ESS - NYSE

Good day, and welcome to the Essex Property Trust Second Quarter 2023 Earnings Conference Call. As a reminder, today's conference is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC. It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you, Ms. Kleiman, you may begin.

Good morning. Thank you for joining Essex's second quarter earnings call. Barb Pak and Jessica Anderson will follow me with prepared remarks, and Adam Berry is here for Q&A. We delivered a solid second quarter with core FFO per share exceeding the high end of our guidance range. In addition, we are pleased to announce a meaningful increase to our 2023 guidance for same property revenues, NOI and core FFO per share growth. Barb will discuss this further in a moment. Our performance to date demonstrates the underlying strength of the West Coast economy along with continued refinement to our operating strategy. My remarks today will focus on our 2023 revised outlook for the West Coast and conclude with an update on the transaction market. Starting with expectations for the balance of the year, as shown on Page S17 of the supplemental. Our improved outlook reflects the year-to-date resilience of the economy and labor markets both surpassing our initial forecast. This dynamic, coupled with slowing apartment deliveries have contributed to a healthy demand for rental housing in our markets. As a result, we raised our average market rent growth expectations for the West Coast by 50 basis points to 2.5%, with notable increases to San Diego and San Jose. Demand associated with job growth is a key driver to the revision. We now expect our markets to generate 1.7% job growth for the full year. This is mostly attributable to the growth achieved in the first half of the year, with our markets posting 2.6% job growth on a trailing 3-month average through June. Additionally, the layoff announcements from the largest technology companies have proven less consequential than headlines suggested with only a fraction occurring within our markets, and the vast majority of those affected quickly finding new employment. Turning to the supply outlook. Our research forecast a slight reduction in 2023 deliveries as a few delay projects get pushed into 2024. While we have been pleased with the steady job growth achieved on the West Coast to start the year, we remain cognizant of the potential for more interest rate increases given the Fed's focus on inflation reduction. Thus, our job outlook contemplates a moderating economy as we approach year-end. And accordingly, our base case expectation assumes modest market rent growth for the remainder of the year. Looking forward to the next several years, we see the West Coast as uniquely positioned to generate above-average rent growth based on 3 key factors present today. First and most importantly, the West Coast supply outlook is relatively muted, and a multiyear lead time is required to develop new housing in our markets. With permitting activities declining, we expect to benefit from moderate supply levels for years to come. Second is rental affordability. Since 2020, average personal income in the Essex market has grown over 20% compared to cumulative rent growth of 10%, resulting in attractive rental affordability. Furthermore, high cost of homeownership continues to favor renting. It is now over 2x expensive to own compared to rent in the Essex market. Third, solid demand drivers. Our Southern region continues to demonstrate stable growth supported by a diverse and vibrant economy. Likewise, the Northern region economies are steadily growing, a key driver is the investment in AI companies that are largely concentrated in Northern California. We've seen open positions of the top 10 tech companies improved gradually each month since the trough earlier this year. Lastly, fully remote as a percent of total job postings have significantly declined at below 10% in June. For these reasons, we expect the West Coast to continue gaining momentum for the remainder of 2023 and outperform over the next several years. Lastly, turning to the investment markets. Transaction activities in the West Coast have remained muted. Similar to the first quarter, volume in the second quarter was about 55% lower than the same period prior year with cap rates in the mid-4% to low 5% range for institutional quality properties. We are starting to see more deals actively marketed at a similar valuation levels. Interest from a healthy group of buyers range from local syndicators to large institutional and foreign investors. As expected, leverage buyers remain largely in the sidelines, waiting for more clarity on interest rates. We continue to diligently underwrite deals as we are well positioned to be opportunistic. With that, I'll turn the call over to Barb Pak.

Thanks, Angela. I'll begin with a brief overview of our second quarter results, discuss increases to our full year guidance and provide an update on capital markets and the balance sheet. Beginning with our second quarter performance. I'm pleased to report we achieved core FFO per share of $3.77. This result exceeded the midpoint of our guidance range by $0.08 per share, of which $0.06 is attributable to better revenue growth and lower property taxes in Washington. Our favorable year-to-date results have enabled us to increase the full year midpoint of our same-property revenue growth by approximately 40 basis points to 4.4%. The increase is due to higher occupancy and net effective rents achieved year-to-date, partially offset by higher delinquency in the second half of the year as compared to our original forecast. As it relates to same-property operating expenses, we have reduced our midpoint by 100 basis points to 4% as a result of a reduction in Washington property taxes. Due to these revisions, our full year same-property NOI growth has increased to 4.5% at the midpoint, representing a 90 basis points improvement to our guidance -- to our initial guidance. As a result of our strong second quarter and revisions to our same-property outlook, we are raising the full year midpoint of core FFO by $0.22 to $15 per share, which represents 3.4% year-over-year growth. Turning to capital markets activities. We have historically been proactive in managing our capital needs and debt maturity profile, taking advantage of attractive opportunities in the market to refinance our debt early, minimizing our near-term capital needs and maximizing our financial flexibility. Subsequent to quarter-end, we closed a $298 million 10-year secured loan at a fixed rate of 5.08%. Proceeds will be used to repay unsecured bonds maturing in May 2024. In the interim, the proceeds will be invested in short-term cash accounts, resulting in a positive impact to FFO of approximately $0.03 per share until the unsecured bonds are repaid next year. Our capital markets team did a terrific job monitoring the variety of debt capital sources available and locking in a favorable rate in today's volatile environment. With this refinancing, the company has addressed approximately 50% of the 2024 debt maturities at pro rata share. Finally, our balance sheet metrics remain strong. Leverage continues to decline, and our net debt-to-EBITDA ratio continues to trend lower and stands at 5.6x today. We have minimum near-term financing needs over the next 18 months and over $1.6 billion in liquidity. As such, the company remains in a strong financial position. I'll now turn the call over to Jessica Anderson.

Thanks, Barb. I'll begin my comments today by providing color on our recent operating results and strategy, followed by regional commentary. I was pleased with our operating results from the second quarter, including a same-property revenue increase of 4% year-over-year. For the first several months of the year, we maintained an occupancy-focused leasing strategy to mitigate expected headwinds from eviction-related move-outs. This approach helped us exceed revenue expectations in the first half of the year and left us well positioned to push rate during peak leasing season, which continues today. Our new lease trade-out accelerated through the second quarter from 0.5% in May to 1.7% in June and finally to a preliminary 2.1% in July. Renewal trade-out is stable and averaged 3.4%, resulting in blended net effective rent growth of 2.2% for the second quarter. These results were achieved despite increased turnover driven by eviction-related move-outs. Given ongoing delinquency court backlog, we will continue to work through evictions for the rest of the year and anticipate some of this activity spilling over into 2024. Moving on to regional specific commentary. In Seattle, blended net effective rent growth averaged negative 0.2% for the second quarter, dragging down the portfolio average. This is attributed to 2 key factors. First is the year-over-year comp. In the second quarter of 2022, Seattle generated a portfolio-leading net effective rent growth of over 16%. Second, Seattle remains our most seasonal market, thus is more sensitive to changes in the operating environment. You may recall during the back half of 2022, the Seattle market experienced increased supply during a period of softening demand, which heavily impacted rents as we headed into 2023. However, throughout the second quarter, we saw a steady strengthening of demand, particularly in Seattle CBD that coincided with Amazon's mandatory May 1 return-to-office of 3 days a week. Strong leasing activity drove a collective 680 basis point sequential increase in net effective rents from April to June and a solid 97% quarter-end occupancy. Moving on to Northern California. Blended net effective rent growth averaged 1.5% for the second quarter. Oakland continues to be impacted by supply posting a negative 0.4% for the quarter, diluting the healthy 2.7% achieved in San Jose, where the bulk of our Northern California portfolio is located. Despite the tech employment headlines, we still experienced corporate housing activity associated with the large tech companies albeit muted from last year, which helped support seasonal demand. Quarter-end occupancy was also solid at 96.7%. Lastly, in Southern California, blended net effective rent growth averaged 4.1% for the quarter, driven by continued strength in San Diego, Ventura and Orange County. Los Angeles is pulling the average down with a 1.9% blended lease trade-out for the quarter. However, because of the eviction activity in this market, rent growth and occupancy are expected to run lower relative to the rest of Southern California for the remainder of the year. Quarter-end occupancy in Southern California was 96.3%. In summary, we are encouraged by our results for the first half of the year and the current operating environment. As we begin the third quarter, we are well positioned with the current physical occupancy of 96.7%, coupled with strong leasing activity across all markets. As we look to the back half of the year, we will reassess our rent growth focused strategy as the summer leasing season wraps up in the next 30 days and maintain our flexible approach to maximize revenue in a variety of market conditions. I will now turn the call back to the operator for questions.

[Operator Instructions]. Our first question is from Eric Wolfe with Citi.

I think at NAREIT, you mentioned that you saw some earlier move-outs of nonpaying tenants, which probably was impacting your pricing and the use of concessions. But based on your comments and just looking at the July data, it seems like your delinquent percentage is staying about the same. So I'm just trying to reconcile that and try to understand when we might actually see the delinquent percentage come down.

Eric, it's Barb. I would say delinquency is generally tracking in mind. We were ahead in the first 6 months relative to our plan, primarily due to emergency rental assistance payments. July is generally on plan. And we do expect that number will continue to trend lower. And by the end of the year will be below 2%. We left our midpoint unchanged at 2% for the full year. But we are making progress, but it's slow, it's dependent upon the courts and just resident behavior. So it's a little bit out of our control.

Understood. But I guess, just to be clear, I mean, if I look at the sort of May data around new leases, you're using concessions, that was what was depressing that number. I mean, guess what -- I guess what drove that then? And then what changed to allow you to feel more comfortable with the push rate?

This is Jessica. Eric, I'll take that. With regards to our shift in strategy around mid-May, we changed from an occupancy-focused strategy to more focus on rent growth. And to your point, what got us more comfortable with that? Well, a couple of things. One would be really the macroeconomic outlook, the headlines that we're seeing earlier in the year and the layoffs, and the headlines overall were concerning. And so we took a proactive approach and the layoffs subsided, and we started seeing strengthening. And then in addition to that, with regards to the eviction, they've been coming back at a pretty steady pace, which is manageable. And so based on the strength we were seeing in the markets and the manageable pace, at which we were getting the evictions, we felt comfortable shifting to a rate growth focus. And what you're seeing in April and May that we had shared as far as our trade-out numbers so reflects concession usage that was predominantly in April. We averaged about a week free at that point. We did go through a lot of evictions that we wanted to offset and reposition our occupancy at a higher rate right before peak season and some of that activity spilled over into May. But as of today, concession usage is minimal across all of our markets.

Our next question is from Steve Sakwa with Evercore ISI.

Just to follow-up on Eric's question, just to be clear. So your delinquencies baked into guidance are basically 2% for Q3 and Q4? And then secondly, can you just provide some color on what your blended, I guess, rate expectations are for Q3 and Q4?

Steve, this is Barb. I'll take the first part of that question. And so in terms of delinquency, yes, it's roughly 2% for the full year. We're at 2.1% today, year-to-date. And so it's a little bit under that in the back half of the year. Like I said, we do expect it to continue to trend favorable, but it's an inherent lumpy number. And so it's difficult to predict month-to-month, but end of the year should be less than 2% for sure. And then on the blended, I'll let Jessica answer that.

Steve, this is Jessica. As far as blended goes, I'm going to break that out into new lease and to renewals. And so year-to-date for our new leases, we've achieved 1.1%. But keep in mind, that reflects our focus on maintaining a high occupancy earlier in the year. And so we gave approximately it's over half a week in concessions to maintain that higher occupancy. And when we look at our outlook, we've revised it from 2% full year rent growth to 2.5%, which reflects the broader expectations of the market. And so in order to make it apples-to-apples, we have to adjust our first half. And so essentially half a week is 1% of rent growth. And so if you add that to our 1.1%, you get to 2.1%, which leads us to 2.8% for new lease growth expected for the back half of the year. And based on the strength that we're seeing in the markets right now, and then the easier comps that we'll be facing in Q3, particularly Q4, that is an achievable number. And then as far as renewals go, renewals are reaccelerating. We've sent renewals out in August and September at around 4%. You may have noticed in our results that renewals had come down, which essentially went to 2.8% preliminary for July. And renewals trail new leases by approximately 60 to 90 days. So wherever new lease -- new leases go renewals end up following, but we've been able to achieve some solid rent growth. And so therefore, the renewals reaccelerated and expect renewals to be around 4% for the back half of the year.

Our next question is from Austin Wurschmidt with KeyBanc Capital Markets.

So given the strength that you highlighted year-to-date, the benefit to same-store revenue growth in the first half of the year as well as some of the new lease rate growth momentum you achieved in June and July. I guess, why leave your back half same-store revenue growth guidance of 3% unchanged?

Yes. This is Barb. I would say, I think we know -- we've done the vast majority of our leases. We still have some to go. So we know where leases are going to trend this year and that top line number. If we get substantially more rent growth from here, it's really going to benefit 2024 at this point versus 2023 given the amount of time that's left in the year. And the number of leases that we have left to sign is lower in the third and the fourth quarter. And so I think that's the biggest factor. The biggest factor to our guidance at this point in terms of same-store is really delinquency. It can swing up or down. That's the biggest wildcard right now. I think with other -- the other components of the same-store revenue are pretty dialed in.

Got it. And then, Jessica, I think you said 2.8% new lease rate growth in the back half of the year. Just trying to understand the cadence of that through the back half, obviously, starting in the low 2% range here. You've got easier comps coming given the deceleration you saw last year. So can you give us a sense of that cadence? And then from a back half perspective, what type of seasonality did you underwrite for the back half?

So as far as where we see trade-out going would expect that is slightly different by market, but expect that to accelerate from here. It will be higher in Q4, and that's simply based on the comps, as you pointed out. And then as far as seasonality goes, we see this as being a typical year, and we may have a prolonged peak. We've been monitoring our rents. And typically, we peak in NorCal and Seattle around -- right around about now or mid-July and then SoCal is often a little bit later. But as of this week, we're still seeing rents accelerate in San Jose specifically in Southern California, and some of our other markets are leveling off at this point. So pretty normal, but we're seeing strong leasing on the ground and anticipate a typical seasonal slowdown.

Our next question is from Jamie Feldman with Wells Fargo.

Your comments and also EQR commented earlier, talked about maybe an improving return-to-office, especially in the Bay Area. Can you talk more about what you're seeing? And also, how do you think about the implications for suburban versus urban type of assets as more people are getting pulled in the cities? I think their comment was the urban -- more urban as the people want to be closer to their workplaces.

Jamie, it's Andrea here. I think there are a couple of things that are different between how our portfolio is located versus EQR and where the key job nodes are in California versus the rest of the country. So I'll start there. So as it relates to the urban, suburban conversation, keep in mind that in California, most of the large tech companies are actually suburban based. And so that, of course, for us, it's always been a benefit even pre-COVID. And the underlying strength is a couple of factors, right? Lower supply in the suburban [indiscernible] the cities are tougher, quality of life, more homeless and some of these other issues. And of course, the proximity to employers are much more favorable from that perspective. And so from that perspective, Essex, our view is that the suburban still is more compelling than the urban. And that is consistent to our prime [indiscernible] even for COVID. As far as the return to office, we saw that in Seattle with Amazon early May. And although I do want to say that, that was somewhat muted than normal just because of the layoff announcements. And so it was really people digesting and getting rehired. And so from the return-to-office activity, what we would expect to see is that it will be more pronounced in September with Meta and some of these other larger companies. Essex, for us, we're doing the same thing. We are mandating a 3-day working from office now until September after Labor Day as well. And so we do see that at that point, the activities will resume in a more robust way.

Okay. And then as we think about your expenses heading into kind of late into the fourth quarter or even into next year. Can you just talk a little bit about where you think you may see either the greatest moderation or maybe some acceleration in operating expense growth across the major line items?

Yes, this is Barb. I would say in the back half of this year, we have easier comps as it relates to eviction costs and turnover because we had those expenses last year in the fourth quarter. And so some of the expenses that we've seen in the first quarter and some of our high R&M, and admin expenses will moderate in the back half of the year just on a year-over-year growth basis. I would say, in terms of other lines this year, I don't see significant change in any other major line this year. I think we've got expenses pretty dialed in for this year, we do know taxes and insurance. As we look to 2024, it's difficult to predict just yet where we're going to land. We'll be going through our budget process here this quarter, and I'll have more clarity on the next quarter call. The 1 line item that we've talked about in the past is insurance, it still is a very challenging market. We would expect that we would be up 20-plus percent next year on the insurance line. But keep in mind, that's a very small line for us. It's only like 4% of our total OpEx spend. So while the headline number is large, it's a small component of our OpEx. And outside of that and outside of the favorable taxes we have in California, where they only grow 2%, we need a little more time to dial in 2024.

Okay. That makes a lot of sense. I guess just sticking with insurance, are you seeing any lightening up from the insurance company in terms of what they're willing to offer as they build up their capital reserves? Or no, you think it's going to be another tough year?

Right now, based on what we know, we believe it will be a tough year. We're going to go through our renewal in the fourth quarter of this year. Our renewal comes up in December. And so I'll have more clarity on the next call in terms of that market. But based on what we're hearing, we think it's still a very challenging market.

Our next question is from Alexander Goldfarb with Piper Sandler.

So two questions. First, Angela, you made comments before that sort of outward migration from California is always a constant, but it's the HP-1 visas, the overseas tech workers, et cetera., entrepreneurs who immigrate to the country that offset and drive. So just sort of curious, what's the latest on tech hiring from overseas? Whether it's permanent or sort of the annual consultants who they bring in? Just curious what's going on there.

Yes, Alex, that's a good question. We haven't seen an active hiring from an international basis yet. And what we have seen is on a net migration for California as a whole. So this is market as a whole. That net outflow remains negative, but it hasn't been -- it's gotten better. So during COVID, it was an extreme outflow. And now when we look at the net migration outflow number, it's pretty consistent to pre-COVID. And so we do think that once we have that international, it would definitely be a good tailwind. As far as when we look at our own portfolio, just on a more granular level, so this is move-ins. We saw a pop last year between the first and third quarter with California reopening, and that acceleration was definitely very encouraging to see. And since then, the move-out, obviously, it's not going to continue at that level in terms of acceleration. But the -- I'm sorry, I meant to say the move-ins, but it has remained positive, and it's been stable. And so that's another good sign.

Okay. Second question is on capital markets. You guys did a secured loan that wasn't for a JV. Normally, I guess, in REIT land for the investment-grade companies, we expect secured loans either in times of distress or for a joint venture asset. Here, it seems like the unsecured debt markets are open. So just sort of curious the decision on that. And also, I imagine there were probably a bunch of people who are out there hungry to buy more of your unsecured. So maybe it's just maybe if something else planned later in the year that satisfies that. But just sort of curious about the decision to do secured and what seems to be a functioning unsecured debt market?

Alex, it's Barb. That's a great question. I will tell you, we do prefer unsecured debt, and that's been kind of our ammo for many, many years as that's the way we finance the balance sheet. In this environment, though, we saw a significant pricing differential between the secured and unsecured market. So while we locked in our -- the secured loans at 5.0%. If we were to go to do an unsecured bond, it would have been 65 to 75 basis points wide of that. And so that pricing differential was so great that we decided to move forward with the secured side of the equation. 95% of our NOI is unencumbered. And so we have lots of room within our covenants to secure a few assets. And there's no change in our overall balance sheet philosophy. It was just really a pricing differential that made us move the way we did.

Our next question is from Josh Dennerlein with Bank of America.

Just wanted to ask about the R&M same-store expenses. It looks like it was impacted by storms and flooding damage in the first half of the year. One, is that all behind us now, so it will kind of normalize out in 3Q? And then what would that trend look like if you could strip out the storm impact?

This is Barb again. Yes, you're correct. It is impacted by some of the spillover from the storm and flood damage cleanup costs in the second quarter. We had a lot in the first quarter and some of it still is in the second quarter. And it also had higher turnover costs because keep in mind, we are getting back units. And so it's that and then just general inflation -- inflationary pressures within the R&M space. And so it's three components. In terms of if we just pulled out the flood, I don't have that in front of me. I'll get back to you on what that would be. But it's really all 3 of those components that drove that increase. In the back half of the year, though, I do expect that number to come down. First of all, we don't expect the same level of storms or floods. It's not a rainy season here right now. And so that should abate and not be in our third or fourth quarter numbers. And then the eviction-related turnover costs, we have easier comps in the third and fourth quarter because we started incurring those last year in the third and fourth quarter. So that 14% that we had in the third quarter should moderate significantly in the third and fourth quarter.

Okay. I appreciate that, Barb. And then can you just clarify when exactly you made that strategy shift from occupancy to rate growth. And then I guess my real question is, does that imply you have a bigger mark-to-market? I'm not sure if you actually set the mark-to-market at this time.

Josh, this is Jessica. Yes, we switched really about mid-May. And as far as the mark-to-market, we're looking -- right now, our loss-to-lease is 1.7%. But as I mentioned earlier, still seeing our rents grow in some markets. And so expect that potentially to go up a little bit more.

Okay. Is that about average of the loss-to-lease at this time of the year, 1.7%? Or is it a little bit below normal because of that -- the initial strategy on the occupancy?

Yes, it's definitely a little suppressed based on our approach earlier in the year.

Our next question is from Nick Yubico with Deutsche Bank.

Daniel [indiscernible] on for Nick. I can ask the question. So July new lease rates accelerated nicely from 2Q. So just curious what markets drove that sequential improvement? And second, do you think it's possible to see continued acceleration given some of your larger markets have lagged year-to-date and are, I guess, still recovering in a sense in tandem with the pretty benign supply backdrop?

This is Jessica. Yes, we did see Seattle was a large contributor to the sequential improvement, followed by Northern California. Southern California has been performing pretty steadily. And then as far as specific markets in Northern California, San Jose has been particularly strong, which reflects over 40% of our portfolio in the Bay Area. So we've seen strong occupancy, strong leasing demand. That one is encouraging, certainly watching it. We've seen with all of the prior return to office announcement. So Amazon and Seattle CBD and then last year with Google as well in the Bay Area, there's definitely demand associated to these return to office events. And so anticipating that Meta, which is in September is going to have the same impact. I would imagine, we're experiencing some of that demand right now. And then also, as I mentioned in my prepared remarks, the corporate housing activity. It is less than last year, but we still saw the activity this year, which is always an encouraging sign as far as the health of the big tech employers, they certainly wouldn't be investing in interns and contract work if they were planning on tightening their belts and we've certainly seen an uptick in hiring as well. So San Jose has been doing quite well. And then Seattle had already touched on the Seattle CBD and the Amazon returned to office, so that was a factor. And we're still seeing strength in demand today. However, it is our most market. And so we certainly see the most pronounced reduction in rents in the back half of the year in that market. But I expect it to be in line with our typical seasonal curve and expectations there and then also supply. We do have good supply headwinds in Seattle. Some of it was pushed to the first half of 2024. So it's a little bit better than what we originally expected, but we still have some supply on our radar there.

Great. And then I'm not sure if you have an answer to this question, but San Diego, one of your stronger markets. Wondering if you have a sense of like which employment sectors are driving demand in that market for your assets?

It's Angela here. The key drivers in actually all of our markets have been in the health services and education and, of course, the leisure and hospitality as well. And so with San Diego rebounding, it's been good to see those activities coming back in a more robust way.

Our next question is from John Kim with BMO Capital Markets.

On the Washington property taxes coming in lower than expected, was that due to a favorable appeal that you had or lower mill rates or something else?

John, it's Barb. So property taxes in Washington declined 1% year-over-year. The assessed values went up 15%. So when we were budgeting, we knew assess side were up quite a bit, but millage rates came down. And so that's what drove the favorable year-over-year reduction in taxes. There was -- it wasn't based on a PL.

Do you think that rate is a good run rate going forward? Or is it more of a onetime reduction?

It's really hard to know. So there's a lag effect in terms of when they do the bills. So our '24 bills will be based off of 1 January of '23 assess values, which we don't know what those will be at this point. Obviously, values have changed over the last year. But it also depends on the millage and what the city does with that. And so that's always a wildcard factor. Historically, we've not had a reduction in Seattle taxes 2 years in a row. But -- so we'll have to just monitor and see next year. I don't know if 1 -- a negative 1% is a good way. I wouldn't use that. I don't think that's how we would view it going forward, but we are pleasantly surprised this year.

Okay. My second question is on your loss-to-lease. I think Jessica mentioned it was 1.7%. Last year, Angela mentioned that the September loss-to-lease is a good indicator for your future earnings. And I'm wondering how you think that trend just given the market rental rate assumption has gone up? I think you touched on this a little bit, but where do you see that September loss-to-lease go to?

Well, it's definitely a little bit too early to predict that, and we have -- while we've had a typical seasonal curve. It will be interesting to see how the back half of peak leasing season plays out. And yes, I did share it, we have the 1.7% loss-to-lease today. But based on several of our markets, still accelerating with rent growth week-over-week that may grow from here and also the Meta return to office that we're watching and the demand overall in the Bay Area could change how we typically experience in August or September. So in short, it's a little bit early. And yes, we will look at that in September as we typically do.

Just a little context. I think last year, around this time, we were sitting around 7% loss-to-lease. And -- but we were looking at the seasonal curve that is occurring in a more -- that mirror pre-COVID level. What happened was the prior year, we didn't even peak until November. So it's been a little wonky coming out of COVID. And so it's September, generally, as a rule of thumb is a good data point. But just because of the uniqueness in the past couple of years, I just -- we didn't want anyone to just peg a June number as a good rule of thumb.

Our next question is from Handel St. Juste with Mizuho.

So first question is on transactions. As we've heard we've seen still pretty stalled. But you mentioned that you're diligently underwriting deals. So I'm curious where you peg the bid-ask spread at today and where asset pricing would need to be for you to get more active?

Haendel, this is Adam. So yes, we are underwriting every deal in the market. And even though in Q2, volume went down pretty considerably. Q3, I expect it to be increased just given the amount of activity in the market today. So we are underwriting a lot of deals right now. And there isn't much of a bit-ask spread. I think many of the deals -- most of the deals that are on the market today will make. So I think there will be capitulation on both sides and a meeting of the minds. And I think echoing what Angela said in her opening comments, I think those are going to be in the mid-4s to low 5s range depending on product, location and then specific circumstances, whether there's assumable debt or some tax abatements. So as far as when we will be back in the market, I think that's really highly dependent on where our cost of capital is. So given where we're trading today, that it's hard to make accretive deals in the mid-4s to low 5s. And so we will continue to market or continue to monitor the market, and we will act when it makes sense.

Got you. That's helpful. A follow-up on the conversation around concessions. Can you guys provide a more detailed breakdown perhaps by region what the average concession that you're providing in your NorCal or SoCal and Seattle regions are and then also a loss-to-lease by region?

Sure. This is Jessica. So concessions in Q2 by region. So if you look at Southern California, it's a little less than half a week. Northern California, 1 week and Seattle a little bit over half a week. So that gets us to 0.7 weeks overall. And keep in mind that a lot of that was concentrated in the April time frame. Some of it's build over into May. By the time we got to the end of the quarter, we pretty much have no concessions across the portfolio with the exception a very small portion of our portfolio that is exposed to lease that's like 10 to 15 properties or so. And then as far as loss-to-lease by market, Southern California, 2.5%; Northern California, 0.7%; and Seattle, 1.9% to make up the 1.7%.

Great. And then sorry, if I missed this, but what's the embedded assumption for bad debt impact the revenue in the back half of the year?

Haendel, it's Barb. It's roughly 2%, a little bit under 2%, consistent with the full year forecast.

That's the incremental tailwind? You're saying that the expectations by year-end? Is that the incremental benefit you expect in the back half of the year?

No, that's the assumption. So we assume 2% for the full year. We're at 2.1% through the first 6 months of the year, we assume effectively like 1.9% in the back half of the year to hit our 2.0% for the full year. So it is an incremental improvement in the back half as well.

Our next question is from [indiscernible] with Green Street.

Just a follow up on the question earlier. What's the total magnitude of acquisitions, you're hoping to achieve in the back half of this year?

Robin, this is Adam. So at this point, our intention is to -- well, our guidance really is not to acquire anything in the back half of the year. We -- like I said, we've been underwriting everything. And if there are deals that makes sense strategically that fit in with our existing portfolio, whether through economies of scale or other methods, then we will focus more on those deals. But for the moment, given our cost of capital, we wouldn't expect much on the acquisitions front.

So with, I guess, in a scenario where there's minimal acquisition, then no development starts penciled. Do you expect to -- how do stock buybacks stack up in terms of midterm priorities for capital allocation?

Yes. I mean we did do stock buybacks in the first quarter, and we will assess our sources of capital to do that because we want to maintain our balance sheet strength and a leverage neutral approach to the stock buyback. So we would need a source of capital to continue to buy back the stock, and so that would imply that we would dispose of something. So it will all depend on where we can find opportunities to add value to the bottom line. Because at the end of the day, that's our goal on the external front is how can we grow accretively. And to Adam's point, it's hard to do it via acquisitions today. But it doesn't mean that we're just going to go buy back the stock. We would need a source of capital to do that as well. So it all go into the mix.

I appreciate that response. And then finally for me, can you give us a rough direction on what percentage of the $100 million outstanding delinquencies that you think you'll ultimately be able to collect?

Yes, it's a great question. It's difficult to know. I mean, obviously, we'll get some of that. But -- and none of that is baked into our guidance for delinquency this year. We are making progress collecting. The problem is, until the courts get caught up delinquency keeps accruing because we have tenants that are in our properties a lot longer than they were historically. Pre-COVID, if somebody went delinquent, they were out within 2 to 3 months. And now they go delinquent, they're out in 9 to 12 months. And so that's part of the compounding problem on the delinquency side and the cumulative delinquency side. In terms of what we're going to collect, I can't give you a number. It's just too hard to predict.

Do you think it's closer to 10%, 20% or towards 50%? I understand it's very hard to predict.

Yes. I'm not going to throw out a number because it's just not something that we know with any sort of certainty at this point. We're working hard to collect every time that we can. We've used all measures possible to go after these tenants who are delinquent and have delinquent balances, but it's not a number I can throw out there.

Our next question is from Michael Goldsmith with UBS.

For the L.A. market, are you seeing any pressure from the writers and actor strikes? Or does your guidance contemplate any impact from this?

This is Jessica. I'll speak to as far as the on-the-ground operations. We have not seen any impact from a strike at this point. We track our exposure to the major studios and it's less than 1% of our L.A. portfolio. And so I think it really comes down to how long the strike is going to go on and if there's potentially a ripple effect to other industries. But at this point, we do not see it have a material impact on our portfolio would have to go on for some time. There may be specific property impact, but not the larger portfolio as a whole.

That's helpful context. And for my follow-up question, when you look at the A versus B quality properties. Are you seeing any differences in trends between them? Is there any differences in demand or tenant health and how that's trending between A versus B quality properties?

This is Jessica again. As far as A versus B, we do not see a material difference in performance. It's more really location. So back to the whole suburban versus urban concept. And the bulk of our portfolio is suburban, and we are seeing strength in our suburban market versus some of the urban properties. And really, I think that's attributed to supply as well. When we look at where we have concentrations of supply is in these urban locations. So Seattle CBD, Downtown L.A., West L.A., Downtown San Diego, and that's where we would see rent lag. So urban versus suburban is where we're seeing the difference.

Our next question is from Nathan [indiscernible] with Robert W. Baird.

Can you speak to what is driving the strength in San Diego? And which market or markets do you believe will be the next to see a rebound?

This is Jessica. So yes, San Diego has been a phenomenal market for us. I think it benefited during the pandemic. It was a popular area to relocate to, rents were lower and overall great quality of life. And as Angela mentioned earlier, there is some underlying employment industries that have strength there. So San Diego has been very solid, and we expect it to continue to perform well. As far as other markets that I have my eye on that are showing signs of strength, go back up to the Bay Area with San Jose. Just to reiterate what I'm seeing there, that's been a strong market for us. And then when you couple that with the recovery as well that we still anticipate with continued return to office and where we're at relative to pre-COVID rent. There's definitely an upside there and then up in the Seattle area for similar reasons. But of course, we're going to be facing some supply headwinds there over the next year.