Essex Property Trust Inc (ESS) — Q2 2022 Earnings Call Transcript

Thank you for joining us today, and welcome to our second quarter earnings conference call. Angela Kleiman and Barb Pak will follow me with prepared remarks and Adam Berry is here for Q&A. I will start with a summary of our second quarter results and then highlight the strong underlying momentum in the Essex portfolio, especially in the markets benefiting from the return-to-office programs of large tech companies and finish with a brief overview of the apartment transaction market. We are pleased to announce our fourth consecutive quarter of improving results with core FFO up 21.1% from the same quarter last year, exceeding the high end of our guidance range and achieving the second best quarterly growth since the Company's IPO in 1994. Given our strong year-to-date results, we increased our guidance ranges for same-property revenues, NOI, and core FFO for a third time in 2022, which Barb will discuss further in her commentary. Starting with operating fundamentals, net effective rents for new leases are now 16% above pre-COVID levels and 20.6% higher year-over-year compared to the second quarter of 2021. Job growth remains robust at 5.6% for June year-over-year, substantially outperforming the U.S. and reflecting the ongoing recovery from the massive COVID-related job losses in 2020. Page S17.1 of our earnings supplement demonstrates the surge in rents in the tech markets of Northern California and Seattle, the largest and last markets in our portfolio to fully recover from the pandemic. Net effective rents have increased between 18% and 20% year-to-date, reflecting momentum from return-to-office programs and very strong job growth. Our data analytics team indicates job openings at the largest technology companies have moderated recently off the very high levels throughout the pandemic, with job openings now about 15% above pre-COVID levels compared to about 77% last quarter. Unlike other industries within our markets, the tech sector was better positioned to pivot to hybrid work in response to the pandemic and accelerated hiring. As a result, labor demand for the most highly skilled workers at the large technology companies remained solid, implying job formation in excess of the number of recently announced layoffs in our markets which we highlight on page S17.2 of our earnings supplement. Given the focus on tech layoffs recently, it's relevant to note the definition of what constitutes a tech company has broadened to include businesses that have digitized a variety of analog processes and thereby represent a much broader umbrella of organizations not necessarily located in the Bay Area, including Peloton fitness offerings, Carvana's auto sales process, and mortgage companies like Better.com. Likewise, the venture capital slowdown is now impacting companies across many industries and geographies, consistent with this broader scope. Conversely, it's the largest tech companies that drive employment in our North Cal and Seattle markets, and they are more insulated from capital market fluctuations, given their growth opportunities and extraordinary financial strength. Rounding out the overall employment picture in Northern California, we continue to see a recovery of jobs that were eliminated during the pandemic. COVID-related regulations were so stringent that much of the local surface economy workforce had to be fundamentally rebuilt. For example, the Essex markets added 420,000 relatively low-paying jobs on a trailing three-month basis, including a 20% to 25% increase in the leisure and hospitality sector, which supports returning tech workers and their demand for services. Our commentary usually focuses on high-paying jobs, but the service jobs are also important because most of their employees need to report to a physical location each day, and they support the ecosystem that creates livable and desirable communities. The strong demand for housing is supported by apartment affordability in our Northern California markets, which has improved sharply relative to long-term averages, reflecting a higher growth rate for median incomes relative to median rents. From a historical perspective, these markets seem affordable for the first time in the last decade, and rental housing is significantly more affordable versus home ownership. The value of the median-priced home in California is up about 13% year-over-year and with higher mortgage interest rates, apartments are clearly the more affordable option. We estimate that it is now over two times more expensive to buy than rent in the Essex markets. Affordability trends will be impacted by the apartment supply picture of moderated deliveries in the second half of 2022 and a further decline expected in 2023. Sharply lower rents in Northern California during the pandemic resulted in fewer apartment starts in 2020 and 2021 and therefore, a significant drop in new Bay Area apartment deliveries into 2023. Production levels of for-sale housing are also muted on the West Coast with only about 0.4% of existing stock being built annually and production is difficult to increase given zoning restrictions and land availability. Looking ahead, we recognize that the Federal Reserve is working to fight inflation, which often leads to a recession. Our experience indicates that no two recessions are alike, and clearly, the current situation is unique given the West Coast remains in recovery mode from the pandemic. Given this backdrop, we believe that the following factors will help moderate the impact in the West Coast rental markets in the event that economic conditions deteriorate later this year. First, large technology companies significantly accelerated hiring during the pandemic, largely because they were beneficiaries of the pandemic-driven preference for touchless interaction. Many newly hired employees were asked to work remotely until offices reopened, which is now occurring and is a key component of our recent market rent growth in Seattle and the Bay Area. Second, we have extremely tight labor markets and strong job growth on the West Coast, a significant portion of which relates to the recovery of jobs lost in the early part of the pandemic. The recovery of jobs, especially in leisure, hospitality, and service sectors has been resilient and should continue for the foreseeable future. Third, the normal migration pattern from the West Coast includes workers approaching retirement who plan to lower their cost of living and use the equity in their homes as part of their retirement plan. We believe that most of these workers left during the pandemic given California's extraordinary lockdowns, and therefore, it's likely that retirement-related migration will be muted for at least a few more years. Finally, foreign immigration was significantly slowed throughout the pandemic. In recent months, new visas for foreign workers are increasing with the large tech companies being a primary beneficiary, restoring an important source of apartment demand. Before I turn the call over to Angela, let me quickly touch on apartment investment activity. The extraordinary uncertainty and volatility in the financial markets and higher interest rates have disrupted the apartment transaction markets, resulting in fewer closings given diverging buyer and seller expectations. We are in a period of price discovery for apartment transactions and the absence of financial distress means that buyers and sellers are not forced to transact. Therefore, we expect fewer apartment transactions for the foreseeable future. It's difficult to pinpoint cap rates in this environment, although limited recent activity indicates cap rates in the high 3% range to low 4% range. We have seen an increase in apartment development activity that was decimated in the pandemic, driven by the strong rent recovery in suburban areas, which should lead to more preferred equity investments going forward. With that, I will turn the call over to Angela Kleiman.

Thanks, Mike. First, I would like to express my appreciation for our operations and support teams for delivering some of our highest levels of quarterly same-store revenue growth, all this while we continue to roll out our property collections operating model throughout the portfolio. Great job team, and thank you. Today, I'll start with key operational highlights in our major regions, discuss rent growth expectations for the remainder of 2022, and conclude with an update on the rollout of our transformational initiatives for the operating business. We are very pleased with our second quarter performance. With strong demand fundamentals and modest supply described by Mike earlier, we maximize revenues by favoring rent growth rather than occupancy. This resulted in same-property revenue growth of 12.7% on a year-over-year basis and a 4.8% on a sequential basis, which are some of the highest growth rates achieved in the Company's history. As we head into August, so far, we are experiencing a normal leasing season with June and July loss to lease for the same-store portfolio at 9.7% and 10.3%, respectively. Turning to regional highlights, starting with our Washington portfolio. This region generated a 20.7% year-over-year net effective rent growth on new leases for the second quarter, which was led by Eastside Seattle, where the majority of our portfolio is located. Seattle continues to benefit from strong job growth, which is driving leasing momentum. Our Seattle portfolio is well positioned and 9.7% loss to lease as of July. On to Northern California. This region generated 17.5% year-over-year net effective rent growth on new leases for the second quarter, which was led by Santa Clara County at 24%, primarily driven by the robust demand from large tech employers in Silicon Valley. Northern California has demonstrated some of the strongest job growth this year. And despite the negative headlines on tech startups, we are not experiencing any softness in rent growth in July or in our third-quarter renewals. We expect positive momentum to continue for Northern California with demand from return to office, which may be further accelerated by incremental job growth throughout the second half of the year. Loss to lease in this region continues to pick up and is 8.7% in July. Moving on to Southern California, which has been a strong performer with 22.4% year-over-year net effective rent growth on new leases for the second quarter. Healthy job growth has continued to drive incremental demand in Southern California, which is built upon the significant rent growth achieved last year and resulted in our highest level of loss to lease at 12.1% in July. Turning to our expectations for the remainder of 2022. As you may recall, we had anticipated a deceleration in market rent growth in the second half of the year because of tougher year-over-year comps. As expected, we are seeing this deceleration show up on our new lease spreads on page S16. However, as demonstrated by our current performance and the increase to same-property growth expectations for the year, our fundamentals remain strong. It is with this backdrop that we continue to advance our company-wide implementation of our property collections operating model. By way of background, we have been transitioning from a dedicated team for each property to teams that cover a collection of around 9 to 12 properties, thereby transforming our business from a property-centric to a customer-centric operating model. As we have rolled out this model to our other regions, we've been able to replicate the improvements in cross-selling from 15% to 23% achieved at the first asset collection that was rolled out last year in San Diego. This demonstrates our sales team's ability to sell effectively across multiple properties, reducing customer acquisition costs and improving overall sales efficiency. Lastly, we have been making good progress co-developing proprietary applications with partners from the RET Ventures such as Funnel, to enhance our technology platform. We execute approximately 60,000 transactions a year, including move-in, move-out, and renewals, and we are focused on automating all manual tasks. Following full deployment of the Funnel suite in late 2023, we anticipate this investment will be an important factor in the 200 to 300 basis points of margin improvement we expect to achieve over the next few years. With that, I'll turn the call over to Barb Pak.

Thanks, Angela. I'll start with a brief overview of our second quarter results, discuss changes to our full-year guidance followed by an update on investments and the balance sheet. We are pleased to report we achieved core FFO per share of $3.68 in the second quarter. The results exceeded the high end of our updated guidance range published in June. Of the $0.10 beat to the midpoint, $0.03 relates to better-than-expected revenues in June and $0.06 relates to lower property taxes, primarily from a combination of lower assessed values and millage rates at our Washington properties. For the full year, we are raising the midpoint of core FFO by $0.29 to $14.45. The revised midpoint equates to 15.7% year-over-year growth. The increase to our midpoint is primarily driven by better-than-expected operating fundamentals and an improved outlook on delinquency. As such, we are raising the midpoint of same-property revenue growth by 70 basis points to 10.3% and NOI growth by 140 basis points to 13.5%. In addition, our full-year guidance assumes a reduction in expense growth from 4% to 3.3% at the midpoint. Turning to delinquency. We are encouraged by the continued improvements we are seeing in our delinquency. For the quarter, net delinquency was 60 basis points of scheduled rents, a significant reduction from the first quarter. This was a result of many efforts by our operations team, which led to a 20% reduction in gross delinquency as compared to the first quarter. In addition, we received a higher level of government reimbursement in the second quarter. Also worth noting, in late June, there were a couple of key events that are positive for the future. First, the State of California allocated an additional $1.9 billion in emergency rental assistance for existing applications after exhausting its initial $5 billion allocation. This gives us more visibility on the remaining funds to be allocated, especially as it relates to our $34 million in outstanding applications. Second, on July 1st, a California state law expired, which provides landlords with additional rights to recapture delinquent units. Thus, outside of L.A. and Alameda counties where eviction protections remain in place, we would expect to see a gradual improvement in gross delinquencies over the coming quarters. Moving to our stock buyback and investment goals. In the second quarter, we repurchased approximately $61 million of common stock at a significant discount to our internal NAV, using free cash flow and excess proceeds from year-to-date transactions. As for our investment goals this year, we have a strong pipeline of accretive preferred equity deals and remain on track to achieve our goal of $50 million to $150 million of new commitments. However, given the rapidly changing interest rate environment and the sharp increase in our cost of capital relative to cap rates in our markets, we are reducing our acquisition goals, which are outlined in the earnings release to focus on share repurchases instead. This is consistent with our disciplined approach to capital allocation, whereby we will shift capital to what the best use is, given changing market dynamics. Lastly, I want to conclude my prepared remarks by highlighting the strength of the balance sheet. Over the past year, we have seen a continued reduction in leverage with our net debt-to-EBITDA ratio improving from 6.6 times at the depths of the pandemic to 5.8 times today. We are rapidly approaching our historical low for this ratio and believe we will see continued improvements in this metric over the next few quarters through growth in EBITDA. As it relates to upcoming capital needs, we are in an advantageous position. Our existing cash flow from operations covers our current dividend, all capital expenditures, and development funding needs. As such, our only known funding needs relate to debt maturities, which are minimal, given we proactively took advantage of the low-interest-rate environment over the last few years to further strengthen the balance sheet. As a result, we have only $300 million in debt maturing in mid-2023 and $400 million maturing in mid-2024. This equates to less than 6% of our debt maturing annually for the next 2.5 years. And while interest rates have increased on new debt, capital markets remain open, and we have access to a variety of secured and unsecured debt sources. This affords us strong financial flexibility, which will enable us to be opportunistic as it relates to these upcoming maturities. With over $1.3 billion in liquidity, we are well positioned. I will now turn the call back to the operator for questions.

My first question is focused on hybrid working. Mike, you said early on that return to work, but more hybrid working would benefit the company, and clearly, it is. I guess, what are some of the latest comments you're hearing or what are you hearing from the tech firms in your market on hybrid-verse at this point thinking about going remote fully? Obviously, there's an article out today about one company going remote. Like, what are you hearing in your markets?

Hey Jeff, that's a great question. Thank you. I think what we're hearing is everyone is now pretty much committed to a hybrid working model, and they're trying to figure out what that means, and some of the issues are being confronted that I think are embedded in that. So, I think that everyone's having trouble and I would include us in that in this case. People like the hybrid model, and they want to stick with a hybrid model. And so, now, it's up to the companies to try to figure out what they need to do to modify their offices to accommodate that model. Notably, Amazon paused some of the work they're doing in Bellevue to take another look at the office format. So, I think you're going to see more of that activity going forward.

Okay. I appreciate the detailed charts on the open positions in your markets. How do you track this data?

We have a data analytics team that's run by Paul Morgan. And so, they scrape that data off various websites and then categorize it by what's in our markets versus other parts of the U.S. We've been doing this for, I would say, the better part of ten years now. And so, it definitely tells the story. Our data analytics team is basically responsible for that data.

Okay. Thanks. Can I just ask, can you say which markets you're seeing the most openings versus, I guess, ones toward the bottom?

We are noticing that the tech markets continue to lead in job openings, which isn't surprising. It's interesting to see that both Google or Alphabet and Apple have reached a new high in job openings, even though I previously mentioned that the top ten tech companies are slightly down from their peak. Nevertheless, the number of positions they have available is remarkable considering the economic challenges we've faced in recent years. There's a lot of ongoing strength in this area, as if the economic turbulence isn't as significant as it seems.

Maybe just on capital allocation. You talked about the share repurchases. So curious, just given the transaction market and how historically you've sold assets to fund share repurchases, kind of the appetite today and how you think about funding additional buybacks?

Hi Nick, it's Barb. Yes, that has been our strategy historically. In the second quarter, we did have excess cash flow, so we used that to buy back the stock. Going forward though, we would look to sell assets to buy back the stock. If we have an asset in contract, we might buy it back a little earlier than the sale. But for the most part, we're going to maintain our disciplined approach to match funding any future buyback going forward.

Thanks. And then, maybe just on operations in terms of the blended rent growth that decelerated a bit in July from the second quarter. I'm wondering how you kind of marry that with the strength in the chart on Northern California and Seattle and the acceleration in rent growth that you're seeing there, just the interplay between the two.

Yes. Hi. It’s Angela here. That's a good question. What we are expecting is the normal seasonality to play out. Having said that, we do have headwinds from tougher year-over-year comps that I described earlier. And just to give you a little more color, last year, in the first half, our blended lease rates were negative, was negative 4%, but in the second half, it surged to about 13.25%. So, that's the tough year-over-year comp. And what we're seeing is with the strength in Northern California is that it's a key reason for the shift of expecting SoCal to outperform in the first half. And now in the second half, we're expecting Seattle and North Cal to lead our growth going forward.

Could you talk about your tenant composition a little bit, please? What portion of your tenants, what mix are employed by big tech versus, say, other industries? And how has that composition changed during the pandemic or more recently?

Yes. This is Mike, and that's another great question. Thank you. We have a variety of price points in our portfolio. So, we cover, I'd say, from the B minus to the A plus category. Therefore, our tenant base is a reflection of the broader economy. So, unless we have a few buildings that are adjacent, very close to the tech companies where we could have 90-plus percent of the tenants working in the tech industry, for the most part, we're much broader than that. Again, we reflect the broader economy, which includes policemen, firemen, teachers, all the hospitality and restaurant workers, et cetera. And it has not changed a lot. Yes.

As we look ahead to 2023, some of your peers have mentioned embedded rent growth. Can you provide more insights on how we should consider the earnings potential going into 2023, given the current rent roll?

Hi. It’s Angela here. Another good question. The embedded earnings for 2023 is really going to be a function of the seasonality curve. At this point, we have one of the strongest loss to lease in the Company's history at 10.3%, and it continues to grow because we have not yet peaked. You add to that the tailwind from the job growth and modest supply; we feel good about our position. But to try to speculate at this point is probably not going to be all that helpful because the third quarter is when we tend to have the most transactions, and so it's the most active quarter. Once we see how that plays out, we'll be able to provide better visibility to the actual shape of that seasonal curve. So, we plan to have a more in-depth discussion on that topic on our October call.

Just one question for me. Adam, I'm curious to get your thoughts on the level of distress you're seeing in the broader preferred equity and mezzanine lending markets on a scale of 1 to 10, 10 being the most dislocated, where are we on that barometer today?

I would rate us at a 1. We're noticing very little distress in the preferred sector. There are some opportunities where bridge lenders have been able to finance deals that are in lease-up, but we've observed a clear pullback in that area. Therefore, we see opportunities for ourselves in those situations, but overall, I would say there is no distress at this moment.

And to be clear, I'm not talking about your specific book, but just in terms of the broader market, deals that are coming your way. So, other people being in distress, not Essex.

Understood. Yes. No, it’s the same answer. We're not seeing any...

I was wondering if you could talk about the renewals that you're sending out, I guess, at this point for August or what you sent out for August, September, and perhaps October. And can you talk about what's embedded in the full year guidance for the second half in terms of overall blended spreads? Thank you.

Sure. Happy to. It’s Angela here. I'll talk about renewals, and I'll turn it over to Barb to talk about guidance. In terms of our third quarter renewals, we're coming in at close to 10%. It's a pretty tight band within all our key markets, Seattle leading the pack around 11; Northern California in the 10 range; and of course, Southern California close to 9.

And then, Steve, as it relates to guidance, as Angela said earlier, the first half of the year, we had much easier comps, but given the surge in rents we saw last year, we have much more difficult comps in the second half of the year. On new leases, we're assuming in the second half of the year 7% new lease growth, it was 15% in the first half of the year, so a significant reduction just because of the comp issue.

Great. That's very helpful. Thanks. And then just in terms of the bad debt, I know this is bouncing around quite a bit based on what you're getting back from the government. And it sounds like you might get a little bit more in the second half, but how would you sort of think the second half shapes up in terms of the bad debt figure?

Yes. So, our revised guidance assumes 1.5% for the full year as a percent of our scheduled rent. We've been talking about it since the start of the pandemic. We assume the first half and the second half are about the same now. Previously, we had assumed a worse second half, but now we've pulled that up now. That's really a function of the $1.9 billion in new emergency rental assistance that the states allocated. It does give us more visibility on continued emergency rental assistance in the back half of the year that we were uncertain about going into this quarter. The other thing is we have seen improvements in our gross delinquency. They have started to come down. In June, they fell; July, they fell. Therefore, we expect a continued moderation in the gross delinquency line, which gets us to the improved outlook on delinquency in the back half of the year.

First question, regarding capital allocation or external growth. It seems you no longer have a land bank development pipeline, as your last one finished leasing up this quarter. I'm curious about your plans and outlook for potential growth through the end of the year given that you've primarily focused on acquisitions. What are your priorities? You've mentioned share repurchases, but are joint ventures an option? Are you considering dispositions to fund these activities? How do you intend to source growth outside of organic opportunities in the coming quarters?

Hi Neil, this is Adam. There was a lot to your question, so I'll start from the beginning. Historically, we haven't focused on land banking. When we develop, we mainly pursue shovel-ready projects. We do have a couple of pre-entitlement projects in the pipeline that we might develop further. Beyond that, we've found the most opportunity in our preferred investments, especially recently. In terms of acquisitions, we're always looking, but it largely depends on our cost of capital and matching funds. We've identified some development opportunities where we can form joint ventures, often combining that with preferred equity. We're very focused on successfully turning those around as well. So, there’s significant potential, but right now, in direct development, we're noticing cap rates in the mid-4s, which we feel lacks sufficient spread to compensate for the risks and costs associated with development.

Yes. Okay. Thanks for that. And then for Angela, you guys have more recently started talking about the operating enhancements, operating model expense types of enhancements, about podding and being more efficient, increasing the resident experience. I just wonder if you could maybe kind of put that in perspective. Talk about that a little bit more. And then specifically, on wage pressure you're seeing, just given the high cost of living there. And then, you talked about like again, improving resident experience by potentially having units that have no people on site. I guess, how does that improve experience if there's no one there to help, particularly with sort of like potential issues, lacks DAs, et cetera, things like that. So, if you can just walk through all those, that would be great.

Sure, happy to. You brought up a couple of points. I'll try to hit all of them. If I miss anything, please chime in. In terms of wage pressure, we're experiencing that just like everybody else. However, from our controllable expenses, especially in the admin line item, we've been able to find offsets and therefore have been able to manage through that. Primarily because of how we have transformed our operating business model to this, I think you call it, collection because that's improved inefficiency. Ultimately, what remains is allowing our people to take less time to get the tasks they used to do. From a customer perspective, first of all, we've been contactless since COVID. It's effectively no change for them in how they interact with us. But as far as availability is concerned, we have appointments available for customers that access our properties. However, if they want, they can reach us via different methods, whether it's online or an 800 number, and they can make an appointment. Every asset collection has a hub. So, sometimes it’s an immediate concern; they will get into a car and drive to a hub nearby. That has not been an issue either. When we look at our customer satisfaction, they actually have been feeling better than pre-COVID.

Okay. Yes. So basically, it sounds like just given the proximity of the pods, a maintenance issue, power, I don't know, leak issue, payment, whatever, amenity issue could be a few-minute drive away is essentially what you're saying?

Let me just clarify something. The maintenance team is on-site. They are responding timely to any customer service request.

Thanks. Good morning. It was a strong quarter. I'm going to return to Angela regarding the earnings question. I realize you may want to keep that information close to the chest. However, if you're giving guidance, it implies you have some expectations for the third quarter regarding leasing activity. This suggests that, while you're uncertain about future events, you do have an assumption regarding what might occur. Based on that assumption, would you agree that you have a specific earn-in number in mind but feel it's too early to disclose it? Is that correct?

Well, it's a little bit more to it than that. I mean, it's speculative, right? Right now, we're saying is with 10.3% loss lease, that's higher than our typical loss lease in the past. Now normal seasonality means that that loss lease will start to decline over time. What I don't know, and that's an honest statement, is the rate of that decline or the steepness of that curve. All I can point to is from what we're seeing right now, the curve looks good. However, there is the broad economy out there, and we will need to see how that plays out to have a better sense.

Hey Rich, I’ll have my blue mood ring now. I just want to point that out. But one additional comment is I think what Angela is saying is seasonality implies that rents peak in July. We don't know if rents are going to peak in July. That inflection point, once we see that inflection point, we have better visibility going forward about what’s going to happen for the rest of the year. So again, it’s really a key time in terms of trying to determine where this is going to go; potentially, rents could keep going up, or it could follow the normal seasonality and we reach a peak in July and start going downhill for the rest of the year. You're right. Barb has built in an assumption into the guidance. Barb, do you want to just comment on that, just to reiterate it?

Like I said earlier, we do assume rent growth year-over-year moderates in the second half of the year because of the more difficult comps. As Angela mentioned, we've assumed a normal seasonal curve. Therefore, we will peak at the end of July, like Mike said. That is what's built into the guidance. However, we do feel good about the tailwinds that are in front of us or behind us from where we are today.

Okay, fair enough. The second question is regarding the rent growth forecast, specifically for S-16 or possibly S-17. Last quarter, Northern California led all markets in growth, but this time it has increased by less than others. In the second quarter, it has actually become the laggard after being the leader, although a growth of 10.5% is still significant. I'm curious if you have considered the impact of tech layoffs that are widely discussed in this forecast, as Southern California and Seattle have outpaced Northern California, though all markets are still growing. I don't want to diminish the outlook, but it's worth noting that Northern California is no longer the leader.

Thanks for acknowledging that these are pretty darn strong numbers across the board. Just to give you a little more background, these revised forecasts reflect how we performed in the first half. Because the first half was so strong in Southern California and in Seattle, that's the driver to the change in order. When we look at the second half, about 7% for the portfolio; we are seeing that Seattle and Northern California will be the path in the second half.

And maybe one other final piece, Rich, Oakland is clearly lagging in the Northern California recovery as well. Downtown Oakland has been slow to recover, and it has quite a bit of development deliveries coming there; that's the part that's holding them back.

Just a couple on back rents. So first, how much of the back rents do you guys anticipate receiving from the government or California programs, and then how much do you think you'll have to go directly to the tenants to collect? I know you guys discussed a little bit about the additional government funds to be allocated. So, I was wondering about how much more to go to the tenants to collect?

Hi. This is Barb. We currently have $34 million in open applications and $78 million in cumulative delinquency. When comparing these two, we expect that some of the $34 million will be processed this year, though we cannot predict how quickly the funds will be disbursed. We estimate that about 50% of that amount will be reflected in our guidance for this year. It's important to note that this figure covers our entire portfolio, not just same-store data. Additionally, we have begun the process of pursuing tenants for back rent through various methods. We're implementing strategies such as checking their credit and potentially using small claims court to recover owed rent while ensuring we comply with all legal requirements. We face the most restrictions in LA and Alameda, but beyond those areas, we have more options for pursuing tenants.

And then just a follow-up on that. What percent of the residents that owe the back rents are no longer within the Essex properties versus tenants that are paying current, but still owe past rents?

That's a good question. I think it's roughly 50-50 at this point. The $34 million in open applications mainly relates to our current residents. Very little of that is for past residents.

I'm not sure if you track this or not, but do you track move-outs because of job loss? And has there been any sort of change in that statistic, if you do?

We monitor new jobs and job transfers, but we don't specifically track job losses. Currently, new jobs and job transfers account for about 15.7% in our portfolio, which is slightly lower than in recent months. We don't keep records on how many individuals lost their jobs; our focus is solely on job statistics in general.

Okay. Got it. It was worth a shot. And then, I guess, on the other side, on the move-in data, has there been data that suggests that tech workers coming back or indeed what's driving a lot of this demand?

Not just tech workers; certainly, tech workers and the return-to-office people. But more broadly, we've mentioned in the script that there are a lot of hospitality, leisure jobs, and all the service jobs that are coming back as we fundamentally rebuilt when California shut everything down and many of them left the state. So, it's really both components. Again, our portfolio is not comprised mostly of tech workers. It is intended to be a broad overview of the broader economy. So, we don't target tech workers per se.

Angela, you highlighted the strength in the loss-to-lease being above that 10% mark and that market rents are still growing at this point. But the portfolio has seen new lease rates decelerate much more quickly than some of your peers. I certainly understand the difficult comps piece and some of the cross currents in the economy that are kind of blurring the next couple of months, perhaps. But I'm really trying to understand with that backdrop of strong job growth, growing market rents still through July, and the healthy loss to lease in place, why do we get to 7% new lease rate growth versus the 14% I think you achieved in July for the back half of the year. Can you just put some additional detail in there, please?

Yes, I'm glad to. We aim to establish a baseline and generally avoid forecasting recessions or excessive growth. I would like to highlight the context from the second half of last year. Our blended lease rates increased by 13.25%, with new lease rates significantly higher. This reflects a more challenging year-over-year comparison. Regarding your point about potential better performance due to strong fundamentals, that's certainly a possibility.

Certainly, we have good visibility on the renewal side, which is expected to be in the high-single-digit range. However, we are uncertain about the new lease rate due to the current turmoil in the financial markets. As mentioned earlier, we are currently following a typical seasonal pattern, but the weaker part of the year usually starts in July and continues through to the end of the year. We are unsure about when we will reach the turning point or what it will look like, making it challenging to predict the remainder of the year since we don't know where the peak in rents will be this year.

Sure. I was more interested in whether 75% of the leases have been signed or committed to at this point, or if it's 85%, whatever that number is. Anyway, Mike, regarding capital allocation, the headlines haven't been favorable for you given your footprint. However, you have executed three guidance increases throughout the year. You've also stepped in to buy back stock, as you have traditionally done when trading at a significant discount to NAV. But if the market isn't recognizing the value you see in your portfolio compared to the private market, aside from selling assets to buy back more shares, are there any other strategies you and the Board are considering to bridge that value gap?

Well, I don't think so. I mean broader strategic issues are not things that you would implement quickly; they are thoughtful processes and just try to work through things. I think this is more tactical. We don't know what's going to happen in the broader economy going forward, and that point was very well made by the investors at NAREIT certainly recently. Given that backdrop, we're going to continue to lean toward a relatively conservative approach to capital allocation, and that's one that Barb was outlining before and Adam too. Maybe what I'd add to what Adam said is focusing on the preferred equity book will be something that we're focused on the remainder of the year. In terms of broader choices, when you look at where the stock price is trading and we do our fundamental research on the value of the company on a per-share basis. When you look at those numbers, it's not a time that we would be aggressively growing the Company, let's say, just because the pieces are not as compelling as they have been certainly at different points in time. Therefore, I think it's the time to execute; take what the market gives us and make thoughtful decisions, and that's what we've done. That's what we're going to continue to do.

I think just a quick one for me. I think you gave some good color on kind of where you see cap rates kind of in the high 3% or low 4% range. Wondering, I guess, how much wider that or how much has that kind of changed from maybe the all-time tights that you saw, be it 3 or 6 months ago? And then, you also kind of mentioned about price discovery, right? Wondering what is that gap now, I guess, that bid-ask spread that's causing kind of price discovery rate, causing limited transactions at this point?

Yes. Hi Adam, this is Adam. To cover the back half of the question first. Transaction volume has been fairly consistent. Over the recent month to six weeks, we've seen things slow down a little bit. Deals have dropped out of the market, and we have seen that bid-ask spread. Depending on the market and vintage, there's probably a 25 to 50 basis-point bid-ask spread between what sellers are looking for and buyers are willing to pay. That's not to say that deals aren't happening because there are still transactions occurring in the market. Can you restate the first part of the question?

Can you clarify how much wider the cap rate range of high-3% to low-4% is compared to the all-time lows observed around 3 to 6 months ago?

Yes. We don't know where cap rates are going. Based on what we're seeing today, in the kind of high-3s to low-4s. I would say that's roughly 50 basis points higher than what we talked about a few quarters ago.

Yes. Thank you, operator. We would like to thank everyone for joining the call today. We feel good about our results, and we feel like we may have a little bit of wind at our back. That's obviously great to see. We look forward to seeing many of you in the near future. Thank you, and good day.