Q2 2023 Essex Property Trust Inc Earnings Call
Good day and welcome to the Essex Property Trust second quarter 2020 earnings Conference call.
As a reminder, today's conference is being recorded statements made on this conference call regarding expected operating results and other future events are forward looking statements that involve risks and uncertainties forward looking statements are made based on current expectations assumptions and beliefs as well as information available to the company at this time.
Number of factors could cause actual results to differ materially from those anticipated further information about these risks can be found on the company's filings with the SEC.
It is now my pleasure to introduce your host Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you MS climate you may begin.
Yeah.
Good morning, Thank you for joining Essex second quarter earnings call. We're packing Jessica Anderson, who will follow me with prepared remarks, and Adam Berry is here for Q&A.
We delivered a solid second quarter with core <unk> 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 revenue NOI and core <unk> per share growth.
Why will discuss this further in a moment.
Our performance today demonstrates the underlying strength of the West Coast got the economy, along with continued refinements 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 S 17 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 two 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 one 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 three month average through June <unk>.
Ali the layoff announcements from the largest technology companies have proven less consequential than headlines suggested with only a fraction occurring within our markets and the vast majority of those affected quickly finding new employment.
Turning to the supply outlook.
Our research forecast a slight reduction in 2023 deliveries.
A few delayed projects get pushed into 2024.
Well, we have been pleased with the steady job growth achieved in the West Coast. You started the year, we remain cognizant of the potential for more interest rate increases given to first focus on inflation reduction.
That's 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 is 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 in a multi year lead time is required to develop new housing in our markets.
With permitting activity is declining we expect to benefit from moderate supply level for years to come.
Second is rental affordability.
2020 average personal income in the Essex market has grown over 20% compared to cumulative rent growth of 10%, resulting in attractive rental affordability.
Are there more high cost of homeownership continues to favor renting it is now over two times more expensive to own compared to rents in the Essex markets.
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 are largely concentrated in northern California, we.
We've seen open positions over the top 10 tech companies improve gradually each month since the trial earlier this year.
Lastly, fully remote as a percent of total job postings have significantly declined at below 10% in June .
For these reasons, we expect the west coast to continue gaining momentum for the remainder of 2023 and outperform over the next several years.
Lastly, turning to the investment markets transaction activities in the West Coast have remained muted similar to the first quarter volume in the second quarter. It was about 55% lower than the same period prior year with cap rates in the mid four to low 5% range for institutional quality properties we.
We are starting to see more deals actively marketed in a similar valuation levels interests from a healthy group of buyers range from local center caters 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.
Yeah.
Thanks, Angela I'll begin with a brief overview of our second quarter results discuss increases to our full year guidance and provide an update on capital markets and the balance sheet.
Beginning with our second quarter performance I'm pleased to report we achieved core <unk> per share of $3.77. This result exceeded the mid point of our guidance range by eight cents per share of which six cents is attributable to better revenue growth and lower property taxes in Washington.
Our favorable year to date results have enabled us to increase the full year midpoint of our same property revenue growth by approximately 40 basis points to four 4%.
The increase is due to higher occupancy and net effective rents achieved year to date, partially offset by higher delinquency in the second half of the year as compared to our original forecast.
As it relates to same property operating expenses, we have reduced our midpoint by 100 basis points to 4% as a result of a reduction in Washington property taxes.
Due to these revisions are full year same property NOI growth has increased to four 5% at the midpoint, representing a 90 basis points of improvement to our guidance.
Our initial guidance.
As a result of our strong second quarter and revisions to our same property outlook, we're raising the full year mid point of core <unk> by 22 cents to $15 per share, which represents three 4% year over year growth.
Turning to capital markets activities.
We have historically been proactive in managing our capital needs and debt maturity profile, taking advantage of attractive opportunities in the market to refinance our debt early minimizing our near term capital needs and maximizing our financial flexibility.
Subsequent to quarter end, we closed the $298 million 10 year secured loan at a fixed rate of 5.08%.
Proceeds will be used to repay unsecured bonds maturing in may 2024.
In the interim the proceeds will be invested in short term cash accounts, resulting in a positive impact of approximately three cents per share until the unsecured bonds are repaid next year.
Our capital markets team did a terrific job monitoring the variety of debt capital sources available and locking in a favorable rate in today's volatile environment.
With this refinancing the company has addressed approximately 50% of the 'twenty 'twenty four debt maturity at pro rata share.
Finally, our balance sheet metrics remained strong leverage continues to decline and our net debt to EBITDA ratio continues to trend lower and stands at five six times today, we have minimal near term financing needs over the next 18 months and over $1 6 billion in liquidity as such the company remains in a strong.
Position I'll now I'll turn the call over to Jessica Anderson. Thanks.
Thanks, Bob I'll begin my comments today by providing color on our recent operating results and strategy followed by regional commentary.
We're pleased with our operating results from the second quarter, including our same property revenue increase of 4% year over year for the first several months of the year. We maintained an occupancy focused leasing strategy to mitigate expected headwinds from eviction related move outs.
This approach helped us exceed revenue expectations in the first half of the year and left us well positioned to push rate during peak leasing season, which continues today, our new lease trade out accelerated through the second quarter from 0.5% in May to one 7% in June and finally to a preliminary too.
One 1% in July renewal trade outs is stable and averaged 3.4%, resulting in blended net effective rent growth of two 2% for the second quarter.
These results were achieved despite increased turnover driven by eviction related move outs.
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 Battle, London, 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 comp in the second quarter of 2022, Seattle generated a portfolio.
Leading net effective rent growth of over 16%.
Second Seattle remains our most seasonal market, thus is more sensitive to changes in the operating environment.
I recall during the back half of 2022, the Seattle market.
<unk> increased supply during a period of softening demand, which heavily impacted rents as we headed into 2023. However throughout the second quarter, we saw steady strengthening of demand, particularly likely in Seattle CBD that coincided with Amazon's mandatory may 1st returned to office three days a week.
Strong leasing activity drove a collective 680 basis points sequential increase in net effective rents from April to June and a solid 97% at quarter end occupancy.
Moving on to Northern California, blended net effective rent growth averaged one 5% for the second quarter Oakland continues to be impacted by supply posting a negative 0.4% for the quarter diluting the healthy two 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 company, albeit needed from last year, which helps support seasonal demand quarter end occupancy was also solid at 96, 7%.
Lastly, in southern California, blended net effective rent growth averaged four 1% for the quarter driven by continued strength in San Diego Ventura, and Orange County, Los Angeles is pulling the average down with a one 9% blended lease trade out for the border. However, because of eviction activity in this market rent growth.
Occupancy are expected to run lower relative to the rest of southern California for the remainder of the year quarter end occupancy.
I N C 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 our 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 maintained our flexible approach to maximize revenue and a variety of market conditions I will now turn the call back to the operator for questions.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
I'll start too if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.
One moment, please while we poll for questions.
Thank you. Our first question is from Eric Wolfe with Citi. Please proceed with your question.
Hey, thanks.
Mary you mentioned that you saw some earlier move outs of non paying.
Tenants, which was which.
Partly what was impacting your pricing in the use of concessions.
But based on your comments and just looking at the July data it seems like.
You can link with percentage of sustained about the same so I'm just trying to reconcile that and I tried to understand when we might actually see the.
Percentage come down.
Hi, Eric It's Barb I would say you know delinquency is generally tracking in line. We were ahead in the first six months relative to our plan primarily due to emergency rental assistance payment July is generally on plan and we do expect that number will continue to trend lower and buy.
The end of the year old people below 2%, we left our midpoint unchanged at 2% for the full year.
But we are making progress, but its slow its dependent upon the courts and just resident behavior. So it's a little bit out of our control.
Understood, but I guess just to be clear I mean.
If I look at the sort of may data around new leases youre using concessions that was what was depressing that number because what.
I guess, what drove that and then what changed to allow you to feel more comfortable to push rate.
This is Jessica Hi, Eric I'll take that.
With regards to our shift in strategy around mid May we are changed from an occupancy focused strategy to more focus on rent growth and to your point, what what got us more comfortable with that well a couple of thing one would be really the macro economic outlook.
The headlines that were seeing earlier in the year and the layoffs are in the headlines overall, we're concerning and so we took a proactive approach and the layoffs subsided and we started seeing strengthening and then in addition to that with regards to the eviction they've been coming back and it's a pretty steady pace.
Which is manageable and so based on the strength, we're seeing in the markets and the manageable pace at which we were getting evictions, we felt comfortable shifting to a rate group focus and what you're seeing in April and May that we had shared as far as our trade out numbers, though reflects our concern.
I shouldn't usage that was predominantly in April we averaged about a week free at that point. We did go through a glut 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 as of today concession usage is minimal.
Across all of our markets.
Okay alright, thank you.
Thank you. Our next question is from feedstock law with Evercore ISI. Please proceed with your question.
Yeah. Thanks, Good morning, 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.
Hi, Steve This is Barbara I'll take the first.
Part of that question and so in terms of delinquency Ah Yeah, it's roughly 2% for the full year. We're at 2.1 today year to date and so it's a little bit under that in the back half of the year like I said, we do expect it to continue to trend favorable but it is.
Inherent lumpy number and so it's difficult to predict but ended the year should be less than 2% for sure.
And then on the blended.
I see this is Jessica as far as blended does I'm going to break that out into new lease and renewal and so year to date for our new leases, we've achieved one 1%, but keep in mind that reflects our focus on maintaining our high occupancy earlier in the year end.
So we gave approximately it's over half a week and concessions you maintained that that higher occupancy and when we look at our 17 outlook. We provided it from 2% full year rent growth, two 2.5%, which reflects the broader expectations of the market and so in order to make it apples to apples we'd have to adjust our first.
Hi, and so essentially a half a week is 1% rent growth and so if you add that to our $1. One you get to the 2.1, which leaves us to two 8% for new lease growth expected for the back half of the year and based on the strength that we're seeing in the markets right now and then the easier comps that we'll be facing in Q3.
Particularly Q4.
That is an achievable number and then as far as renewals go renewals or re accelerating we've sent renewals out in August and September are around 4% you may have noticed in our results that our renewals have come down which essentially to two 8% preliminary.
For July and renewals trail, new leases by approximately 60 to 90 days, but wherever newly newly Cisco renewals and up the following but we've been able to achieve some solid rent growth and so therefore, the renewals reaccelerate and expect renewals to be around 4%.
For the back half of the year.
Great. Thanks very much.
Yeah.
Thank you. Our next question is from Austin worst Schmidt with Keybanc capital markets. Please proceed with your question.
Great. Thank you so given the strength that you highlighted year to date the benefit to same store revenue growth in the first half of the years as well as some of the new lease rate growth momentum you achieved in June and July I guess, what why leave your back half same store revenue growth guidance of 3% unchanged.
Yeah. This is barb I, often I would say you know I think we know you know we've we've.
We've done the vast majority of our leases we still have some to go. So we know where leases are going to trend. This year and that topline number you know if we can get substantially more rent growth from here its really going to benefit 2024 at this point versus 2023, given the amount of time, that's left in the year and the number of leased.
That we have left are fine.
It is lower than that.
Third in the fourth quarter and so I think that's the biggest factor the biggest factor for our guidance at this point in terms of same store, it's really delinquency and can swing up or down that's the biggest wildcard right. Now you can go to other the other components of the same store revenue are pretty dialed in.
Got it and then just because I think he 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 you know given the deceleration you saw last year. So can you give us a sense of that cadence and then.
From a back half perspective, you know what type of seasonality did you underwrite.
For for the back half.
Okay, so as far as where we see.
Great trade outgoing would expect slightly different by market, but expect that to accelerate from here it will be higher in Q4 and not simply based on the comps as you pointed out and then as far as seasonality goes we see this as being a typical year and we may have a pro.
Lungs peak.
Monitoring our rents and typically we peak in norcal and Seattle around right around about now or mid July and then Socal is often a little bit later, but as of this week, we're still seeing rents accelerate and San Jose, specifically and southern California, and some of our other mark.
Or leveling off at this point, so pretty normal, but we're seeing strong leasing on the ground.
Anticipate a typical seasonal slowdown.
Yeah. That's helpful. Thank you.
Thank you. Our next question is from Jamie Feldman with Wells Fargo. Please proceed with your question.
Great. Thank you.
Your comments and also your comment earlier, you talked about maybe improving return to office, especially in the Bay area you talk more about what Youre seeing.
Also you know how do you think about the implications for suburban versus urban.
Tied to happen there's more people are getting pulled into the city I think their comment was.
Hum.
The urban more urban people want to be closer to their workplaces.
Okay.
Hey, Jamie it's Angela here I think there are a couple of things are different between how our portfolio is.
Located.
Versus EUR, and 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 keeping in mind that in California. Most of the large tech companies are actually suburban based and so you know that that of <unk>.
Course.
For us.
It's always been a benefit even pre COVID-19 and.
The underlying strength is couple of factors right lower supply in the suburban gets the cities are tougher a quality of life more homeless in some of these other issues.
And of course, the proximity to employers are much more hum.
Yeah favorable from that perspective.
And so from that perspective.
Essex, our view is that the suburban still is more compelling than the urban and that is consistent to our thesis.
Thesis, even before Covid.
As far as the return to office.
We saw that in Seattle with Amazon.
Early may and although I do want to say that that was somewhat muted than normal just because of the layoff announcements and so it was really people digesting and getting rehired.
And so from the things we tried to office activity, what we would expect to see is that it would be more pronounced in September with net out in some of these other larger companies ethics, you know for US we're doing the same thing here.
Ann dating a three day office now until September after labor day, as well and so we do see that at that point.
<unk> well.
And tomorrow.
Best way.
Okay. Thank you and then as we think about your.
Expenses heading into that late in the fourth quarter or even into next year.
Just talk a little bit about where you think either the greatest moderation or maybe some acceleration in operating expense growth across the major line items.
Yeah. This is barb I would say you know in the back half of this year you know we have easier comps as it relates to eviction Cos and turnover because we had those expenses last year in the fourth quarter and so some of the expense.
Is that we've seen in the first quarter and some of our high R&M and admin expenses will moderate in the back half of the year just on a year over year growth basis, I would say in terms of other lines. This year I don't I don't see a significant change in any other major line. This year I think we've got expenses.
Dialed in.
For this year, we do know taxes and insurance as we looked at 2024, it's difficult to predict just yet where we're going to land it.
Going through our budget process here this quarter and I'll have more clarity on the next quarter call.
The one line item that was talked about in the past with insurance. It. So it's a very challenging market. We would expect that we would be up 20 plus percent next year on the insurance line, but keep in mind, that's a very small line for us it's only like 4% of our total opex spend so.
While the headline number is large it's a small component of our opex and outside of that and outside of the favorable taxes, we havent in California, where they only grew 2% we need a little more time to dial in 2024.
Okay that makes a lot of it then I guess just sticking with industry are you seeing any lightning up from the insurance company.
What they are willing to offer as they build up their capital reserves are now you think it's going to be another tough year.
Right now based on what we know we we believe it will be a tough year, we're going to go through a renewal in the fourth quarter of this year a renewal comes up in December and so I'll have more clarity on the next call in terms of that market, but based on what we're hearing we think it's still a very challenging market.
Thank you. Our next question is from Alexander Goldfarb with Piper Sandler Piper Sandler. Please proceed with your question.
Hey, good morning out there.
So two questions first Angela.
Yeah, you'd made comments before that you were sort of outward migration from California is always a constant but it's the.
It's the HB one visas the overseas tech workers et cetera, entrepreneurs, who immigrate to the country that you know offset and drive so just sort of curious what's the latest on your tech hiring from overseas.
You know, whether its permanent or sort of the annual consultants, who they bring in just curious what's going on there.
Yeah, Alex that's a good question.
We haven't seen an active hiring from an international basis yet.
And what we have seen is on a net migration from.
California as a whole. So this is market as a whole that net outflow remains negative, but it hasn't been it's gotten better so Jordan Cove. It it was a extreme outflow and now when we look at the net migration outflow number it's pretty consistent to pre COVID-19.
And so we do think that once we have that international.
It would definitely be a good tailwind as far as when we look at our own portfolio. Oh, you know just on a more granular level. So this is a move in we saw a pop last year between the first and third quarter with a California reopening and that that acceleration was with Oh, yes definitely there.
Encouraging to see.
And since then the move out obviously, it's not going to continue at that level interests acceleration, but.
I'm, sorry, I meant to say the move ins him, but he has remained positive and it's been stable and so that's another good sign.
Okay. Second question is on capital markets, you guys did a a.
Our secured loan that wasn't for a JV normally I guess in REIT land for the investment grade companies, we expect secured loans either in times of distress or for a joint venture asset here.
It seems like the unsecured debt markets are open so just sort of curious.
The decision on that and also I imagine they were probably a bunch of people who are out there are hungry to buy more of your unsecured. So maybe it's just yes, maybe you have something else planned later in the year that satisfies that but just sort of curious about the decision to do secured and what seems to be.
A functioning unsecured debt market.
Hi, Alex its Bob 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 that that's the way we financed the balance sheet in this environment, though we saw a significant pricing.
So between the secured and the unsecured market, so while we locked in or on.
The secured loans at 5.08% if we were to go to do an unsecured bond. It would have been 65 to 75 basis points wide of that and so that pricing differential was so great that we decided to move forward with the secured side of equation, 95% of our NOI is unencumbered and so we have lots of.
A room within our covenants to secure a few assets and there's no change in our overall balance sheet philosophy. It was just really a pricing differential that that made us move the way we did.
Okay. Thank you.
Thank you. Our next question is from Josh Federline with Bank of America. Please proceed with your question.
Yeah, Hi, everyone. Thanks for the time.
I wanted to ask about the R&M same store expenses it was impacted by storms and flooding damage in the first half of the year. One is that all behind us now sort of what kind of normalize out in <unk>.
And then.
What would that trend look like.
Sure.
Perfect.
Yeah.
Hi, This is Barbara again, yes, you're correct. It is impacted by some of the spillover from the storm and flood damage clean up cost in the second quarter, we had a lot in the first quarter and some of it still in the second quarter and it also had higher turnover costs because keep in mind, we are getting back units and so.
It's that and then just general inflation inflationary pressures within the R&M space and so it's three components in terms of if we just pulled out the flood I don't have that in front of me I'll get back to you on what that would be but.
It's really all three of those components that drove that increase in the back half of the year, though I do expect that number to come down. So first of all we don't expect the same level of storms or floods, it's not a rainy season here right now and so that should abate and and not be in our third or fourth quarter numbers and then the eviction related turnover costs.
We have easier comps in the third and fourth quarter, because we started incurring those last year in the third and fourth quarter. So that 14% that we had in the third quarter. So it should moderate significantly in the third and fourth quarter.
Okay I appreciate that Barb and then 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 said the mark to market.
It's hard.
Yeah, Hi, Josh This is Jessica yeah, we switched them really about mid may and as far as the mark to market. We're looking right now our loss to lease was one 7%, but as I mentioned earlier still seeing our rents grow and in some markets and so that's that.
<unk> potentially could go up a little bit more.
Okay is that about average the loss to lease at this time of year 1.7, whereas it a little bit below.
Normal because of that.
Initial strategy.
Yeah.
Yeah, it's definitely a little surprised based on our approach and our approach earlier in the year.
Thank you. Our next question is from Nick <unk> with Deutsche Bank. Please proceed with your question.
Okay.
Yeah.
Okay.
Nick is your line on mute.
Hi, Dan it's Eric on for Nick I can ask the question.
So July new lease rates accelerated nicely from <unk>. So I'm, just curious what markets drove that sequential improvement.
Second do you think it's possible to see continued acceleration given you know some of your larger markets have lagged year to date and are I guess still recovering in a sense.
Tandem with the you know pretty benign supply that drop.
Hi, This is Jessica yes, we did see Seattle was a large contributor to the sequential improvement followed by Northern California, Southern California has been performing pretty pretty steadily and then as far as specific markets in Northern California, San Jose has been particularly.
Early strong which reflects our over 40% of our portfolio in the Bay area. So we've seen strong occupancy strong leasing demand that was encouraging certainly watching it we've seen with all of the prior returned to office announcements so Amazon.
And Seattle CBD in than last year with with Google as well on the Bay area. There is definitely demand associated to these returned to office events and so anticipating that matter, which is in September is going to have the same impact I would imagine we're experiencing some of that some of that demand right now and then also as I mentioned.
In my prepared remarks, the corporate housing activity. It is less than last year, but we still saw the activity. This year, which is always an encouraging sign as far as the health of the big Tech employers. They certainly wouldn't be investing in and turns and contract work you know if they were planning on.
Heightening thereabouts, and we've certainly seen an uptick in hiring as well so San Jose has been doing quite well and then Seattle had already touched on the Seattle CBD in the Amazon return to office. So that was a factor and we're still seeing strength in demand. Today. However, it is our most seasonal market and so we certainly see.
The most pronounced reduction in rents in the back half of the year in that market, but expect it to be in line with our typical seasonal curve and expectations. There and then also supply we do have some supply headwinds in Seattle some of it was pushed.
To the first half of 2024, so it's a little bit better than what we originally expected, but we still have some supply on our radar there.
Great. Thank you for that and then I'm not sure. If you have an answer this question, but San Diego you know one of your stronger markets wondering if you have a sense of like which employment sectors are driving.
Demand in that in that market for your assets.
Hey, it's Angela here.
So the key drivers in actually all of our markets have been.
India Health services, and education and of course, the leisure and hospitality as well and and so you know what with San Diego are rebounding. It's it's been it's been good to see those activities coming back in a more robust way.
Sure.
Alright, thank you.
Thank you. Our next question is from John Kim with BMO Capital markets. Please proceed with your question.
Thank you on the Washington property taxes coming in lower than expected.
Was that due to a favorable appeal, but you had or lower leverage.
Something else.
Yeah, Hi, John it's Barb, so property taxes in Washington declined 1% year over year. The assessed values went up 15%. So when we were budgeting. We we knew assess size were up quite a bit but millage rates came down and so that's what drove the favorable year over year reduction.
Texas there wasn't it wasn't based on 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 so theres a lag effect in terms of when they do the bill. So our 24 bills will be based off of one.
January of 'twenty, three reassess values, which we don't know what those would be at this point, obviously values have changed over the last year, but it also depends on the millage rate and what the city does with that and so that's always a wildcard factor historically, we've not had a reduction in Seattle taxes two years in a row.
But so we'll have to just monitor and see you know.
Next year I don't know if one a negative 1% is a good way to I wouldn't use that I don't think that's how we would view it going forward, but we were 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 September at a loss to lease is a good indicator for your future earning.
And I'm wondering how you think that trends 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 master lease go too.
Well, it's definitely a little bit too early to predict that and we have all of them had a typical seasonal curb it'll be interesting to see how the back half of peak leasing season plays out and yes, I did share and we have the one 7% loss to lease today, but based on <unk>.
All of our markets are still accelerating with rent growth week over week that may may grow from here and also the met our return to office that we're watching and the demand overall in the Bay area could change how we typically experience in August or September so in short its a little bit early and yes.
We will look at that in September as we typically do.
Let's see how long this angela.
Just contacts you know I think last year around this time, we were sitting around 7% loss to lease.
And but we.
We were looking at the seasonal curve that is occurring in a more you know about them near pre COVID-19 level. What happened was the prior year, we didn't even keep until November so it's been a little wonky coming out of Covid and so.
It's you know September generally as a rule of thumb is a good data point.
But just because of the uniqueness in in the past couple of years I. Just you know we we didn't want anyone to just had a June number.
It is a good rule of thumb.
Okay.
Hey, Colin.
Thank you. Our next question is from handheld think just with the new home. Please proceed with your question.
Hey, good morning still.
So first question is on transactions.
We've heard that hasn't seen still for installed but you'd mentioned that your diligently underwriting deals. So I'm curious, where where do you peg the bid ask spread at today, and where asset pricing would need to be to get more active.
Hi, This is Adam.
So yes, we were underwriting every deal in the market and even though in Q2 volume went down pretty considerably in Q3 are expected to be increased just given the amount of activity in the market today. So we are underwriting.
Lot of deals right now and.
There isn't much of a bid ask spread I think many of the deals most of the deals that are on the market today.
I'll make so I think there will be a capitulation on both sides and in a meeting of the minds and I think echoing what Angela said in her opening comments I think those are going to be in the mid fours to low fives range, depending on product location and then specific circumstances, whether there's.
Assumable debt or.
There are some tax abatements, so as far as when we will be back in the market I think thats, a really highly dependent on where our cost of capital is so given where we're trading today that are it's hard to make accretive deals.
In the mid fours to low fives and so.
We will continue to market are continuing to monitor the market and are we.
We will act when it makes sense.
Yeah that's helpful. The.
A follow up on the companies wanted concessions can you guys provide a more detailed breakdown, perhaps by region, what the average concessions that you're providing in your no-cal. So Karl in Seattle reasons are and then also a loss to lease by region.
Sure. This is Jessica so concessions in Q2 by region. So if we look at southern California, It's a little less than a half a week.
Northern California, one week, and Seattle, a little bit over half a week, so that gets us to seven weeks overall and keep in mind that a lot of that was concentrated in the April timeframe. Some of that spilled over into may by the time, we got to the end of the quarter, we pretty much have no concern.
Actions across the portfolio with the exception of a very small portion of our portfolio that is exposed to at least 10 to 15 properties or so and then as far as loss to lease are by market, Southern California, 2.5%, Northern California up 7% and Seattle.
One 9% to make up the one seven.
Great. Thanks, and then sorry, if I missed this but what's the embedded assumption for bad debt impact to revenue in the back half year.
And as far as it's it's roughly 2% a little bit under 2% consistent with our full year forecast.
But the incremental.
Good morning.
Alright.
You're saying that the expectations by yearend is that the incremental benefit you're expecting back up here.
No. That's the assumption so we assume 2% for the full year were at two 1% through the first six months of the year, we assume effectively like one nine in the back half of the year to hit our 2.8% for the full year. So is it incremental improvement.
The back half as well.
Got it got it okay. Thank you.
Thank you. Our next question is from Robin Lu with Green Street. Please proceed with your question.
Hi, Thanks for taking my question cause a follow up on the question earlier whats the total magnitude of acquisitions, you're hoping to achieve in the back half of this year.
Hi, Robin this is Adam so at this point or.
Our intention is to Oh, well our guidance really is not to acquire anything in the back half of the year.
Like I said, we've been underwriting everything and if there are deals that make sense strategically that fit in with our existing portfolio, whether through economies of scale or or other methods. Then then we will focus more on those deals but for the moment given our cost of capital we wouldn't expect much on the acquisition front.
So with I guess.
In a scenario, where there's many more acquisitions and new developments thoughts penciled out do you expect to stop how does stock buybacks a stack up in terms of my top priority.
For capital allocation.
Yeah, I mean, we did do stock buybacks in the first quarter and we will assess our sources of capital to do that because we want to maintain our balance sheet strength.
On a leverage neutral approach to the stock buyback. So we would need a source of capital to continue to buy back the stock and so that would imply that we would dispose of something so it will all depend on where we can find opportunities to add value to the bottom line because at the end of the day, that's our our goal on the external front is how can we grow accretively.
And to Adam's point, it's hard to do it via acquisitions today, but it.
It doesn't mean that we're just going to go buy back the stock we would need a source of castle to do that as well. So it all go into the mix.
I appreciate that response and then finally from me can you give us a rough directional what the sand each of the $100 million Outsang delinquencies that do you think you'll ultimately be able to collect.
Yeah. That's a that's a great question, it's difficult to know I mean, obviously, we'll we'll get some of that but none of that is baked into our guidance for delinquency. This year.
We are making progress collecting the problem is until the courts get caught up delinquency keeps accruing because we have tenants that are in our properties a lot longer than they were historically you know pre COVID-19. If somebody went delinquent they were out within two to three months and now if they go to like when they're out in nine to 12 months and so that's part of the.
<unk> problem on the delinquency side and the cumulative delinquency side in terms of what we're gonna collect I can't I can't give you a number it 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.
Yeah, I I am 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.
Used all measures possible to go after these tenants who are delinquent or have delinquent balances, but it's not a number I can throw out there.
I appreciate that thank you.
Yeah.
Thank you. Our next question is from Michael Goldsmith.
With UBS. Please proceed with your question.
Good afternoon. Thanks, a lot for taking my questions for the L. A market are you seeing any pressure from the writers and actors strikes or does your guidance contemplate any impact from this.
Oh, Hi, this is Jessica I'll speak to as far as the underground operation, we have not seen any impact from the strike at this point, we track our exposure to the major studios and it's less than 1% of our la portfolio and so I think it really comes down to.
How long the strike is going to go on and if there is potentially a ripple effect to other industries, but at this point, we do not seen it have a material impact on our portfolio would have to go on for some time, there may be specific property impact, but not to the larger portfolio as a whole.
Okay. That's helpful context.
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 or tenant health and how that's trending between a versus b quality properties.
This is Jessica again as far as a versus B, we do not see a material difference in performance, it's more really location so back to the whole suburban versus urban concept and the bulk of our portfolio is suburban and we are seeing strength in our suburban.
Market versus some of the urban properties and really I think that's attributed to supply as well when we look at where we have concentrations of supply. It is in these urban locations. So Seattle CBD downtown L. A west L. A downtown San Diego, and that's where we would see rents lag so.
Urban versus suburban is where we're seeing the difference.
You very much.
Thank you. Our next question is from Nathan <unk> with Robert W. Baird. Please proceed with your question.
Hey, good morning out there 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 San Diego has been a phenomenal market for us I think it benefited during the pandemic. It was a popular area to relocate two and rents were lower and overall, great great quality of life and as Angela mentioned earlier, there's some underlying them.
Appointment of industries that have strength there so San Diego has been very solid and we expect it to continue to perform well as far as other markets that I have my eye on that are showing signs of strength.
Go back up to the Bay area with San Jose just to reiterate what I'm seeing there that's been a strong market for US and then when you couple that with the recovery as well that we still anticipate with continued return to office and where we're at relative to pre Covid brands, there's definitely an upside there.
And then up in the Seattle area for similar reasons, but of course, we're gonna be facing some supply.
Headwinds there over the next year.
Great. Thank you.
Thank you there are no further questions at this time.
This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Goodbye.