Essex Property Trust Inc (ESS) — Q2 2025 Earnings Call Transcript

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, 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. The 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 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 over 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 the 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 the potential factors for the 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 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 continue to decline in 2026 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, a 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.

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 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. 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 that the supply is heavier in the first half, which, of course, we knew that was going to be an impact. The delinquency recovery is taking time. 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, the first half is moving along; it's just not improving at such a great rate. The last factor is really it's a soft demand environment. And what we're seeing in the soft demand environment is actually not just Los Angeles; it's Southern California as a whole. 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 doesn't have any cracks, but it's been soft. For those reasons, Southern California as a whole, which is 40% of our portfolio, has been more of a drag, and we expect that in the second half, the one benefit is that the supply is declining. Supply in the first half is actually 68% of total supply in Southern California. So that is one benefit. We have certainly seen offsets from our Northern regions that have 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 some numbers on how the blended rate growth trended there and market was outperforming. Maybe you could just 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's sort of moderating 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 the increase in guidance that you gave?

Nick, yes, that's a great question. We are seeing strength in Northern California. What I think has been a little confusing are really 2 factors. One is that we had expected a solid performance from Northern California, and we are seeing job postings gradually increase, which, of course, it does lag from that perspective. The seasonal curve in Northern California is performing 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. 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 comparison 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 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 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 have a higher premium. Our blend, if we use all leases, it would be 4% versus 3%. And once again, that's what hits our financials. 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 assumption that we have achieved our seasonal peak, which is normal. July is a normal time for us to take. Therefore, the rest of the year, this is normal seasonality; it's going to decelerate. It would be unusual for the blend to be higher in any normal environment. The one caveat is that if we see greater strength in the macro economy, if hirings pick up in a meaningful way, for example, then we could see a situation where the seasonal peak actually gets prolonged, which is not what we're currently observing. We have all experienced a lot of noise with public policy and the lack of clarity there. Companies have been more reticent in hiring and investing, which, of course, impacts overall growth. That's really what we're experiencing here. But Northern California is doing just fine.

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. I know that you guys and others articulated that, hey, single-family people are different from apartment people, which clearly is the case. But also the COVID unit replacement taking this long. We're 5 years past. Are there other dynamics at work, like is this more just the Hollywood spillover, the strikes or fallout 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 California or Seattle, but still would have expected that 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. 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 it would run a little tighter, which is where we had forecasted. What we are experiencing is overall macroeconomic softness, which of course has an impact on L.A. And keep in mind, yes, we're 5 years since COVID. That's 2020, but L.A. was shut down for 3 years; the eviction moratorium lasted 3 years. We're only in the second half, the back half of the second year of this recovery. It's a huge economy is going to take more time. We have not redlined L.A. because there is a lot going for L.A. It is the largest economy in terms of by county with over $1 trillion of GDP and with the infrastructure investment earmarked for L.A. for the World Cup and the Olympics, the latest estimate is over $80 billion. We do see that the market has been stable. It's remained that low 95% occupancy; it hasn't picked up as much as we would like. Having said that, we do see a positive environment moving forward.

Okay. The second question is about your mezzanine platform; you have a strong history of generating substantial profits. I understand you don’t factor those gains into Core FFO, but you have created significant value over time. It seems like you might not be completely exiting, but rather significantly reducing your involvement. So I have two parts: first, what prompted the decision to reduce involvement despite your successful history? And second, Barb, could you explain the fourth-quarter FFO impact, as it appears to be below consensus. I'm trying to grasp how much of that shortfall is due to the debt preferred FFO going away compared to other factors. To summarize, why the significant reduction and the impact on FFO 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 scale that we got this book to. 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. We think it's more appropriate to have it at a much smaller size. Investing the money into stabilized multifamily assets leads to better quality of cash flow and cash flow growth and NAV growth. This will be a portion of our company, but it's going to be smaller in that 3% of our FFO going forward. In terms of our impact on the fourth quarter, it's about $0.06 because the maturities are kind of evenly balanced between the third and the fourth quarter, and they are pretty median. 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 5%, which is where we're investing for new stabilized assets.

And just to be clear, yes?

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

I'll pass that on.

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 have remained elevated relative to the rest of the portfolio for L.A. If I compare just Q2 this year to Q2 last year, it's slightly higher. And going forward, we are not talking much dramatically higher; we're talking about somewhere a little over a week, and it has remained more elevated 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. 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 in need of temporary bridge financing. Overall, we don't expect to utilize it in a different way than how we've utilized our line historically.

I want to return back to the guidance for blended rent growth in the back half. It looks like you only lowered it a little bit from around, call it, 3% to 2.7%. Your second quarter was in line with your guidance. 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 with the normal seasonal curve. It's just the normal seasonality of our business. For example, if I look at our new lease rates for the fourth quarter for the estimate, actual last year, new lease rates declined down to 190 basis points. We've mentioned in the past that our loss to lease by year-end actually becomes a gain to lease, once again, not unusual. This year, the peak is obviously not as strong as last year; it's still on plan, which means we are expecting a more modest deceleration. 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 you're 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 that has a bigger impact in the fourth quarter because L.A.s seasonality is a little different than maybe the broader Northern California and PNW markets. So that's the other factor influencing the fourth quarter that changed.

Could you provide some details on the strategy moving forward with the new joint venture focused on structured finance investments? It seems like your preference at this stage of the cycle is to acquire on the balance sheet, but I'm curious about what you are observing regarding cap rates.

Good question. Again, this goes back to Barb's comment earlier. We're strategically trying to target an FFO contribution from preferred and mezzanine that's sub-4% of FFO. 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 mezzanine, 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.

Thank you, Rylan. Angela, I appreciate your detailed insights on the like-for-like blended rent spreads. It seems that in the initial guidance, there was an expectation that the blended rent growth in the first half would be lower than in the second half. I'm trying to understand if you're observing a year-over-year change, why the blends would need to decelerate in the second half now.

In the first half, we exceeded our expectations, with Northern California showing strong performance. We're anticipating the second half will follow the same strategy as last quarter's earnings call, assuming the second quarter will meet our plans. Currently, we expect the second half to align with our original expectations. While there may be anticipation for a higher growth rate, it is unlikely because the strength in the first half was largely driven by the first quarter.

Angela, I appreciate all the detail on 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 seasonally related and typically reverses in the back half of the year? 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. It's a big variation. The blend, which resulted in the blend of 100 basis points greater. Of course, as you mentioned, it will decelerate more. We are assuming that the full year blend on all lease basis lands close to 3%. On 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 here. 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. If we outperformed in the first half of the year, there is a carryforward effect that offsets the lower blend in the fourth quarter. We're still in line with our full-year forecast on that aspect of our budget.

That's helpful. I think on last quarter's call, you had talked about achieving renewals around the high 3% range for April. I take it it went out a little bit higher than that. 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. What I can tell you is 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. If you look at the components, essentially, Southern California remains soft, and it was offset mostly from the Northern regions. As far as August and September, we're sending renewals out slightly higher in Q2, which is a good trend. So the mid-4s. The question here is how much will we need to negotiate? 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.

Great. Rylan, I have a question for you. Some comments made earlier in the call mentioned cap rates compressing, and you seem positive about purchasing before the shift. It seems you have been acquiring properties in the mid to high 4s. Can you update us on the current cap rates? Are they below 4 or in the low 4s? What is your outlook for them moving forward?

Jamie, yes. We have been buying market rate for the past year. We've been involved in nearly $1 billion in Northern California. We've been the largest buyer along the Peninsula over the past year. Market cap rates on average are slightly above 4.5%. 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. As Northern California and San Francisco have outperformed the nation, you've seen incremental buyers step in. A lot of the deals that were recently listed in recent months have guided and 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 on an equivalent basis of around 4%. There are instances of deals transacting in some cases below 4 cap, but I would say the average now in Northern California for a marketed deal is probably in that 4.25 for a well-located institutional product. We've been able to do better over the past year. As you would expect, as prices change, our return expectations change, and our capital allocation preferences will evolve in light of this environment. 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. Given your success there buying ahead of the curve, L.A. is clearly struggling hard to know when it gets better. Any thoughts — I know you've sold there and redeployed into Northern California — but any thoughts on going the other way, getting very early in the cycle and probably finding better opportunities in Los Angeles? Or still feel investable about reallocating into Northern California and keeping your ships there?

Yes, Jamie, as you would expect, as I mentioned, as these prices change, our preferences change. 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 and they are higher, again, unlimited transaction activity, but we are tracking it closely. For the right opportunity, we would definitely consider going in.

Great. Just wanted to ask about 2Q blended rate growth. I think it was exactly in line with what you had guided to a quarter ago. What were the puts and takes there? Was it renewals or better, new leases, or worse, vice versa? In terms of specific markets, I would imagine L.A. probably came in worse than you thought, but maybe just breaking this down 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 are the results in the other markets?

Yes. No, that's a good question. L.A. certainly underperformed. The blended came in below 1.5%, so close to 1.3%. We had expected that Southern California as a whole, and of course, with L.A., would be a little bit north of that 2%. That's probably the biggest factor in the second quarter. Of course, renewal came in a lot stronger. But keep in mind, our strategy is not to focus just on one specific metric. I caution against 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. 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 2%. In the current environment, where we're talking about moderate growth in the overall economy, especially for Southern California, it's more beneficial to reduce turnover friction and maintain stable occupancy. You'll see us toggle between renewals and new leases while being mindful of occupancy to maximize rents. That's why we try to point people back to look at the blend, occupancy, and our total revenues because that's the big ball that we focus on.

That's really helpful. As a follow-up, capital allocation priorities, we've talked about acquisitions here a bit. We've talked about the mezz book business. How would you stack rank your capital allocation priorities today? I know development rate is back as well. You started a 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 our top priority. We are underwriting a lot of development land sites, but the economics continue to remain challenging. You need to find the few opportunities. In the structured finance book, there's been a lot of capital raised to invest in that preferred mezzanine space over the past several years. It's important that we remain disciplined in light of that capital. 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. As importantly, we have a great development partner on this project as well that's going to stand behind the project. You 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.

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?

In the third quarter, our guidance for blended is slightly lower than the second quarter, but not significantly so. We expect the blended figure in the fourth quarter to be around 2%, down from 3% currently. This represents the deceleration we anticipate for the fourth quarter. What was your second question?

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

It's too early to discuss earn-in because we haven't seen the rate of deceleration yet. It might turn out to be more moderate, which would lead to a better earn-in, or it could be more severe. We can’t predict this accurately at the moment given the current economic uncertainty. There’s a possibility it could remain flat, and we anticipate a lower supply delivery. Northern California continues to perform well, so the range of potential outcomes is still broad enough that making predictions at this time would not be beneficial.

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

Yes, that's a complicated topic. In terms of actual demand, we're not noticing a direct effect from immigration policy. The softness in demand is largely influenced by the overall economy. Do we have tariffs currently? No, we don't. It seems to be a confusing situation, especially for businesses trying to decide on growth or hiring. It's a broader economic issue. Regarding the expectations tied to immigration and other policies, those likely affect the labor side and will depend on how severe and lasting those policies are. So far, we haven't observed a significant impact overall. If the situation intensifies leading to a labor shortage, that could pose a challenge for the entire U.S., rather than being a localized issue in L.A.

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. 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 walk you through the size of the book, and that might help you get there. Currently, by the end of the second quarter, our total book value in the structured finance investments is $550 million. This includes the mezz investments that we have. Assuming we don't do any new investments that haven't already been disclosed, the book is expected to be around $400 million by the end of the year. As we look to 2026, given the maturities that we have, we expect the book to be $200 million to $250 million by the end of the year. The redemptions are front-end loaded in the first 2 quarters. From a modeling perspective, you'd want to take the book down and then take the coupon from a 10% we earn on investments down to 5%. 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 understand the groundwork.

No, that is very helpful. Appreciate that, Barb. Just one more. I guess I was curious on your thoughts; last month, the California State Assembly passed and the governor signed a bill aiming to catalyze new housing through exemptions to CEQA. 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, etc.

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

Yes, Haendel. In the near term, we expect this to have limited impact. I'd remind you that over 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, which has really had limited impact so far. I acknowledge that CEQA reform is significant given its history and has been used in the past to delay and sometimes prevent projects from occurring. We've underwritten about 100 development deals over the past year; 80% had entitlements. There was no CEQA risk to begin with, and the majority of those, the economics just don't make sense. I'd call it an untrended return on cost, sub-5% on most of those projects, so we feel the economics will continue to be a limiting factor as it relates to supply in California. This has limited near-term impact.

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

So we have seen steady demand in Northern California and Seattle. We've not seen any softness as it relates to traffic or otherwise. Especially in Northern California, we are still sitting in one of the best affordability positions that we have been in 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. 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. We are seeing the demand pressures shift in the second half to our favor. In the first half, the supply delivery was about 60% of total supply, and the second half is 40%. There are certainly no cracks. The underlying strength continues to remain solid in our northern regions.

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 typically lasts depending on the magnitude around 6 to 9 months on average. With the supply abating, that lease pressure is actually going to improve. You'll see concessions start to improve and end up somewhere closer to half a week versus closer to a week range over time. That's one good metric to look at. The other influencing factor with L.A. is with other economies; you can see what are the puts and takes. For example, Northern California has that technology and artificial intelligence benefit that's been quite steady. In Southern California, particularly L.A., there's been a huge amount of infrastructure spending announced, which is specific to L.A. That $80 billion will serve as a meaningful injection into that economy and drive demand, driving people to that market to build and do business.

Obviously covered a lot of ground today, but just 1 question on bad debt. It looks like on balance, you're 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. Does that imply that we're better than expected elsewhere in the portfolio from a bad debt perspective? 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. Overall, our guidance assumes we're at this level for the rest of the year. Could we do better? Yes, I will just be at the higher end of our guidance.

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

Actually, it's based on data. 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%; today, it's only about half of that, about 30%. The BLS data is just not a good indication of what's really going on. A perfect example is that the BOS shows that Northern California region produced the worst job year-to-date, 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 are other indicators you look at outside of rent growth that suggests that the job growth is really gaining momentum in the Bay Area.

Yes. A good indicator we use, which is a third-party vendor, is we track the job openings of the top 20 technology companies. We have seen, once again, not acceleration, but just a gradual, steady increase. We are now nearing pre-COVID levels, which is a good sign. As these companies backfill the job openings, the open positions remain high, and 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. Last one for me, Rylan. Can you give us a sense of 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, about borrowing at 13.5% interest on the loan.

Yes. John, I would say, typically, our underwriting standards were starting around the 60% loan-to-cost and willing to go up to 85%, assuming a full accrual stack. We will not go above that 85% position on our underwriting numbers too, right? We take the developers underwriting and recast the land value to what we think is an appropriate value for this market. We have a fairly conservative approach to sourcing development projects.

So the total loan to cost in this project will be in the 80% range?

Yes, that's in the ballpark.

Just we saw the spread between renewals and the move-ins widen again this quarter. 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? Do you expect the spread to tighten moving forward?

Yes. Normally, Alex, you would see a wide range between renewal and new lease rates in an environment if market rents continue to accelerate. If that happens next year, then the test spread is likely to remain wide. If market rents perform closer to the long-term CAGR between 3% to 4%, then those 2 metrics will likely converge. With the caveat, L.A. will be different because we have other influences impacting L.A.