Essex Property Trust Inc (ESS) 2024 Q2 法說會逐字稿

Good day, and welcome to Essex Property Trust's second quarter 2024 earnings call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions, and beliefs as well as information available to the company at this time.

The 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 Executive Officer for Essex Property Trust. Thank you, Ms. Kleiman. You may begin.

Good morning and thank you for joining Essex second quarter earnings call. Our pack will follow with prepared remarks, and Rylan Burns is here for Q&A. We are pleased to report a strong second quarter with core FFO per share exceeding the high end of our guidance range by $0.05.

As a result, we have our second notable increase to our full year guidance. Today, my comments will focus on underlying drivers to our outperformance and operational highlights, followed by an update on the investment market. Starting with operating fundamentals. Year to date, demand for West Coast multifamily housing has exceeded our expectations, particularly in Northern California and Seattle region.

While we've traditionally relied on the BLS to assess housing demand, the reported data have not correlated to the strength we're experiencing on the ground. As such, we've analyzed alternative demand indicators from third party sources for better insight into the key drivers supporting housing demand. #

The first of these, his job openings at the top 20 technology companies. In June, openings in the Essex market total over 17,000 jobs, which represents a 150% increase from the 2023 trough. While, we have yet to return to the historical average of 25,000 jobs. The steady improvement so far has generated an incremental demand and in our markets and is a good precursor over the recovery, particularly in Northern California and Seattle.

Another factor contributing to West Coast housing demand is migration. Real-time data using placed over AI shows a gradual improvement in domestic migration patterns on the West Coast. This is illustrated on page S16.1 of our supplemental. This data suggests that workers are relocating back to the coastal headquarters, generating a share or demand similar to a new jobs being added. Additionally, this year, Northern California has positive net domestic migration for the first time since pre-COVID.

As supply dynamics, limited new housing combined with favorable rental affordability continues to underpin our market fundamentals. For example, the rate of income growth has outpaced rent growth, which has improved affordability metrics in our markets. Additionally, it is 2.8 times more expensive to own than to rent in our markets today, compared to 1.7 times back in 2019 when interest rates were near the historical low. Even as mortgage rates were to revert back to the 2019 level, home ownership in our markets will still remain significantly less affordable than renting.

Turning to property operations, we experienced a solid peak leasing season with blended rent growth for same property portfolio of 3.4% for the quarter. Blended rent growth would have been 4.5%, so 110 basis points higher if we exclude LA and Alameda, the two counties with elevated delinquency related turnover. As for regional highlights, Seattle has been our best performing market today, achieving a 4.9% blended rent growth while maintaining strong occupancy level of 97% in the second quarter. The east side, which has been less impacted by supply than the CBD led this region with 5% blended rent growth. There are two key factors that contributed to the strong performance.

First, relative to our other regions, Seattle has a stronger job growth. Second, the new supply has been less impactful as timing delays resulted in fewer deliveries in the first half of the year. These two factors have led to a prolonged seasonal peaks in that this market typically peaks around late June, but this year the peak occurred a month later around the end of July.

Northern California was our second best performing region, achieving 3.3% blended rent growth in the second quarter and occupancy of 96.3%, San Mateo and San Jose with a notable outperformers at around 4% growth with Alameda County pulling down the regional average by 80 basis points due to delinquency turnover and the continued elevated supply in Oakland.

Generally rents in this region peaks around early July and consistent with historical patterns. Lastly, Southern California continues to be a steady performer. We achieved 2.8% blended rent growth for the quarter, which would have been 200 basis points higher if we were to exclude outlay.

In similar fashion, Southern California's average occupancy of 95.7% for the quarter was tempered by Los Angeles with all other markets at or above 96% occupancy. Excluding LA, Southern California's rents peaked in late July, consistent with historical patterns.

As we begin the third quarter, our portfolio is well positioned, with average concession of less than two days, and occupancy is healthy and nine 96.2%. We are prepared to shift to an occupancy strategy as appropriate, while maintaining the optionality to minimize rental growth.

Finally, on the transaction market, in the second quarter, there was a significant increase in investor demand for well-located, newer multifamily properties on the West Coast. In contrast, the number of marketed properties for sale remained low. This combination has resulted in a highly competitive bidding process and a compression in cap rates in some markets.

Over the past few months, assets has selectively procure three high-quality communities in the Bay Area. All three of these investments have significant upside potential based on the favorable fundamental backdrop and efficiencies from our operating platform.

We are pleased with the progress to date with over $500 million in acquisitions closed and are optimistic more opportunities will arise in the near future. As always, we remain disciplined and focused on maximizing shareholder value and enhancing the growth profile of the company.

With that, I'll turn the call over to Barb.

Thanks, Angela. I'll begin with comments on our second quarter results, followed by the key components of our full year guidance raised and conclude with an update on the balance sheet. Beginning with our second quarter results, we are pleased to report core FFO per share of $3.94, which exceeded the midpoint of our guidance range by $0.11.

The outperformance was primarily driven by $0.05 of higher same property revenues, which was largely the result of stronger net effective rent growth. In addition, this quarter benefited from $0.04 of one-time revenues and lower operating expenses, which are timing related. Turning to our full-year guidance revision. Our strong second-quarter results and healthy peak leasing season have enabled us to increase the midpoint of our same property revenue growth by 75 basis points to 3%.

Our improved outlook is largely driven by blended rent growth, outpacing our initial forecast, resulting in a 50 basis points increase to revenue growth. We now forecast blended rent growth to be 120 basis points higher than our initial forecast, driven by outperformance in Northern California and Seattle. As for same property operating expenses, higher utility costs and legal fees are the primary drivers of 50 basis points increase in our midpoint to 4.75%.

As it relates to controllable expenses, we have been effective in managing this aspect of the business despite the elevated cost environment. For the year, we expect controllable expenses to increase less than 3%. In total, we now expect same property NOI to grow by 2.3% at the midpoint, representing a 90 basis points improvement to our prior guidance and 170 basis points improvement from our initial outlook.

Based on our strong second quarter results and the revision to the same property growth, we are raising full year core FFO by $0.27 to $15.50 per share, which represents 3.1% year over year growth. In total, we've raised core FFO notable $0.47 per share so far this year. As it relates to our third quarter guidance, we are forecasting $3.87 at the midpoint.

The sequential decline from the second quarter relates to two factors. First, same-property NOI is expected to be $0.05 lower, which was driven by elevated operating expenses given the typical seasonality and spending for repairs and maintenance, taxes, and utilities. And second, we had to some one-time items in the second quarter.

Turning to the preferred equity portfolio. For the year, we expect between $125 million to $175 million in redemptions of which we received $50 million to date. Our intention is to redeploy the proceeds into acquisitions depending on market opportunities. In terms of the watch list, we started the year with five properties on the list of which three have been removed so far to date.

To the properties were acquired and consolidated on our financials. And one of the investments had a significant equity infusion, which puts us in a better position in the capital stack. In total, the reduction in the watch list added approximately $0.04 to our full year core FFO. The rest of the portfolio is performing as planned. And finally, our balance sheet metrics remain a key source of strength.

We have no remaining consolidated maturities in 2024, our leverage levels remain healthy with net debt to EBITDA at 5.4 times, and we have over $1 billion in available liquidity. As such, we are well positioned to capitalize on opportunities as they arise.

I will now turn the call back to the operator for questions.

(Operator Instructions)

Austin Wurschmidt, KeyBanc Capital Markets.

Good morning, everybody. Angela, you mentioned that you're prepared to shift to an occupancy strategy. So just curious if we should view the pullback in renewal rate growth in recent months as a tactical move to drive occupancy? Or are you getting some pushback on the increases in kind of seeing retention moderate? What sort of driving the pullback? Thanks.

Hey, Austin. Good to hear from you. This is more in line with our approach to address seasonality in our business. And so typically, as we approach the seasonal peak, we would push on rents. And now as we shift toward the seasonal slower time of demand, we start to migrate toward occupancy. Ultimately, the goal is to maximus revenues. So it's not so much of anything or seeing that is any red flags on the fundamentals. It's more of how we normally run our business to maximize rents and revenue.

Got it. And then could you breakout on new lease group has trended across the three regions as you get into July? And just curious where you're seeing kind of the most moderation and what's kind of holding stronger maybe a little longer than you would have anticipated? Thanks.

First thing, so on the new lease rates, net effective new lease rates, we are seeing Southern California holding studies, slight deceleration, but yes, nothing material like 10 basis points, 20 basis points. Northern California is the more just the deceleration, about 200 basis points and then Seattle now about 50 basis points to 60 basis points of deceleration. And once again, under the new lease activity here, it's pretty much what we had expected. There's nothing here that's giving us any alarm business, normal business now with us normally Northern California peaks earlier than Southern California, and so this is on plan.

Eric Wolfe, Citi.

Thanks. It's Nick Joseph here with Eric. Maybe just following up on that prising strategy of a more specific to LA and Alameda, are you getting closer to the point where you can be pushing pricing more right now? Or do you need to get to a certain occupancy level first?

That's a great question, Nick. We are not quite there on LA Alameda in terms of our operating strategy. We pretty much ran a multi-currency focused strategy starting from late last year, that has continued throughout the year. We've been able to cast switch back and forth a little bit, but really didn't last long. At this point we made really good progress on delinquency and essentially improved by almost 50%. We reduced by another 50% from began the year. We're making good traction there. We probably will not be able to have pricing power until we get through the rest of this year in LA and Alameda.

Thanks. And then just on your gross bad data, it looks like it came down by 80 basis points in July of your expectation that will hold around this level for the rest of the year?

Hi, Nick. It's Barb. Yes, our guidance has about 1% baked into the rest of the year. Remember the number can bounce around a month to month, but we're pleased with it progress that we've made so far and feel comfortable that we'll continue to make progress if we do make more progress in the 80 basis points, I'll just be upside to the high end or be to the high end of the guidance range.

Makes sense. Thank you very much.

Josh Dennerlein, Bank of America.

Hi, Steven Song on for Josh. Thanks for your time. And my first question is on the bad debt assumption seems like that's progressing better than expected so far. I wonder if you can give more color on how it will trend for the second half.

Yeah, this is Barb. It isn't difficult number to predict because it does bounce around a month to month, and we are pleased with the progress. Keep in mind, we did take that. We did increase our guidance in the first quarter by 40 basis points because we didn't lower bad debt to 1.1% for the full year. And through July, we are at 1.1% year to date were in line with our forecast. And we do expect we're working hard to make progress, but it does depend on when tenants leave and when the courts process evictions. And so it's a little out of our control. So we've got 1% positive in the back half of the year.

That's very helpful. And then my second question is on the concession. If I here this correctly. You said it is less than two days across the markets. I wonder like whether you separate that you have separated out for different regions and how that's trending so far?

Yeah. We have that detail, concessions. So generally speaking, so Southern California has a heavier concession in LA for the most part, no surprise there. And Northern California has concession environment is driven primarily by Oakland because of the higher the elevated supply. So now Southern California DQ with LA and Northern California, Oakland with supply. And those are the two primary drivers of higher concession levels. But ultimately, we're talking about, say closer to four, five days in those areas versus rest of the region where Seattle has essentially zero and everywhere else around one to two days. So that averages to the two days in July.

Okay. Thank you.

Steve Sakwa, Evercore ISI.

Hi, this is Sanket on for Steve. We were looking at those same-store revenue guidance that you guys updated view of the surprises that you didn't update it like you didn't raise the low end more because year to date you guys are running at 3.5%. So you're just curious about how do you get to low end or lower range of the guidance range in terms of same-store revenue?

Yeah, hi, this is Barb. Yeah, there's a lot of factors that go into it and the low end, it just does depend on how steep the decline is in the back half of the year. In terms of the peak leasing season, we expect a normal season, but we've seen air pockets in the past. And so that factors into the low end or not could impact occupancy and concessions.

And then delinquency has been a wild card. It feels like it's less of a wildcard this year. But once again, that is something where we've seen blips every now and then. And so those are the factors that really led to the low end where it is. But we feel very comfortable with where our midpoint is.

Okay. And if as a follow very, you guys sending out renewals for the month of August and September?

Yeah, for sending out renewals at around low 4% portfolio-wide. And based on the negotiations that we're seeing will probably land somewhere between mid-threes to high threes on the renewal side.

Okay. That's helpful. Thank you.

Nick Yulico, Scotiabank.

Hey, good morning team. It's Daniel Tricarico on for Nick. Can you talk to your expectations around pricing through the back half of the year with respect to your comments on a normal seasonal pattern and pricing peaking later than typical? And would you say there's any conservatism in the new guide related to any macroeconomic or political related factors?

That's a great question. Well, let's start with we have expected that full year, our blended rents will be about 2.7%, and we achieved was 2.9% in the first half. So there's an implied deceleration of our 35 basis points to 40 basis points. And this is actually quite moderate. It's not seem to be nothing to be concerned about that aside from what's going on out there in the political realm.

The key drivers to our anticipation is really that we have tougher year-over-year comps. So last year, our seasonal peak actually occurred one to two months later, Northern California month later, and Southern California, two months later. So that tougher year-over-year comp is a primary driver. And then the secondary factor is the renewables ultimately will converge towards market rate over time. And that's normal.

Very helpful. Thanks, Angela. My follow-up is you've been a bit more active in the transaction market and what your JV partners recently. Obviously seems to imply a vote of confidence in your markets. You also mentioned a competitive bidding at enterprise top rate. So just curious if you're considering any new on-balance sheet development today, what the supply demand outlook you're communicating?

Yeah. This is Rylan here. It's a good question. I'd say working in our favor, we've started to see hard costs come down a little bit from a year ago or the vast majority of development that we underwrote, however, does not meet our return expectations. We're looking for a significant premium to where we can go and purchase today given the risks inherent in development.

But I would say the trends are favorable and we are pursuing several opportunities that could lead to an increase in our development pipeline in the near future.

What would be the spread you're targeting versus just marketing cap rates?

Yeah, it's case-by-case dependent, but a general rule would be in our markets today for a shovel ready. So full entitlements, we'd be looking for at least 100 basis point spread to what we can go and buy a comparable product.

Thanks, Rylan.

Brad Heffern, RBC Capital Markets.

Yes. Thanks, everyone, for LA and Alameda, when you do get pricing power back, do you see those markets just returning to kind of a normal level of growth, or should there be some sort of catch up given incomes have gone up much more than rent has gone up?

That's a great question, Brad. I think that's going to depend on demand. So how quickly do we see job acceleration as we return back to that normal state to the pre-COVID level. And so fortunately for us, we don't need much, right given the such low level of supply and which is one of the reasons we've been able to produced solid results, even though we are in a low demand growth environment. But the magnitude, if we're what you're talking about will be really dependent on job growth.

Okay. And then, Barb, on the new guidance, I think the fourth quarter implied core FFO numbers down slightly from the third quarter. Normally the seasonal pattern with you guys is that the fourth quarter start of the highest FFO quarter. So I'm just curious if there's something that's offsetting that or there's something timing related that's falling into the fourth quarter?

Yeah, most of the timing on the preferred redemption. So we got $50 million today. Most of that occurred in July. And then the rest of it is slated for beginning of the -- end of the third quarter, beginning of the fourth quarter. So we'll see the biggest impact from those redemptions then, and that's what's causing that anomaly.

Okay. Thank you.

Haendel St. Juste, Mizuho Securities.

Thanks for taking my question. I was intrigued by the locality made about staying positive in-migration into Northern California for the first time since I think pre-COVID and hearing more of employers enforcing return office mandates. I guess I'm curious, are you seeing that translate it all into more demand replications, anything tangible that you can point to in effect, perhaps something that could drive perhaps some rent or any upside over the next couple of quarters?

Hey, Haendel, that's a great question. Ultimately, we're seeing pricing power and that's translating to our outperformance, and you've seen us raise guidance twice and primarily by demand because we've always maintained that having that low supply environment we're in a really good position here. As far as where that's going to land, it's hard to say because it depends on the weight of the return. And so just to give you some data points during COVID, about 400,000 people migrated out of our markets.

And what's interesting is the majority of the out migration was to tertiary markets was in Washington and California. And so say about a third, 35% of them actually went out to the Sun Belt and East Coast. And so we're seeing right now is about a quarter of that has returned about 100,000 has come back. And it's generally in line with that proportion of offered out of Washington and California and to servers within the tertiary markets.

So there's still some legs here for the question here is when and how much and that is just we just don't have any visibility on the timing about that one.

Okay. I appreciate that. And I guess we'll be watching. And I think you also mentioned, I guess there's an earlier question about transaction activity. I think you mentioned your comment that you bought assets with some occupancy or perhaps some repositioning upside for, I guess I'm curious overall than just the state of sellers psychology in the marketplace, are you seeing more potential sellers are willing to engage the assets that you're underwriting? What IRRs are you looking for and your overall level of interest in deploying more capital and what cap rate range you're probably seeing in the market?

Hi, Haendel, this is Rylan here. Several questions in there. So forget one, please follow up. But in general, we've seen volumes pick up in the second quarter compared to a year ago, as well as the first quarter. Cap rates are fairly consistent across our markets for high-quality, well-located buildings in the mid to high four cap range. So we are looking for unique opportunities that we can put it onto our operating platform and generate some additional accretion just from offering a little bit more efficiently.

We're always looking for ways that potentially can add incremental yield on the top line. So we are again, pretty excited about the investments we're able to make in second quarter. The one that was noted at the Elan was a high four cap. We're expecting some additional benefit from putting it onto our operating platform because of the building probably 20% discount to replacement cost and with rents that are about 15% below pre-COVID levels.

So those given our fundamental outlook for some of the submarkets that we can find more opportunities like that we will pursue as we have always aggressively, but with great discipline as well.

Any color on potentially the IRRs that you're underwriting?

Yeah, I don't want to provide too much detail just for competitive reasons. But, you know, back-of-the-envelope math would suggest that these are above eight.

Okay. Appreciate that. And last one, if I could squeeze one in just probably if you give us a sense of whether loss or maybe gain-to-lease is across the major regions of the portfolio?

Sure. Haendel. For you, yeah, you could squeeze another one end. So July loss to lease, it has about 2%. And so it's certainly a good position, especially when we compare to last year, July, it's tough. It's a 50 basis points improvement. Last July was only at 1.6%. So things are moving the right direction.

Adam Kramer, Morgan Stanley.

Hey guys. Thanks for the questions. I wanted to ask about competition from new supply in the market. I think working out the kind of supply disclosures and supplemental really helpful, by the way. And it looks in multifamily supplies maybe lower than it was in the prior disclosure, but that there may be kind of more single-family new supply, any kind of where that you guys tabulated. I'm just wondering if you kind of seen that have any effect on the market is kind of competition from great or new single family supply?

It's Angela. The best indication of our new supply competition is looking at our concessionary activities. And with where we are today at two days and that concessionary environment has progressively improved over the past six months, we certainly are not seeing competition from the single-family side.

Got it. Okay. That's helpful. I wanted to ask about kind of modeling and puts and takes with regards to the kind of the private equity investments and then it kind of buying those assets out. I know you did one in the quarter to be one subsequent to quarter end. So just wondering how to figure out kind of the trade-off there, right. You're buying these overcome a fairly tight cap rates using the although it's a much higher on both just convert them with the modeling puts and takes of how to think about come about the short term impact in terms of kind of gain of NOI and maybe lost equity income.

Yeah. This is Barb. And I might have to follow up after with the puts and takes on that. What I will tell you is that on the two investments that we didn't acquire, and we have preferred equity on various, we originally forecasted in our guidance for 2024, no FFO impact. And so by buying them out, we actually gained about a [$0.01] for this year in terms of core FFO because we didn't have any on preferred equity income baked into the model given they were on the watch list.

And given where values were at the end of last year, we took a conservative approach on the accruing on those two. And so net-net, it did at about a &0.01 so, but I can follow-up with you after and go through the NOI and the other various metrics.

Great. Thanks for the time.

Jamie Feldman, Wells Fargo.

Great. Thank you for taking the question. I guess maybe a question for Rylan. It sounds like you're getting more active on potentially the acquisition front. Your markets we are at the leading edge or in the headlines probably the most in terms of rent control regulation. Obviously Prop 13 is always out there. How do you underwrite a potential long-term rent growth or at least handicap those risks to the top line? And I guess the expense line as you're looking at new assets going forward, especially given the big election coming up in what seems to be on the table.

That's a fair question. I mean, at a high level, we believe of the cost of Hawkins regulations coming up this November. Again, we can go into some more detail. But historically that has been resoundingly defeated and but there is our base case that that is going to happen again this year. Now we will look at those specific submarkets that have rent control and that occasion will proposal specific rent control, and we'll certainly factor that into our rent growth assumptions. But at a high level, our expectations driven by our economic research model, and we are not anticipating any change to statewide of rent regulation in the near term.

Okay. So you'll underwriting greater than 5% growth over the long term across any of your markets?

Assets, it's all on a case-by-case basis, but that's certainly feasible and giving AB-1482, that is certainly achievable. So we know that that's certainly possible, I would say a possibility that is not our base case. Typically, when we're looking at this market rent growth, we are thinking over the long term. And so there the closer to a long-term averages.

And then in some instances where, again, some submarkets in Northern California where the affordability metrics, the future look on supply as well as some positive traction we're seeing in terms of potential demand, those are the types of investments will relate a little bit more aggressive in the near term as a catch up on the rent.

Okay. And then just thinking about your comments on the urban markets, getting a little healthier and the term, like do you think you might get more you could get more aggressive, find better value buying in the urban markets now given what you think you're seeing, or do you think you'll keep the portfolio balance? I know you kind of by which you can get that hits your IRRs. But is there a play there of getting more aggressive in the cities given that they've been more challenged?

It's certainly something that we're evaluating. We've seen much fewer transactions in the urban core across our markets, but they're starting to see some more products come to market. And that's something that we're certainly evaluating. Again, the majority of our portfolio located in great suburban markets near transportation nodes, that's kind of our bread and butter, but we will look at anything and everything has a price. So we are excited to potentially see some more opportunities throughout all of our markets in the coming quarters.

Okay, great. Thank you.

Connor Mitchell, Piper Sandler.

Hey, thanks for taking my question. So there's been a lot of discussion on the bidding wars and cover environment and lot of transaction activity. Just thinking about that and then maybe also the prospect of Fed rate cuts. Just wondering, does that increase opportunities for the preferred and mezzanine business investments or you guys kind of weigh more on the acquisition opportunities still.

Yeah. As you can see from our activity today, we've been very focused on acquiring high-quality fee, simple ownership of properties or not. That's kind of our base case. We are open to the preferred and the mezz investments, and we are pursuing several. So it's not that we've shut that off.

That's really it a large portion historically of our profit. And those investments have come as a result of development opportunity. So as the development pipeline has slowed considerably in the past year, there's just fewer opportunities for us to deploy and the prop space. So we are open, and I think we're well known within our markets has been a great partner for that product. And so we will continue to pursue. But as a result of supply coming down and the new development starts coming down, there's just been fewer opportunities.

Okay. Appreciate it. And then from the opening comments, I think it was discussed the strength of Seattle. It's seeing less of an impact from supply and some more return to office. Just wondering if you guys could give an outlook on those two items for the Seattle market going forward in the back half of the year?

Sure, thanks. Seattle is an interesting market in that it's one of our more volatile markets because of supply. And what's interesting here, as we originally had expected Seattle to continue to outperform in the second half, but now the supply got pushed this going to end up being an offset because Seattle last year in the second half had fallen quite a bit. And so it has this our combination of easier year over year comp, but now more supply. So it probably often tend to something new choice, slightly better.

John Kim, BMO Capital Markets.

Thank you. I wanted to follow-up a couple of times rather than mentioned, cap rates in the mid-to high 4% range and rent growth expectations Rylan, I think you mentioned with a lot the rents were 15% of pre-COVID levels. Is that the level of rent growth that you and competitive buyers are looking at today on acquisitions?

Just for clarity, those rents are about 15% below pre-COVID levels and we are not anticipating that snaps back tomorrow but we know that given the strong income growth we've seen in the sub market as well as what we feel is coming through the COVID and slowdown in the tech market. But the fundamental setup is attractive, and I wouldn't be surprised if we recover those rent growth within several years. So that is a factor as to what our peers are doing. We are seeing some assets trade that we're not we're staying disciplined on the levels that don't make a lot of sense to us.

I do think there are other participants in the market underwriting even more aggressive rent growth in some of the submarket. So it's difficult to parse through exactly what our competitors are underwriting. But in general, it feels like there's been a lot of capital demand and excitement about Northern California given the final set up that we've been talking about for a couple of years now.

And it seems on this call, there's been a lot of discussion on pricing power and some favorable trends. Your rent to income ratios are improving in your markets and it seems to be some lowest in the country. Should we think about renewal rates exceeding the 5% that you've been getting recently?

Hey, John, if we have reached our peak, then that would be more likelihood. But at this point, what we're seeing is renewal rates trending downward. And relative to the prior months, it's been gradual. So the good news is it's not a huge deceleration, but you know, from June to July, it's about 30-ish basis points cell and renewal ultimately will converge toward market rent. So that will be possible if suddenly there's massive amount of job growth and demand and debt and then the market rents take off. But that's not a likely scenario that we are seeing at this point in time.

Got it. Thank you.

David Siegal, Essex Property.

Thank you. I was curious if you could provide some color on what is changing with the multi-family supply forecasts and whether some deliveries are being pushed into next year. And to extent that you can comments on the outlook for 2020 supply growth relative to this year. Thank you.

Yean, this is Barb. So in -- as it relates to our 2024 forecast for supply, some properties and really Southern California were delayed more than we saw. And they it's about 2,700 units are effectively were pushed into next year. And in Seattle some of our delay adjustments work too hard, and they're delivering this year. So we pushed up some of the Seattle supply by about 2,000. So there's not a small reduction to our supply from multifamily this year.

And then as we look to next year, and we think Southern California will be slightly higher because of the delays that occurred this year. Northern California will be pretty neutral to this year. San Jose up slightly, but offset by lower supply in Oakland and then Seattle, pretty neutral. So overall, it's going to be up a little bit, but our forecast right now called first supplies and be very muted at 50 basis points of total stock similar to this year. So no, material change.

Great. And I'm curious, how does the delinquency issues in your portfolio compared to the broader market? And to what degree could delinquencies and the rest of the market, so create some overhang in terms of competition for newly listed units?

Yes, that's a good question. We have very little visibility when it comes to the broader market. The one thing that we can tell is that when the entire state of California was going through the -- started going through the delinquency process, the courts deal had a huge backlog and it took about 12 months to process it and now it's down less than six months.

And that's been a direct correlation to our ability to recover delinquent units and the related improvements in that area. And so as we see this improvements continue and as I've Barb mentioned, it could be lumpy. But if you look at our blocks of time, say, three months period, it has continued pretty steadily is when it would be surprising for delinquency to increase suddenly and it's extremely. Obviously, the core processing time is key. And so as long as a whole study, then we should be in good shape.

Great. Thank you.

(Operator Instructions)

Wes Golladay, Baird.

Hello, everyone. Just want to talk about the developer environment right now on the West Coast. It's has been a very tough cycle. Are you seeing any developers exit the market permanently?

Yeah. I think there was news actually just last week of and land-based of developer that's decided to pull out of the West Coast. And given this is not a huge surprise to us, given what we've long said as a very challenging environment to develop. And so we're aware of it.

And to be honest, we're not that concerned with fewer developers means in a less competitive product in the near future and should create additional opportunities for Essex.

Yeah, that's what I was kind of going with. I think you mentioned you had your target of 100 basis points spread versus acquisitions. I figured you might be able to develop more countercyclical at this time. Can you comment on where your spread would be today, how much further has to go?

Yeah, that's our estimate is current today. Again, it's all dependent on our fundamental outlook for the specific submarket, where that we can acquire land and a regional basis that can really drive and the numbers. And then we're tracking hard costs very closely. So I say we're closer today than we've been in many years. We haven't started news development of almost four years. And so we've been really disciplined. We know it's very challenging to effectively develop and create value for shareholders through that process.

So we're going to continue to be very disciplined. But the company has a long history of stepping in bottoms of the cycle. And we are cautiously optimistic that we're going to be able to rebuild that pipeline in the near future.

Ami Probandt, UBS.

Hi, thanks. Bad debt ticked up from Southern California, excluding LA County. So I'm wondering if that's lumpiness or if you're seeing residents potentially having difficulty paying or and potentially signs of resurgence and bad actors?

Yeah, this is Barb. The numbers do bounce around month to month. We tend not to like to publish the monthly numbers because there is noise every month. So we're not overly concerned about it, nothing to fly. There are just some monthly noise.

Thanks for confirming. And then in terms of move outs, have there been any notable changes recently in reasons for move out?

This is Angela here. The reasons to move out has remained steady. It's mostly job changes or changes in households and that's remained relatively consistent.

Great. Thank you.

Thank you. There are no further questions at this time. I'd like to turn the call back over to Angela for closing remarks.

Thank you all for joining the Essex call and for all your questions. And we look forward to seeing all of the real soon.

This concludes today's teleconference. You may disconnect at this time. Thank you for your participation.