ESS - NYSE

Good day, and welcome to Essex Property Trust Second Quarter 2025 Earnings Call. As a reminder, today's conference call 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. Welcome to Essex's Second Quarter Earnings Call. Barb Pak will follow with prepared remarks, and Rylan Burns is here for Q&A. Today, I will cover key takeaways from the quarter, our outlook for the second half of the year and provide an update on the transaction market. We are pleased to report solid results for the first half of 2025 and highlighted by a $0.07 Core FFO outperformance in the second quarter and an increase to same property and Core FFO guidance for the year. Starting with operations highlights. Second quarter performed on plan with 3% blended rate growth for the same store portfolio. Northern California and Seattle lagged with 3.8% and 3.7% blended rate growth, respectively, while Southern California lagged with 2% blended rate growth, primarily because of Los Angeles. On a more granular level, the suburban markets of San Mateo and San Jose were notable outperformers with 5.6% and 4.4% blended rate growth, respectively. We attribute the outperformance through limited housing supply increased enforcement of return to office and likely better job growth than what has been reported by the BLS. In contrast, Los Angeles remains challenging with 1.3% blended rent growth resulting from pockets of elevated supply deliveries, coupled with legacy delinquency challenges in a soft demand environment. Despite these challenges, we have been able to generate a positive blended rate growth in every Los Angeles submarket year-to-date. Additionally, we are tracking several large infrastructure investments related to the World Cup and Olympics that should improve overall economic activities in this market in the next few years. Moving on to our outlook for the second half of the year. We continue to expect modest U.S. GDP and job growth. And for the West Coast, a stable job environment. Year-to-date, our seasonal rent curves have generally matched our expectations and our seasonal peak for rents occurred around late July. Accordingly, our guidance for the second half of the year assumes market rents to moderate consistent with normal seasonality. Our increase to the same-store revenue guidance generally reflects the outperformance achieved to date. In terms of range of outcomes, the low end of our guidance contemplates 2 factors: first, a softer macro economy stemming from public policy. Second, delinquency recovery in Los Angeles slows because this area can be lumpy. As for potential factors for high end of the guidance range, first is an increase in hiring driving rent growth. We have seen a gradual positive trend in job openings in the 20 largest tech companies and this metric has been a reliable leading indicator of demand. The second factor is a more favorable operating environment as we are expecting an average decrease of 35% in multifamily supply deliveries in our markets in the second half of the year compared to the first. Turning to the transaction market. Investor appetite for the West Coast multifamily properties remains healthy, with deal volumes slightly higher in the second quarter compared to the same period last year and average cap rates have remained in the mid-4% for institutional quality assets. In the second quarter, we started to see a higher volume of transaction pricing in the low 4% in Northern California. In comparison, Essex is generating on average yields in the mid to high 4% from approximately $1 billion of acquisitions in Northern California over the last 12 months. Our team has done a terrific job investing ahead of the cap rate compression resulting in immediate NAV accretion. Lastly, as we have maintained our disciplined capital allocation by funding the majority of these acquisitions with select dispositions. Going forward, we will continue to arbitrage our cost of capital and reallocate our portfolio to optimize the risk-adjusted returns to drive NAV and Core FFO per share accretion. With that, I'll turn the call over to Barb.

Thanks, Angela. I'll begin with a recap of our second quarter results, followed by the components to our revised full year guidance and conclude with an update on capital markets and the balance sheet. Beginning with our second quarter results. We achieved a solid second quarter with Core FFO per share exceeding the midpoint of our guidance range by $0.07. The primary driver of the beat relates to $0.04 from better same-property operations, of which half relates to higher same-property revenue growth and the other half relates to lower operating expenses. The expense reduction is driven by a 9% decline in Washington property taxes as compared to 2024. In addition, the quarter benefited from lower G&A, which is timing related. Turning to our revised full year outlook. We are pleased to announce a $0.10 increase at the midpoint for Core FFO per share to $15.91 contributing to the increase are 3 factors: First, we are raising the midpoint for same-property revenue growth by 15 basis points to 3.15% driven by higher other income and better delinquency collections, partially offset by lower occupancy. Second, we are reducing our same-property expense midpoint by 50 basis points to 3.25% on account of lower property taxes, which I previously mentioned. With these revisions, we now expect same property NOI to grow 3.1% at the midpoint, a 40 basis point improvement from our original guidance. The increase in same property NOI contributed $0.07 to our full year FFO guidance raise. The third component relates to our co-investment platform as our joint venture properties are performing ahead of plan. As for our third quarter Core FFO guidance, we are forecasting $3.94 at the midpoint, a $0.09 sequential decline from the second quarter, primarily related to elevated operating expenses given typical seasonality in utilities and taxes, which is partially offset by higher sequential revenues. For the third quarter, we are forecasting same-property operating expense growth to increase 3% on a year-over-year basis. In addition, preferred equity redemptions are expected to be back-end loaded, which is also causing a reduction in sequential Core FFO. Year-to-date, we have received approximately $30 million in redemptions and we expect an additional $175 million in proceeds before year-end. We are pleased with the progress we have made in executing our strategy to reduce the size of the book, even though it is causing a temporary headwind to Core FFO growth. At year-end, we anticipate the structured finance book will be less than 4% of Core FFO and continued decline in 2026 and as we anticipate being repaid on the majority of our outstanding investments over the next 4 quarters, after which the earnings headwind will have largely abated. Lastly, a few comments on capital markets and the balance sheet. During the quarter, we executed several transactions to further enhance our balance sheet flexibility. We issued a $300 million delayed draw term loan, of which $150 million is drawn and fixed at an attractive 4.1% rate through April of 2030. We also expanded our line of credit to $1.5 billion, while extending the maturity to 2030, and we established a commercial paper program. As a result of these financings, we further enhanced our balance sheet strength while optimizing our cost and access to capital. With minimal refinancing needs in 2025, healthy net debt to EBITDA of 5.5x and $1.5 billion in available liquidity, we are well positioned. I will now turn the call back to the operator for questions.

[Operator Instructions] Our first question comes from the line of Nick Yulico with Scotiabank.

I guess, first off, just turning to Los Angeles. Can you just talk a little bit more about what drove some of the weaker blended pricing? And then also, since you highlighted L.A. County, is there also sort of a specific like fire ordinance impact that's happened as maybe different than what was previously expected?

Nick, it's Angela here. On Los Angeles, it has underperformed relative to our expectations. And it's really a couple of different factors. It's not related to the fire ordinance, it's now a legislative concern. It's more of -- the supply is heavier in the first half, which of course, we knew that was going to be an impact. And the delinquency recovery is taking time. And what we had hoped for was that we could make progress sooner because of the progress we made from last year to this year. But so far, first half is it's moving along. It's just not improving at such a great rate. And then the last factor is really it's a soft demand environment. And what we're seeing the soft demand environment is actually not just Los Angeles, it's Southern California as a whole. And I just want to remind everyone that Southern California mirrors the U.S. economy and the U.S. economy has been soft. It's not broken. It's not -- it doesn't have any -- we're not seeing cracks, but it's been soft. And so for those reasons, Southern California as a whole, which is 40% of our portfolio has been more of a drag and what we expect is that in the second half, the one benefit is that the supply is declining. So supply in the first half is actually 68% of total supply in Southern California. So that is 1 benefit. And we certainly have seen offsets from our Northern regions that has benefited our overall performance with Northern California and of course, strength in Seattle.

And then I guess the second question is just on Northern California. I know you gave -- I think you gave some numbers on how the blended rate growth trended there and market was outperforming. Maybe you could just -- maybe if we sort of take a step back a little bit because I know everyone tends to focus a bit on blended rate growth, and there's talk about -- I think you said that, that's sort of moderates in the back half of the year. But I mean is that masking though, what is perhaps sort of bigger strength not being appreciated in Northern California that even if it's not showing maybe continued acceleration in the back half of the year that there's some other impact and benefit to the portfolio that's not fully showing up right now in terms of like the increase in guidance that you gave?

Nick, yes, that's a great question. We are seeing strength in Northern California. And what I think has been a little confusing is really 2 factors. One is that we had expected a solid performance from Northern California, and we are seeing job postings to gradually increase, which of course, it does lag from that perspective. And the -- when we look at the seasonal curve in Northern California, it's performing actually slightly better than we had expected. I think what's confusing is the blended and how that is presented across our peers because everyone defines it differently. And so let me just step back and explain our blended lease for a second. Our blended lease, what we try to do is provide an apples-to-apples for like-to-like, for example, 9 to 15 months leases. But that doesn't represent all leases. What impacts our financials is all leases, so the -- what's showing up that's reported is about 75% of the leases signed. If we use all leases, new lease rates would flip from 70 basis points as reported to 3.3%. I know that's a huge delta, which is why we try to shy away from doing all because there is more volatility. But that 25% makes a difference because that represents corporates, which typically has a 15% to 25% premium and of course, the short-term leases, which has a higher premium. And so our blend, if we use all leases, it will be 4% versus 3%. And once again, that's what hits our financials. And I think the other factor that can be a little confusing is that people expect the blend to continue to accelerate throughout the year. But that would be contrary to the common that we have achieved our seasonal peak, which is normal. July is a normal time for us to take. And therefore, the rest of the year, this is normal seasonality, it's going to decelerate. And it would be unusual for the blend to actually be higher in any normal environment. The 1 caveat is that if we see a greater strength on the macro economy, if hirings pick up in a meaningful way, for example. Then yes, then we could see that. And then we could see a situation where the seasonal peak actually gets prolonged, which is not what we're currently observing. And I think we've all experienced a lot of the noise with public policy and the lack of clarity there. And so I do think companies have been more reticent in hiring and investing, which, of course, impacts overall growth. And that's really what we're experiencing here. But Northern California is doing just fine.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

So just, Andrew, just to go back and maybe this was all our sort of misunderstanding of the fire impact on housing. But presumably, we would have thought that L.A. would have seen a pickup in demand. And I know that you guys and others articulated that, hey, single-family people are different than apartment people, which clearly is the case but also the COVID unit replacement taking this long. I mean, we're 5 years past. So are there other dynamics at work? Like is this more just the Hollywood spillover, the strikes or fall out of port workers who got laid off, just trying to understand the dynamic because I would have expected at least a little bit better, maybe not the strength of Northern Cali or Seattle, but still would have expected that the -- between the COVID units and just absorption, it would have been a little bit faster this year, not what seems to be slower.

Yes. Alex, that's a great question. And we share your view in that we didn't expect L.A. to just suddenly take off. But we did expect that on the occupancy side that it would run a little tighter, which is where we had forecasted. And what we are experiencing is that overall macroeconomy softness, which of course, has an impact on L.A. And of course, keep in mind, yes, we're 5 years since COVID, that's 2020, but L.A. was shut down for 3 years, evasion moratorium lasted 3 years. We're only in the second half, the back half of the second year of this recovery. And it's a huge economy is going to take more time. What we have not done is we have not redline L.A. because there is a lot going for L.A. And it is the largest economy in terms of by county with over $1 trillion of GDP and with the infrastructure investment that's earmarked for L.A. for the World Cup and the Olympics, the latest estimate is over $80 billion. And so we do see that the market has been stable. So that's great. It's remained at that low 95% occupancy hasn't picked up as much as we would like. Having said that, we do see positive environment moving forward.

Okay. And then the second question is on your mezz platform, you guys have a long track record of making a lot of money. I know that you don't include the gains in Core FFO, but you guys have created a lot of value over time, but it almost sounds like you're maybe not fully exiting, but dramatically scaling back. So 2 parts. One, why the decision to scale back when you have a successful track record and two, Barb, can you just articulate the fourth quarter FFO impact because obviously, the number is below where consensus is. So trying to understand how much of that below -- the implied below is just from the debt preferred FFO going away versus others. So one is why the dramatic scale back into the FFO impact in the fourth quarter.

Yes, Alex, this is Barb. You are correct. We do have a long successful track record in this business, and we are going to remain in the business, just not to the level of scale that we got this book too. So the book got to $700 million, and it became 9% of our FFO back in '22, '23, and it creates a lot of volatility in earnings. And we think it's more appropriate to have it a much smaller size. We think the -- investing the money into stabilized multifamily assets leads to better quality of cash flow and cash flow growth and NAV growth. And so -- this will be a portion of our company, but it's going to be smaller in that 3% of our FFO going forward. And then in terms of our impact to the fourth quarter, it's about $0.06 because we are -- the maturities are kind of evenly balanced between the third and the fourth quarter, and they are pretty median. And so that's what's driving that fourth quarter reduction. From a modeling perspective, you should assume that the 10% coupon we're earning on the mezz and preferred equity investments is rolling down to a 5, which is where we're investing for new stabilized assets at.

And just to be clear -- yes?

It's Angela here. I just want to point to, you've seen us diverting or reallocating our investments, very much focused on fee simple assets and in Northern California and back to when the pref equity book was up to 9% FFO, the dynamics were completely different. We were not developing because cost was going -- was increasing higher than revenues or rent growth, that was one. And in addition to that, the rent growth actually was [indiscernible] on long-term CAGR. So it made sense to lean into prep equity at that point, and it was a great way to complement our development pipeline. So the world is very different now. And of course, we would want to shift our strategy to make sure that we're optimizing our returns to whenever possible. And then the one thing I do want to complement your firm is that just on a separate note, that I thought Piper Sandler published a really good now on the impact of AI and jobs and the developers. I thought that was a thoughtful piece. So I thought you're tech team should know that.

I'll pass that on.

Our next question comes from the line of Brad Heffern with RBC Capital Markets.

Can you talk about what you're seeing for concessions in L.A? Is the year-over-year activity higher? Or is it just more broad spend, more widespread on the rent side and not the concession side?

Yes. Concessions has remained elevated relative to the rest of the portfolio for L.A. So if I compare just Q2 this year to Q2 last year, it's slightly higher. And going forward, now we're not talking much dramatically higher. We're talking about somewhere a little over a week and so it remain it more higher than the portfolio. It's not getting dramatically worse or better.

Okay. Got it. And then, Barb, you guys have the commercial paper program now. Is there a significant savings on that versus the revolver? And just how do you plan to leverage that tool versus how you would historically use the revolver?

Yes, that's correct. It's about 70 basis points difference in borrowing costs between our line of credit and commercial paper program. Historically, though, we have not utilized our line as a permanent source of capital. We've used it as a temporary bridge to permanent financing. And so going forward, how we'll be using the CP program is very similar. We don't expect to have a large balance on that over long periods of time. You will see it pop up when we are a temporary bridging financing. But overall, we don't expect to utilize it in a different way than how we've utilized our line historically.

Our next question comes from the line of Eric Wolfe with Citibank.

I want to return back to the guidance for blended rent growth in the back half. I mean it looks like you only lowered it a little bit from around, call it, 3% to 2.7%. And your second quarter was in line with your guidance. So I was just curious if it was more recent pricing that caused you to lower it? If you're trying to communicate something around market rent growth sort of shifting in certain markets and to whatever extent you can discuss recent trends on new and renewal leases that would help as well.

Yes. No, that's a good question. In terms of our view of the second half, we do have the blended decelerating. Having said that, it's also typical the normal seasonal curve. It's just the normal seasonality of our business. And so for example, if I look at our new lease rates for the fourth quarter for the estimate. Actual last year, new lease rates decline down to 190 basis points. And we've said that in the past where our loss to lease by year-end actually become a gain to lease, once again, not unusual. This year, the peak, obviously is not as strong as last year. It's still on plan and -- which means we -- we are expecting a more modest deceleration, but we don't know what that level is, but we're assuming a negative 70 basis points on new lease rates, just as an example.

Okay. So your original guidance expected something maybe a little bit stronger because supply is coming down and you're putting that into your assumption versus now your forecasting something that is sort of similar to your historical pattern? Is that the right way to think about it?

Yes, Eric, this is Barb. I think the other component is just L.A. It didn't take off like we thought it might. It's been more anemic and so that has a bigger impact to the fourth quarter because L.A. seasonality is a little different than maybe the broader Northern California and PNW markets. So that's the other factor in the fourth quarter that changed.

Our next question comes from the line of Jana Galan with Bank of America.

A question for Rylan, if you could provide some details on the strategy to go forward with the new joint venture focused on structured finance investments, it sounded like your preference at this point in the cycle was to buy on balance sheet, but just curious what's kind of -- what you're seeing on cap rates.

Good question. Again, this goes back to Barb's comment earlier, we're strategically, we're trying to target an FFO contribution from pref and mezz, that's sub-4% of FFO. So we've had a lot of partner interest in this business given our track record of success and relationships as it relates to preferred and mezz and so this allows us to stay in the business and really select the highest risk-adjusted reward opportunities while managing that earnings volatility inherent in some of the shorter-term investments.

Thanks, Rylan. And then, Angela, thank you for all the detailed comments on the like-for-like blended rent spreads. But it still seems like the initial guidance, there was an expectation, the blended rent growth in the second half would be a little bit lower -- I'm sorry, in the first half would be lower than in the second half. And then so just trying to better understand kind of if you're seeing if it's a year- over-year, why that would need -- the blends would need to decelerate in the second half now?

Well, the first half blend, actually we outperformed our expectations in the first half. And it's really strength of Northern California, which is a good -- it's a quality beat. That's what Barb calls it. And so what we're expecting is second half just the same approach we did when we had an earnings call last quarter, which is we assume the second quarter will perform as on plan. And therefore, right now, what we're doing is we are expecting that the second half will perform on plan as our original plan. And so the -- you may be expecting a greater rate, but it's really not going to because we're just -- it's really the strength of the first half, driven by the first quarter.

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Angela, I appreciate all the detail on kind of the like-for-like leases versus all leases. I'm interested in how much of that benefit in 2Q to new lease rate growth is seasonal related and typically reverses in the back half of the year? And then I guess for that all lease metric, what did you expect at the outset of the year versus what you're expecting now within the revised guidance?

Austin, good question. On the second quarter, it's about 260 basis points higher on new leases when you look at the all versus just a like-for-like. So it's a big variation. And the blend is -- which resulted in the blend of 100 basis points greater. And of course, as you mentioned, it's going to decel more. And so we are assuming that the full year blend on all lease basis to land close to 3%. And original guidance, Barb, would you comment on that? I don't have one with me.

Yes, Austin, there's a couple of puts and takes there. So we -- in terms of our top line, we assumed 2.3% scheduled rent growth, which is factored with all this blended rent growth. That's what goes into it. Because if we outperformed in the first half of the year, there is a carryforward effect that offsets the lower blend in the fourth quarter. And so we're still in line with our full year forecast on that aspect of our budget.

That's helpful. And then I think on last quarter's call, you had talked about achieving renewals around the high 3% range for April. I take it went out a little bit higher that. And clearly, that metric improved through the quarter. Do you think you can continue to achieve that low to mid-4% level moving forward? Or is some of the pressure you're seeing in Southern California could lead for that renewal piece to moderate?

That's an excellent question, and I wish I had a crystal ball. And what I can tell you that for the second quarter as a whole, we sent renewals out at about 4.3% for the whole portfolio. We landed at 4.2%. We didn't need to negotiate much, which is terrific. And if you look at the components, essentially Southern California remains soft, and it was offset mostly from the Northern regions. As far as August, September, we're sending renewals out slightly higher in Q2, which is a good trend. So in the mid-4s. The question here is how much will we need to negotiate. And we just -- it's just too early to tell at this point. But it is a good sign that we're sending out renewals at comparable or slightly better levels.

Our next question comes from the line of Jamie Feldman with Wells Fargo.

Great. Rylan, maybe a question for you. I think some of the comments here earlier in the call talked about cap rates compressing, you guys feeling good about buying ahead of the move. I think you've been buying in the mid-4s -- mid to high 4s. So can you talk about where cap rates are now? Are they below 4, low 4s? And where do you see them heading?

Jamie, Yes. We -- I would say buying market rate for the past year, we've been over almost $1 billion in Northern California. We've been the largest buyer along the Peninsula over the past year. And market cap rates on average are slightly above 4.5%. But again, our platform, we've been hitting closer to a 5% cap rate, and that was consistent with the 2 acquisitions we were able to source in the second quarter in an off-market transaction. We have seen cap rates compress. I think as Northern California and San Francisco have outperformed the nation. You've seen incremental buyers step in. And a lot of the deals that were recently listed in recent months have guided in several instances, traded in that low 4% range. I think in the city of San Francisco, it's actually when you factor in the mansion tax you're buying an equivalent basis of around 4%. So there are instances of deals transacting in some cases, below 4 cap, but I would say the average now in Northern California is for a marketed deal is probably in that 4.25 for a well-located institutional product. So we've been able to do better over the past year, and this is, as you would expect, as prices change, our return expectations changed and our capital allocation preferences will also evolve in light of this environment. So I remain optimistic that we're going to be able to continue to source opportunities at better yields where we can generate accretion and allocate to the highest risk-adjusted returns. But it has gotten more competitive in Northern California.

Okay. And I guess given your success there buying ahead of the curve, L.A. clearly struggling hard to know when it gets better. I mean any -- and I know you've sold there and redeployed into Northern California, but any thoughts to go in the other way, get very early in the cycle and probably find better opportunities in Los Angeles or still feel invest about reallocating into Northern California and keeping your ships there?

Yes, Jamie, as you would expect, as I mentioned, as these prices changes, our preferences change. So we underwrite everything on the West Coast, and we are going to be tracking L.A. very closely. What I would say is that a lot of the well-located submarkets in L.A. maybe surprisingly to some people, still trade in that mid- to high 4% range. Glendale, Pasadena, West L.A. There's still very competitive markets. Downtown L.A. is one notable exception where there's been a few transactions and cap rates are given some of the property cash flow challenges in that submarket. There's probably a little bit more variability in cap rates are higher, again, unlimited transaction activity, but we are tracking it closely. And again, for the right opportunity, we would definitely be there.

Our next question comes from the line of Adam Kramer with Morgan Stanley.

Great. Just wanted to ask about 2Q blended rate growth. I think it was exactly in line what you had guided to a quarter ago. So I just wanted to ask kind of what were the puts and takes there, right? Was it renewals or better, new leases or worse, vice versa? In terms of specific markets, I mean I would imagine L.A. probably came in worse than you thought, but maybe just breaking down that if you can quantify that at all, sort of how much worse was L.A. than maybe what you had thought a quarter ago? And how much better is a result where the other markets?

Yes. No, that's a good question. L.A. certainly underperformed L.A. Blended came in below 1.5%, so close to, say, 1.3% And we had expected that Southern California as a whole, and of course, with L.A., we do -- would be a little bit north of that 2%. And so that's probably the biggest factor on the second quarter, but of course, renewal came in a lot stronger. But keep in mind, our strategy is not to focus just on one specific metric. And I do -- and I caution on getting too hyper focused on whether it's new lease rates, specifically or only renewals because the way we run our business is we want to maximize revenues. And so our goal is to generate new lease rates in a way that can be net positive. Keep in mind, there is a cost to incurring turnover, and it can be expensive. I mean, 2 weeks of downtime is -- I mean, 1 week of downtime is 2%. And so in the current environment, where we're talking about a moderate growth in overall economy, especially for Southern California, it's more beneficial to reduce turnover friction and maintain a stable occupancy and so you'll see us toggle between renewals and new leases with being mindful of occupancy to maximize rents and so that's why we try to point people back to look at the blend, look at that occupancy and look at our total revenues because that's the big ball that we just -- we're very focused on that.

That's really helpful. And then just as a follow-up, just capital allocation priorities, and we've talked about acquisitions here a bit. We've talked about the sort of the mezz book business, how would you sort of stack rank your capital allocation priorities today? I know development rate is back as well. I know you started the project last quarter. Could you maybe just stack rank the different opportunities in terms of capital allocation here?

This is Rylan here. I would still put fee simple acquisitions relative to our cost of capital and the risks inherent in development as probably our top priority. We are underwriting a lot of development land sites, but the economics continue to remain challenging. So you need to find the few opportunities. And then again, in the structured finance book. There's been a lot of capital raised to invest in that pref mezz space over the past several years. So I think it's really important that we remain disciplined at this point in light of those capital. So the one deal we did this quarter is we really like the submarket of South San Francisco. We really like the economics of this deal. And as importantly is we've got a great development partner on this project as well that's going to stand behind the project. So again, you just have to be really selective in these types of environments, but we still think there's value to be had on the acquisition opportunity to answer your question most directly.

Our next question comes from the line of John Kim with BMO Capital Markets.

I'm not sure if you addressed this, but your guidance for blended implies 2.7% in the second half of the year. I was wondering if you could split that out between the third and fourth quarter. I think you implied there's some seasonality in there. And how are you thinking about earn-in for 2026?

John, it's Barb. Yes, in the third quarter, our blended -- what's baked in our guidance is a little bit lower than the second quarter, but not too much lower. It's really the fourth quarter where we expect the blended to be closer to 2% versus being at 3% now. So that's really the decel that we are expecting is really in the fourth quarter of the year. And what was your second question, sorry?

I guess that sort of answers it, but how are you thinking about earn-in for '26?

Well, earn-in is -- it's way too early, and it's not because we don't want to give it out. It's because we don't -- it's too early to see the rate of deceleration and it could be more moderate in which case, we'll have a better earn-in. It could be more extreme. We don't really see that, but it's possible given the economy is a little bit unclear these days, right? But it also could just be flat because we are anticipating a lower supply deliveries and Northern California continues to remain strong. So the range of outcomes is still wide enough that it's just -- it's not going to be useful to try to predict it today.

Angela, you mentioned a couple of times public policy and its impact on the economy. I was wondering in L.A. specifically, if you've seen an impact on -- from immigration policy on your portfolio? I mean maybe not directly, but indirectly, is it just creates softer demand and more options, more housing options for some of your tenants?

Yes, that's a complicated topic. But as it relates to the actual impact on the demand side, we're not seeing a direct impact from the immigration policy. The softness of the demand is really more of the general economy. Do we have tariffs today? No, we don't. Is it 100%? Now it's 12%. And it's confusing, right? So if you're a business and you're trying to make decisions, whether you want to grow your business or hire people, it's hard to do. And so I think that's -- it's a broader economy. As far as the -- what we would expect on the immigration of some of these other policy impact probably more on the labor side, and it will depend on the severity of the policy and the duration. And so at this point, we haven't seen a material impact across the board. But if the intensity continues and we end up with a labor shortage I think that is going to be an issue for the U.S. as a whole, I don't think it's a specific L.A. issue.

Our next question comes from the line of Haendel St. Juste, Mizuho Securities.

First is more of a follow-up. I wanted to get some more color and clarity on the expected cadence of earnings from the structured investment book. It sounds like you're expecting the majority of repayments over the next 3, 4 quarters. You mentioned $0.02 of repayment headwinds in 3Q I think another $0.06 in 4Q. So I was hoping, one, that those numbers are actually accurate. And secondly, a sense of what that headwind could look like in '26 as you rightsize the book.

Yes. This is Barb. From a modeling perspective, let me just try to walk you through the size of the book, and then I think that might help you get there. So right now, at the end of the second quarter, we -- our total book value in the structured finance investments is $550 million. That includes the mezz investments that we have. And by the end of the year, assuming we don't do any new investments that haven't already been disclosed, the book is expected to be around $400 million. And then as we look to 2026, given the maturities that we have, we expect the book will be $200 million to $250 million by the end of the year, although the redemptions are front-end loaded in the first 2 quarters. And so from a modeling perspective, you'd want to take the book down and then take the coupon from a 10% that we're earning on the investments down to 5%. So that should give you enough cover color. We haven't modeled out '26 yet. We haven't started our budget process yet. But that should hopefully help you get into the crack sound.

No, that is very helpful. Appreciate that, Barb. And just 1 more. I guess I was curious on your thoughts last month, the California State Assembly passed and governor some sign to bill that appears, I guess, aimed at what they say, catalyzing new housing through exemptions to CEQA, the [lot of] land in California since 1970. So I guess I'm curious what your initial thoughts are on this repeal of CEQA. And what you think it could mean for long-term capital flows, asset pricing, development, rents, et cetera?

Yes. We actually view CEQA to be net positive. It's a great example of California moving toward a more reasonable or in other words, a more moderate political environment. And as far as the impact to supply and the development business, Rylan can provide more color.

Yes, Haendel, in the near term, we really expect this is going to have a limited impact. I'd remind you that in the past several years, the state legislature passed several reforms to encourage development over the past 3 years, permits are down anywhere from 40% to 50% in our submarket. So really had limited impact so far. I acknowledge that CEQA reform is significant, given its history and how it has been used in the past and delay and sometimes prevent projects from recurring. But to take an example from our development underwriting, we've underwritten approximately 100 development deals over the past year. 80% of those had entitlements. So there was no CEQA risk to begin with. And the vast majority of those, the economics really just don't make sense. I'd call it an untrended return on cost, sub-5% on the majority of those projects. So we think the economics are going to continue to be a limiting factor as it relates to supply in California. And so yes, limited near-term impact.

Our next question comes from the line of Michael Goldsmith with UBS.

This is Amy on for Michael. I was wondering if you have seen any changes in demand in Northern California or Seattle if rents are being more price sensitive, any changes in foot traffic or conversions or reasons for move out?

So we have seen a steady demand in Northern California and Seattle. And we've not seen any softness as it relates to whether it's traffic or otherwise. I think primarily because, especially in Northern California, we are still sitting in one of the best affordability position that we have been from -- for the history of the company because rents are just starting to recover and income has grown consistently over the past 5 years. So it's still catching up. And as far as Seattle is concerned, the demand remains steady. It's a higher supply market, therefore, the demand is more influenced by the supply landscape than anything else. And what we're seeing is that we're seeing the demand delivery or the demand pressures shift in the second quarter -- or in the second half to our favor. In the first half, the supply delivery was about 60% of total supply and second half is 40%. So definitely, no cracks. The underlying strength continues to remain solid in our northern regions.

Our next question comes from the line of Wes Golladay with Baird.

I just want to go back to Los Angeles here, L.A. County. How do we see a recovery playing out? I think you mentioned supply would be down, but what about the lease-up pressure from that supply?

Well, the lease-up pressure, it typically lasts depending on the magnitude around, say, 6 to 9 months on average. And so with the supply abating, that lease pressure is actually going to improve. And what you'll see is the concessions will start to improve, better and kind of end up in that maybe half a week versus closer to a week range over time. So that's one good metric to look at. And the other influencing factor with L.A. is with other economies, you could tell or you could see what are the puts and takes, for example, Northern California, of course, there's that technology and artificial intelligence benefit that has been quite steady. In Southern California, particularly L.A., there's been a huge amount of infrastructure spending announced that is specific to L.A. And that $80 billion will be a meaningful injection into that economy and driving demand, driving people to that market to build and do the business there.

Our next question comes from Rich Hightower with Barclays.

Obviously covered a lot of ground today, but just 1 question on bad debt. So it looks like on balance, you're kind of down to that 50 basis point number, which I think is roughly in line with history. But obviously, trends are still a little bit worse than expected in L.A. specifically. So does that sort of imply that we're better than expected elsewhere in the portfolio from a bad debt perspective? And what do you expect from here?

Rich, it's Barb. Yes, your memory is pretty good. We are about 10 basis points off of our long-term historical average with L.A. being worse than our average and then being offset by slightly better in NorCal and PNW. But overall, our guidance assumes we're at this level for the rest of the year. Could we do better? Yes, I will just be the higher end of our guidance.

Our next question comes from the line of John Pawlowski with Green Street Capital Advisors.

Angela, can you provide details around your comment that you believe the Bay Area job growth is better than what the BLS is reporting because the jobs data just in terms of nonfarm jobs both from an absolute growth rate and the momentum that could have been better in SoCal relative to NorCal. So just curious why you play devil's advocate against the BLS numbers?

Yes. Actually, it's based on data. So this is not Angela's feeling index here when it comes to the BLS data. it's become less reliable because participation rate has fallen. pre-COVID, the participation rate was about 60%. And today, the participation is only about half of that, about 30%. And -- and so the BLS data is just -- it doesn't -- it's just not a good indication of what's really going on in the ground. But a perfect example is that the [BOS] shows it's actually the Northern California region produced the worst job year-to-date. It's negative 70 basis points. You contrast that with -- it's actually our best rent growth market. It's extreme, and that's not possible without job growth.

Understood. I understand BLS data is far from perfect. Just curious if there's other indicators you look at a side of rent growth that suggests that the job growth is really gaining momentum in the Bay Area.

Yes, yes. A good indicator -- a good data we use, which is a third-party vendor is we track the job openings of the top 20 technology companies. And we have seen, once again, not acceleration, but just a gradual, steady increase. And we are now pre-down close to pre-COVID levels which is a good sign. Because what I means is as these companies back fill the job openings, the open positions remains high, which means they are still incrementally growing. So we're not in that robust frothy period, but it's definitely a great start as far as we're concerned.

Okay. And then last one for me, Rylan. Can you give us a sense where the new preferred equity investment in the new JV sits in the capital stack and how much total leverage is on this -- is going to be on this development project. I'm worried and skeptical, the borrower kind of forward 13.5% interest on the loan.

Yes. John, I would say, typically, our underwriting standards were typically starting around the 60% loan-to-cost and willing to go up to 85%, assuming a full accrual stack. So we're not going above that 85% position in this deal -- on our underwriting numbers, too, right? So we'll take the developers underwriting and we'll recast the land value of what we think is an appropriate value for this market. So I think we have a fairly conservative approach as it relates to development and underwriting.

So the total loan to cost in this project will be in the 80-ish percent range.

Sorry, please repeat the question.

Yes. Your preferred equity investment plus any other debt on the property, the total loan to cost on the development will be somewhere in the 70% to 80% range, is that fair?

Yes, that's in the ballpark.

Our final question for today's call comes from [ Alex Kim ] from

Just we saw the spread between renewals and the move-ins widened again this quarter. And previously, there might have been some expectations for market rents to converge with renewals. Just curious what you think this might mean from a market demand perspective? And then do you expect the spread to tighten moving forward?

Yes. Normally, Alex, normally, you would see the -- a wide range between renewal and new lease -- I'm sorry, yes, renewal and new lease rates in an environment if market rents continue to accelerate. So if that happens next year, then it's test spread is going to remain [wide]. If market rents performs closer to, say, the long-term CAGR between 3% to 4%, then those 2 metrics will likely converge. And with the caveat, the L.A. will be different because we have other influences impacting L.A.