Essex Property Trust Inc (ESS) — Q2 2023 Earnings Call Transcript

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 forecasts a slight reduction in 2023 deliveries as a few delayed 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 three key factors present today. First and most importantly, the West Coast supply outlook is relatively muted, and a multi-year 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, the high cost of homeownership continues to favor renting. It is now over twice as 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 improve gradually each month since the trough earlier this year. Lastly, fully remote as a percent of total job postings have significantly declined to 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 similar valuation levels. Interest from a healthy group of buyers ranges from local syndicators to large institutional and foreign investors. As expected, leverage buyers remain largely on 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.

Thank you, Angela. I'll start with an overview of our second quarter results, discuss our updated full year guidance, and share insights on capital markets and our balance sheet. For the second quarter performance, I'm happy to report that we achieved core FFO per share of $3.77, which is $0.08 above the midpoint of our guidance range, with $0.06 of that attributed to better revenue growth and lower property taxes in Washington. Our strong year-to-date performance has allowed us to raise the full year midpoint for same-property revenue growth by about 40 basis points to 4.4%. This increase is due to improved occupancy and net effective rents, although we’re seeing higher delinquency in the second half of the year compared to our previous forecasts. For same-property operating expenses, we've adjusted our midpoint down by 100 basis points to 4% due to the decrease in Washington property taxes. Consequently, our full year same-property NOI growth forecast has risen to 4.5% at the midpoint, reflecting a 90 basis point increase from our initial guidance. Based on our strong second quarter results and updates to our same-property outlook, we are raising the full year midpoint of core FFO by $0.22 to $15 per share, indicating a year-over-year growth of 3.4%. Regarding capital markets activities, we have historically managed our capital needs and debt maturity profile proactively, taking advantage of favorable opportunities for early debt refinancing, which minimizes our near-term capital needs and enhances our financial flexibility. After the quarter ended, we secured a $298 million 10-year loan at a fixed rate of 5.08%, with proceeds allocated to repay unsecured bonds maturing in May 2024. In the meantime, these funds will be placed in short-term cash accounts, contributing an additional $0.03 per share to FFO until the bonds are paid off next year. Our capital markets team performed excellently by monitoring various sources of debt capital and securing a competitive rate in today’s volatile market. This refinancing addresses about 50% of our 2024 debt maturities on a pro rata basis. Lastly, our balance sheet remains robust, with leverage declining and our net debt-to-EBITDA ratio now at 5.6x. We have minimal financing needs over the next 18 months and over $1.6 billion in liquidity, keeping the company in a solid financial position. I will 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 rates during the 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 two key factors. First is the year-over-year comparison. 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 it 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 three 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.

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 line with our projections. We were ahead in the first six 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, we expect it to be below 2%. We left our midpoint unchanged at 2% for the full year. But we are making progress; however, it's slow, and it depends on the courts and resident behavior. So it's a little bit out of our control.

Understood. To clarify, when I review the May data on new leases, it's clear that concessions were impacting those numbers. What factors contributed to that, and what has changed to give you more confidence in 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 a more focused rent growth strategy. 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 we saw earlier in the year and the layoffs were concerning. So we took a proactive approach, and as the layoffs subsided, we started seeing strengthening. In addition to that, as it relates to the eviction, they have been coming back at a pretty steady pace, which is manageable. 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 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.

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 favorably, but being an inherently lumpy number, it's difficult to predict month-to-month. But by the end of the year, it 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 renewals. For new leases year-to-date, we've achieved 1.1%. But keep in mind, that reflects our focus on maintaining a high occupancy earlier in the year. We gave approximately over half a week in concessions to maintain that higher occupancy. 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. In order to make it apples-to-apples, we have to adjust our first half. So essentially, half a week is 1% of rent growth. Add that to our 1.1%, and you get to 2.1%, which leads us to expectation of 2.8% for new lease growth in the back half of the year. Based on the strength that we're seeing in the markets right now and the easier comps that we will be facing in Q3, particularly in Q4, that is an achievable number. 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. Renewals trail new leases by approximately 60 to 90 days. So wherever new leases go, renewals end up following, but we've been able to achieve some solid rent growth. Therefore, we expect renewals to be around 4% for the back half of the year.

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 that we have completed the majority of our leases, with a few still pending. We have a good understanding of how leases will trend this year and the associated top line number. If we see significant rent growth from now on, it will mainly impact 2024 rather than 2023 due to the limited time left in this year and the fewer leases remaining to sign in the third and fourth quarters. The most critical factor influencing our guidance at this moment, regarding same-store performance, is delinquency, which can fluctuate significantly. That's the main variable we're facing right now, while the other aspects of same-store revenue seem to be well established.

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?

We anticipate that trade-out will vary by market but expect it to pick up from here. It should be higher in the fourth quarter due to the comparisons, as you mentioned. In terms of seasonality, we believe this will be a typical year, possibly with an extended peak. We are keeping track of our rents. Usually, we see peaks in Northern California and Seattle around now or mid-July, while Southern California tends to be a bit later. However, as of this week, we are still noticing rent increases in San Jose and Southern California, while some other markets are stabilizing. Overall, it's fairly normal, but we are experiencing strong leasing activity and anticipate a standard seasonal slowdown.

Your comments, along with EQR's earlier remarks, mentioned an improving return-to-office scenario, particularly in the Bay Area. Can you elaborate on what you're observing? Additionally, how do you view the implications for suburban versus urban assets as more people are drawn to the cities? I believe the comment was that urban areas are becoming more desirable as people seek to be nearer to their workplaces.

Jamie, it's Angela 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. The underlying strength is a couple of factors, right? Lower supply in the suburban areas make the cities tougher; quality of life issues, more homelessness, and some of these other factors. And of course, the proximity to employers is much more favorable from that perspective. From that perspective, Essex, our view is that the suburban areas still remain more compelling than the urban. That is consistent with our prime positioning, even pre-COVID. As far as the return to office, we saw that in Seattle with Amazon early May. Although I do want to say that, that was somewhat muted compared to normal just because of the layoff announcements. So it was really people digesting and getting rehired. 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 three-day working from the office now until September after Labor Day, as well. 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 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. Some of the expenses that we've seen in the first quarter and some of our high repair and maintenance and administrative 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 one line item 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 operating expenses. While the headline number is large, it's a small component of our operating expenses. 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, do 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. I will have more clarity on the next call regarding that market. Based on what we're hearing, we think it's still a very challenging market.

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, that's a good question. We have not observed significant international hiring yet. However, we have seen a net migration trend for California overall. The net outflow remains negative, but it has improved. During COVID, there was a substantial outflow, and now the net migration outflow is fairly consistent with what we saw before COVID. We believe that an influx of international talent would provide a positive boost. Looking at our own portfolio more closely, we experienced a spike in move-ins last year between the first and third quarters due to California reopening, and that acceleration was very encouraging. Move-ins have remained positive and stable, which is another positive indicator.

Okay. Second question is on capital markets. You guys did a secured loan that wasn't for a joint venture. 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 about 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 is 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 markets. While we locked in our 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. The pricing differential was so great that we decided to move forward with the secured side of the equation. 95% of our NOI is unencumbered. So we have lots of room within our covenants to secure a few assets. There’s no change in our overall balance sheet philosophy. It was just really the pricing differential that made us move the way we did.

Just wanted to ask about the repair and maintenance 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 right. There were impacts from the cleanup costs associated with storm and flood damage in the second quarter. We experienced significant costs in the first quarter, and some of those continued into the second quarter. Additionally, there were higher turnover costs as we are receiving back units. This, along with general inflation pressures in the repair and maintenance sector, contributed to the increase. I don't have the exact figures for flood-related costs to pull out for you, but it's really those three factors that caused the rise. However, I anticipate that number will decrease in the latter half of the year. We don't expect the same level of storms or floods going forward, and we're currently not in a rainy season, which should alleviate impacts on our third and fourth quarter results. Furthermore, turnover costs related to evictions should also decline as we will have easier comparisons to last year's figures for the third and fourth quarters. Therefore, the 14% we saw in the third quarter should significantly moderate in the latter half of the year.

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.

Jessica mentioned that they made the shift around mid-May. Currently, their loss-to-lease stands at 1.7%. However, they are still experiencing rent growth in certain markets, so they anticipate that this figure may increase slightly.

Is the current loss-to-lease of 1.7% about average for this time of year, or is it slightly lower than usual due to the initial occupancy strategy?

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

Daniel on for Nick. I can ask the question. So July new lease rates accelerated nicely from Q2. 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 observed that Seattle significantly contributed to the sequential improvement, followed by Northern California. Southern California has been performing quite consistently. In Northern California, San Jose has shown particularly strong performance, accounting for over 40% of our portfolio in the Bay Area. We are experiencing solid occupancy and leasing demand, which is encouraging, especially with the recent return-to-office announcements from companies like Amazon in Seattle and Google in the Bay Area. We anticipate that Meta's announcement in September will likely have a similar effect, and we are already seeing some demand developing. Additionally, as I mentioned earlier, corporate housing activity is lower than last year, but there is still some activity this year, which is a positive sign. The major tech companies wouldn’t be investing in interns and contract work if they were planning to cut back, and we have seen an increase in hiring as well. San Jose is performing well, and I previously discussed the impact of Seattle's CBD and Amazon's return to office. We continue to see strong demand. However, it is our most seasonal market, and we typically notice the most significant rent reductions in the latter half of the year in that area. I expect it to align with our usual seasonal trends and expectations, along with some supply challenges in Seattle, some of which may be deferred to the first half of 2024. Overall, the situation is slightly better than we initially anticipated, but we still have supply concerns on our radar.

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 health services and education and, of course, the leisure and hospitality as well. With San Diego rebounding, it's been good to see those activities coming back in a more robust way.

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?

Property taxes in Washington declined 1% year-over-year, while assessed values increased by 15%. When we were budgeting, we recognized that assessed values were significantly up, but millage rates decreased. This led to the favorable reduction in taxes compared to the previous year. It wasn't a result of an appeal.

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. There's a lag effect in terms of when they do the bills. Our '24 bills will be based off of January 1, 2023 assessed 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. That's always a wildcard factor. Historically, we've not had a reduction in Seattle taxes two years in a row. So we'll have to just monitor and see next year. I don't know if negative 1% is a good way. I wouldn't use that. We 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. 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 going?

It's definitely a little early to make predictions. While we've observed a typical seasonal pattern, it will be interesting to see how the latter part of the peak leasing season unfolds. I mentioned that our current loss-to-lease is 1.7%. In several of our markets, we are still seeing week-over-week rent growth that may continue to increase. The return to office by Meta and the overall demand in the Bay Area might influence our typical experience in August or September. So, in summary, it's still a bit early. We will evaluate this further in September as we usually do.

Just a little context. I think last year, around this time, we were experiencing a 7% loss-to-lease. However, we were observing a seasonal trend that reflects pre-COVID levels. The issue was that the previous year, we didn't reach our peak until November. The recovery from COVID has made things a bit unpredictable. Generally, September is a reliable data point, but due to the unique circumstances of the last couple of years, I wouldn't want anyone to consider a June number as a definitive benchmark.

So first question is on transactions. As we've heard, we've seen things 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. Yes, we are underwriting every deal in the market. Although the volume in Q2 dropped significantly, I anticipate an increase in Q3 due to the current activity levels in the market. We are currently underwriting many deals. There isn't much of a bid-ask spread. I believe that most of the deals available today will close, as I expect both sides to come to an agreement. Echoing what Angela mentioned earlier, these deals are likely to fall within the mid-4s to low 5s range, depending on factors like product type, location, and specific circumstances such as assumable debt or tax abatements. Regarding our timing to re-enter the market, it heavily relies on our cost of capital. Given our current trading conditions, it’s difficult to engage in beneficial deals within the mid-4s to low 5s. We will keep an eye on the market and take action when it is appropriate.

Got you. That's helpful. A follow-up on the conversation around concessions. Can you provide a more detailed breakdown, perhaps by region, of 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: Southern California is a little less than half a week; Northern California, one week; and Seattle is a little bit over half a week. So that gets us to 0.7 weeks overall. Keep in mind that much of that was concentrated in April, some of it spilling over into May. By the time we got to the end of the quarter, we pretty much had no concessions across the portfolio, with the exception of a very small portion of our portfolio exposed to lease that's about 10 to 15 properties or so. As far as loss-to-lease by market, Southern California is at 2.5%; Northern California, 0.7%; and Seattle, 1.9%, which makes up the total of 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. We assume 2% for the full year. We're at 2.1% through the first six 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.

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?

At this point, our guidance is not to acquire anything in the second half of the year. We have been reviewing all opportunities. If any deals align strategically with our existing portfolio through economies of scale or other methods, we will prioritize those. However, considering our cost of capital, we do not anticipate significant activity in acquisitions.

In a scenario with minimal acquisition and no planned developments, how do stock buybacks compare in your midterm capital allocation priorities?

Yes. 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 stock buybacks. We would need a source of capital to continue to buy back the stock, which would imply that we would dispose of something. It will all depend on where we can find opportunities to add value to the bottom line. At the end of the day, that's our goal on the external front: how can we grow accretively? To Adam's point, it's hard to do it via acquisitions today. That doesn't mean 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 goes 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?

It's a great question. It's difficult to know. Obviously, we'll get some of that. But none of that is included in our guidance for delinquency this year. We are making progress in collecting. The issue is that until the courts catch up, delinquency continues to accrue because tenants are staying in our properties much longer than they did in the past. Before COVID, if someone went delinquent, they would be out within 2 to 3 months. Now, they remain delinquent for 9 to 12 months. This adds to the cumulative delinquency problem. In terms of what we are going to collect, I can't provide 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.

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.

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 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. 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 having a material impact on our portfolio; it 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. The bulk of our portfolio is suburban, and we are seeing strength in our suburban market versus some of the urban properties. That difference is attributed to supply; when we look at where we have concentrations of supply, it is in these urban locations. Seattle CBD, Downtown L.A., West L.A., Downtown San Diego; that’s where we would see rent lag. So urban versus suburban is where we're seeing the difference.

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 overall, and it offers a great quality of life. As Angela mentioned earlier, there are some underlying employment industries that have strength there. We expect San Diego to continue to perform well. Other markets that I have my eye on that are showing signs of strength include a rebound in the Bay Area with San Jose. To reiterate, that's been a strong market for us. When you couple that with the recovery we still anticipate, along with a continued return to office and where we're at relative to pre-COVID rent levels, there's definitely upside there. Seattle is also on the radar for similar reasons, but, of course, we're going to be facing some supply headwinds over the next year.