a great question. From our current activity in the Inland Empire West submarket, actually, we're seeing a lot of good activity, strong activity, strong lease-up for us internally in that market. I'll remind you that this market saw the most aggressive acceleration in rental rates through the pandemic of any submarket within our region here in Southern California. Today, despite the recent relative volatility, it still probably has the highest rent growth since the beginning of the pandemic of any regional submarket in the region. I think that if you want the truth, it's a strong performing market. Although, again, as we said, you should expect to see some nominal levels of volatility quarter-over-quarter.

Samir Khanal, Analyst

Okay, got it. And I guess on the redevelopment pipeline, just in terms of the lease-up there, with demand normalizing. I mean, how should we think about the timing of the lease-up? Are you seeing any sort of slippage in timing at all? I mean, just trying to get an idea of the lease-up of the pipeline, given that demand continues to normalize? Thanks.

Howard Schwimmer, Co-CEO

Yes. Hi Samir, it's Howard. Look, there's always some components that are moving around. We've had a few delays here and there related to permitting and utility timing. And some things have moved forward a little quicker as well as obviously on the leasing side. While we have some adjustments in timing related to permits, etc., the leasing timeframe sometimes gives the out. But all-in-all, just a nominal change when you look at aggregate over the prior quarter.

Laura Clark, CFO

Yes. And Samir, to provide some context on that, the overall change is about one month longer than our previous forecast.

Vikram Malhotra, Analyst

Good morning. Thank you for taking my questions. Regarding the redevelopment aspect, you mentioned a modest delay of about one month in terms of lease-up or stabilization. I'm curious about projects that might be taking longer. Are these delays primarily due to tenant issues, or is construction progressing more slowly because of supply chain challenges? What specifically is causing the delays in your stabilization estimates?

Howard Schwimmer, Co-CEO

Vikram, it's all of that, right? And as Laura mentioned, sometimes we’re able to push things a little quicker and other times, there are situations where they're just out of our control. We're dealing with cities and utility companies, and we just can't control the timing on those. Again, these are fairly nominal adjustments and the market, I think as we've indicated, is still doing pretty well in terms of leasing activity. So, we're optimistic that we'll actually beat some of these timeframes as we look forward.

Laura Clark, CFO

And Vikram, I'll also add that while we've mentioned a nominal one-month delay in timing, our stabilized yields are largely in line with the expectations we set at the beginning of the year for repositions and redevelopments as a whole.

Vikram Malhotra, Analyst

Okay, that's helpful. So, obviously, you had good spreads this quarter. You mentioned the cash mark-to-market is now 26%, I think. If I just take that forward and use your estimates for the three-year opportunity on mark-to-market, assume flat occupancy. I'm not putting words in your mouth, but I'm sort of getting to 6%-ish same-store NOI growth next year. If I leverage that up, add your benefit acquisitions, I'm just wondering, can you still generate sort of that 14% to 17% FFO in the next two years? Or does that get pushed out or does the trajectory get changed a little bit over the next three years?

Laura Clark, CFO

Yes, Vikram, great question. At the beginning of the year, we provided a forecast and I look forward to our expected three-year average annual FFO per share growth and we provided a range of 11% to 13% over the next three years. If you think about our guidance for this year, it implies 6% to 7% growth, so that would imply a higher growth rate for FFO per share into 2025 and 2026. While we're not going to update that forecast today, we're going to update that on an annual basis. I will say that we are still comfortable with the projection of 11% to 13% average annual FFO growth over the next three years.

Vikram Malhotra, Analyst

Got it. And just one last question. You mentioned a distinction between your product and portfolio compared to the average older product. I'm curious about how private players that have portfolios similar to yours approach things differently, particularly regarding lease-up or gaining market share. Are they offering incentives or adjusting prices? Could this situation potentially lead to a mini price war in the short term among the larger private companies with comparable portfolios?

Michael Frankel, Co-CEO

Hi Vikram, it's Michael. Thanks for joining us today. When you think about the landscape of ownership within our infill market, it is, as you say, predominantly private ownership. We call those mom-and-pop operators because they're not real estate professionals who own the vast majority of our infill market, again, comprised of small and medium-sized properties. They are relatively passive owners. They're not generally investing and improving in their assets. Number one. There’s another very small segment where you have some private players, not public REITs who are investing for the purpose of generating acceptable yields relative to their cost of capital. That, frankly, is a really small segment of the marketplace. Nobody has the scale of Rexford, not even a rounding error. There are not really any players deploying a strategy of any magnitude that we would call material, improving assets the way Rexford is, frankly, just a few very small players here and there.

Howard Schwimmer, Co-CEO

But keep in mind, Vikram, if you're a private owner and you have a lower quality asset, it is a price war because there's not as much value in that asset in utility for the tenant to use the space. The only way they win is on pricing.

Michael Frankel, Co-CEO

Which is in contrast to our property, frankly, because we're investing, we're improving the functionality, we're competing on a different playing field of higher quality, highly functional space, of which there's an exceedingly low availability. Typically, when we see stated market vacancy and we drill down into how many vacant buildings actually compete with the Rexford portfolio on a quality and functional basis, the number is typically well under half the stated market vacancy rate. It is indeed the tale of two markets. Rexford is only about 2.7% market share. Through the quality and functionality, we really are able to compete on a different playing field.

Greg McGinniss, Analyst

Hey, good morning out there. Based on the opening remarks, it sounds like new supply is not a significant factor within the submarkets that Rexford was operating. So, the increase in vacancy is purely a demand-side concern and I understand predicting an inflection point is difficult. In the near-term, what are you expecting on rent growth based on tenant and industry demand trends that you're seeing right now?

Michael Frankel, Co-CEO

Hey Greg, thanks so much for joining us today. In terms of supply, when we talk about the fact you can't increase net supply for all practical purposes, we're really talking about the smaller and medium-sized segment of the market. Our average space size is 26,000 square feet. It is simply not economical to construct new products in that range. It hasn't been for quite a long time. Some supply increases may occur in larger-sized spaces, but that is not generally our target market. I think that's disproportionately impacting the vacancy factors. The other bigger factor is the lower functional space, the obsolete space, contributing to negative absorption and an increase in vacancy, which is not directly competitive with the Rexford product. In terms of market rents, again, we're not really giving any guidance or speculating on where market rents are going.

Greg McGinniss, Analyst

Okay. I can understand that it's a different type of product that's competing, but the disclosure that you do provide on rent growth is for a comparable portfolio. So, you are seeing that the headwinds on rent growth on a comparable portfolio basis. I was just trying to get some understanding as to what you think in the near-term are some of the factors that could be driving that higher or lower?

Michael Frankel, Co-CEO

Yes. No, it's a great point. Thanks for the clarification. We do see and expect to see some nominal levels of volatility in occupancy and rents over the near-term. But again, I think as we described, we see the foundation for potential market rent growth within our markets today. When sentiment turns, that catalyst could be interest rate-driven or some of the other factors that we talked about. We're certainly seeing a very strong broad base of demand out there. So, my personal opinion, off the record, it's going to be a little more macro-driven.

Laura Clark, CFO

In discussing the FFO run rate for the remainder of the year, I want to highlight a couple of key points. Firstly, there was a one-time item this quarter related to interest income. We maintained higher cash balances this quarter due to the convertible issuance we closed at the end of last quarter, which involved a $1.15 billion issuance and led to increased interest income. We do not anticipate maintaining cash at those levels in the second half of the year, which contributes about $0.01. Additionally, there will be another $0.01 impact from higher general and administrative expenses that we expect in the latter half of the year. Our G&A guidance has not changed; however, the timing of hiring will lead to slightly higher expenses in the fourth quarter due to bonuses and the potential hire of a CFO later in the year. Together, these two factors will have an approximate 2% impact on the run rate.

Operator, Operator

Thank you. That concludes our Q&A session. I will now turn the call back over to management for closing remarks.

Michael Frankel, Co-CEO

We'd like to thank everybody today for joining us for your interest in Rexford, and we look forward to reconnecting next quarter. Thank you so much and wish you all a great day.

Operator, Operator

This concludes today's call. You may now disconnect.