Good day, and welcome to the Equity Residential Second Quarter 2024 Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Marty McKenna. Please go ahead.

Good morning, and thanks for joining us to discuss Equity Residential's Second Quarter 2024 Results. Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer; Alex Brackenridge, our Chief Investment Officer, is here with us as well for the Q&A. Our earnings release is posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn the call over to Mark Parrell.

Thank you, Marty. Good morning, and thank you all for joining us today. I will start us off, and then Michael Manelis, our Chief Operating Officer, will discuss our second quarter 2024 revenue results and outlook as well as give some recent highlights from what we call our property operations innovation machine. And then Bob Garechana, our Chief Financial Officer, will discuss our expense results and updated normalized funds from operations guidance, and then we'll take your questions. Looking at our quarterly results, same-store revenues increased 2.9%, and same-store expenses rose only 2.7%, which led to same-store NOI growth of 3% and an increase in our NFFO per share of 3.2%. So far this year, our revenue performance has exceeded expectations as steady demand across all of our markets has met limited supply in our coastal established markets. As a reminder, approximately 94% of our NOI comes from our coastal established markets. Michael will get into the details shortly, but the Northeastern markets of Boston, New York and Washington, D.C. as well as Seattle are standouts relative to our expectations back in January. Our expansion markets of Atlanta, Austin, Dallas-Fort Worth and Denver, which together constitutes 6% of our NOI, continue to have good demand, but remain under pressure from continuing high levels of supply with our Atlanta and Austin portfolios most impacted. Putting all of this together, this led us to increase our same-store revenue guidance by 70 basis points at the midpoint to 3.2%. Underlying these positive results and outlook are several trends that continue to support rental housing performance, including high homeownership costs, limited for-sale inventory and a steady though moderating employment picture. We continue to see high levels of retention among our residents due to elevated homeownership costs, with homeownership processing record levels last month, making rental housing a good value alternative. We also see a steady employment picture in our target higher-earning renter demographic leading to sustained good levels of demand. In the second quarter, we saw a continuation of total employment growth across nearly all of our markets. Drilling down into office using employment, we saw a return to positive growth in Q2 for the first time in several quarters, with strong numbers posted by Washington, D.C., Los Angeles and Atlanta. And, of course, lifestyle factors like delayed marriage and childbearing, which we've discussed in prior calls, continue to be a positive factor. The expense side of the equation is similarly positive news as we continue to utilize our sector-leading innovation machine to drive improvements in both our cost structure and our resident service experience. We lowered the same-store expense midpoint of our annual guidance by a full percentage point to 3%, leading to a new same-store NOI guidance midpoint of 3.25% for the year, which is 145 basis points better than our prior midpoint. My appreciation to all my outstanding on-site and corporate colleagues, their hard work and dedication to our customers and to supporting each other. Switching to capital allocation, we're seeing more transaction activity as the interest rate climate stabilizes and sellers and buyers' cap rate expectations coalesce around 5%. Transaction volumes in our markets in the second quarter of 2024 were almost triple what they were in the first quarter and double what they were in the second quarter of 2023. As you saw in our release, during the second quarter, we acquired one property in suburban Boston. And subsequent to the end of the quarter, we acquired a property in Atlanta and one in Dallas. Alex Brackenridge, our Chief Investment Officer, is here to answer your specific questions in a moment. But generally speaking, we are buying recently built properties in our expansion markets at a basis that compares well to replacement cost and underwriting a 5% forward cap rate with our pro forma assuming further degradation of rents, but also assuming the benefits in year one of our more focused delinquency and vacancy management processes. In year two, as we get the acquired properties fully integrated into our superior operating platform, we are assuming that we can pod the acquired properties with our other nearby properties as we obtain scale in these markets and efficiently share employees across properties as we do in our coastal established markets. While we acknowledge that current rent levels are weak in these expansion markets and likely to remain so in the near term, in the longer term, we see relief on the way as starts in these oversupplied markets have collapsed and deliveries in 2026 and 2027 are likely to be much lower than both current levels and historical levels. These expected lower supply levels underpin our property acquisition underwriting in outer years where we expect a significant rental rate recovery. We are excited to acquire these properties at a basis that we see as highly favorable and add properties with strong cash flow growth prospects once supply levels normalize in a few years. The entire Equity team also looks forward to demonstrating our core competencies of smartly acquiring and efficiently integrating new acquisitions. And with that, I'll turn the call over to Michael Manelis.

Thanks, Mark, and thanks to everyone for joining us today. This morning, I will review our second quarter 2024 operating performance as well as provide some highlights of our increased same-store operating guidance. As you saw in our release, our overall operating fundamentals remain healthy, driven by good demand across our portfolio and a strong renewal process that resulted in low resident turnover and strong occupancy of 96.4% for the quarter. As Mark mentioned, we are benefiting from what we see as a solid job picture across the country keeping our residents well employed with growing wages as well as very little competitive new supply in our established markets. The rent-to-income ratio on new move-ins during the quarter remained stable at around 20%. Not surprisingly, we are also benefiting from a very low percent of our residents moving out to buy homes. About 7.5% of our move-outs cited buying a home as the reason. This is the lowest number we have seen in any given quarter. That, along with the benefits of our centralized renewal process, has made our year-to-date results on renewals, both in terms of the volume of residents renewing and the achieved renewal rate increases, a key driver to our outperformance. As has been the case for a while now, our East Coast markets are the best performers with occupancies around 97%. On the West Coast, Seattle is performing particularly well, and San Francisco is showing improvement but not quite at the pace of Seattle. Our Southern California markets have good demand, but are feeling some pressure on pricing. In our expansion markets, we continue to feel the impact of new supply as expected, but have been able to maintain occupancy at or above 95% given the strong demand in those markets. Overall, we continue to see improvements in the eviction process times as the court systems work through their backlogs and the number of long-standing delinquent residents continue to decline. This trend continues to support our view that we will see overall improvement in bad debt net contribute 30 basis points to our same-store revenue for the full year. Given all of these trends, we have revised our full-year same-store revenue guidance midpoint to 3.2%, which includes an assumption of seasonal moderation in both new lease and renewals and a normal decline in occupancy later in the year. Now a little more color on the individual markets. Starting in Boston, the market is performing in line with our expectations, which assumed that it would be one of our best markets in 2024. Occupancy is holding strong amidst the highly seasonal summer leasing months as compared to past years when we often saw a declining occupancy as residents churned in and out more frequently. Overall, strong retention in the second quarter, along with continued new lease growth, has positioned us well as we finish the primary leasing season. We are seeing good performance in both our urban and suburban portfolios here, but the urban portfolio produced stronger results in the quarter. The market has a stable employment picture and little new competitive supply being delivered in 2024. New York continues to perform very well. We think this market probably has the best supply-demand dynamics in the country for the next couple of years. We're over 97% occupied, with both new leases and renewals coming in better than expected. Overall, the economy in New York feels healthy with a solid and increasingly diversified employment base. In fact, private sector employment in New York is at an all-time high. All indications are that this market will continue to show strength through the remainder of the leasing season. Washington, D.C. continues to be a real standout performer for us in 2024. The market is over 97% occupied and showing great rental rate growth. Demand feels good across all of our submarkets, and we expect this to continue, but we will be keeping an eye on new supply deliveries in the back half of the year as we have felt isolated periods of pressure in the central D.C. submarket. In Los Angeles, a generally stable employment picture is leading to good demand in the market. Traffic and applications are up, and our second quarter occupancy, while slightly below where we wanted it to be, is up 70 basis points from the second quarter of 2023. During the quarter, our new lease change was negatively impacted by some concentrated new supply in Hollywood Mid-Wilshire as well as some shadow supply coming into the market in downtown and West LA submarkets from evictions. Our suburban deals in Ventura and Santa Clarita, which did not experience this, are leading the pack. We are already seeing marked improvement to the new lease change in the third quarter, but we expect this stat to continue to be volatile as the market works through filling these units, which remains a catalyst to our revenue growth. Rounding out the rest of Southern California, San Diego and Orange County are continuing to see good demand, but we are seeing some price sensitivity with residents willing to move further out in these markets for affordability reasons. Now for the markets that may be of most interest, San Francisco, Seattle and our expansion markets of Dallas-Fort Worth, Denver, Atlanta and Austin. San Francisco and Seattle continued to perform better than expected, with Seattle outperforming the most. Remember that we entered the year with relatively modest expectations and the potential for upside in both of these markets. In San Francisco, demand feels good right now, and we are seeing some of the best weeks in terms of traffic and application volume. We continue to see really positive signs in the downtown submarket in regard to the quality of life issues. Property crime is down, and the city's nightlife scene is thriving. Recent reports that Salesforce is pushing harder on return to office should have a positive impact on the city. Looking forward, there is little new supply coming to the market. Overall starts are way down, and there have been no new starts of competitive products for the last three quarters, which supports improving conditions for the next couple of years. As I mentioned earlier, Seattle is really showing signs of recovery. Occupancy is 96.2%. Our renewal performance remained strong. We’re feeling good about both the quality of life issues in the market as well as traction in places like South Lake Union from the return to office at companies like Amazon. The tech employment here looks solid as we see more postings for positions in both the city of Seattle and the Bellevue, Redmond area. And looking at our migration patterns, we are also seeing more people come to us from the farther out suburbs, which is an additional demand driver to our assets. Also, we expect our large concentration of properties in Central Seattle to benefit from a newly completed $800 million infrastructure project that better connects Downtown to the waterfront and created a spectacular new park for our residents to enjoy. We are excited to join in the effort to enhance Downtown Seattle with our newly completed $8 million improvement of the Staircase Plaza at our 761-unit Harbor Steps Apartments. Our steps and the associated new retail there are another way to connect the city down to the newly activated waterfront park. At this point, the Seattle market is positioned to do well, but there is supply coming later this year, and we need to see if the demand and pricing holds through the third quarter. Switching to the expansion markets, there's really no surprises here. We continue to see demand, but it's a challenging operating environment for both new leases and retention given the amount of new supply. Right now, the pressure on new leases makes renewing residents the number one priority in these markets. Overall, the expansion markets are performing in line with our expectations, with Dallas and Denver leading the way. Looking forward, we're excited to grow our portfolio and create operating scale in these markets that continue to demonstrate long-term demand from our target affluent renter demographic. And finally, on the innovation front. This past quarter, we began testing a new AI resident assistant that we anticipate could handle 75% of general resident inquiries, including the ability to help residents triage basic service requests and then automatically submit those that require a visit from our service members. In addition, we continue to see promising results with a self-guided tour experience app that increases tour availability to meet the needs of our prospects. We are very excited about these initiatives as they will continue to create future operating efficiencies, while providing a more seamless customer experience. I want to give a shout out to our amazing teams across our platform for their continued dedication to innovation, enhancing customer service and their exceptional disciplined approach to expense management. With that, I'll turn the call over to Bob.

Thanks, Michael. Mark and Michael went over the drivers of our 70 basis point improvement in same-store revenue at the midpoint. So I'll focus on our revisions to same-store expense and NOI guidance, along with normalized FFO. Turning to same-store expenses, expense management continues to be a core competency for the team. Our revision reflects this with a 100 basis point reduction at the midpoint, which is now below the low end of our prior range. This reduction reflects really solid year-to-date performance driven by three major categories: repairs and maintenance, payroll and utilities. These categories make up about half of our same-store expenses, and all three have growth that is either flat or negative year-to-date. While we expect growth to accelerate in the second half of this year given more challenging 2023 comparisons, we still anticipate delivering very low growth of around 3% for the full year. This is yet again a reflection of the value in our platform from harnessing innovation, technology and efficiency to deliver outstanding results. With these revenue and expense improvements, we are increasing our same-store NOI growth outlook and now expect same-store operating margin expansion for the full year, something of a rarity in the apartment sector today. This NOI growth is the main driver of our $0.04 or 100 basis point improvement to NFFO growth reflected at the midpoint of our guidance. Page 2 of the release provides a detailed reconciliation of our revised NFFO guidance for your reference. One final note before I turn it over to the operator. This quarter, we enhanced our capital expenditure disclosure with the intent of providing stakeholders better insight into the value-enhancing CapEx activities we undertake. In 2024, these activities primarily consist of unit renovations, technology spend, and sustainability initiatives that are discretionary and provide positive return on investments through enhanced revenue growth, additional income or reduced expenses. These projects are often some of the best risk-adjusted returns we can make. With this new disclosure, we also believe that we are presenting our CapEx spend more in line with our industry peers. With that, I'll turn it over to the operator.

Thank you. Your first question comes from Eric Wolfe with Citi.

Hey, thanks. I was hoping you could go into greater detail on what you're expecting in terms of seasonality for the rest of the year. And I asked the question in part because it looks like you guided to around 2.4% employment rate growth in the first half. You're guiding to 2.5% in the third quarter. So it feels like you're guiding to no deceleration in the fourth quarter, but just trying to understand if that's actually the case?

Hey, Eric, this is Michael. And I guess I'll just start out. I'll give you a little bit of color. So first and foremost, I think specific to the third quarter, right now, we expect very stable kind of achieved renewal rate increases around 4.5% and slight seasonal moderation of new lease change. We do have a little bit of an easier comp in September from the declines that we saw last year. So it may hold up a little bit better than expected, but we didn't include kind of a lot of that in the initial forecast right now. Overall, for us, I think the key takeaway should be that we originally modeled kind of this full-year blended rates to be about 2%. And right now, we're expecting them to be closer to like the mid-twos. A lot of that is going to depend on the mix of the renewals and new lease transactions, both in the third and fourth quarter. But if we just look at the snapshot today, the portfolio is over 96% occupied, our application volumes remain solid, and our net effective pricing trend curve is more in line with a normal year as compared to the slightly muted curve that we initially modeled. So I think right now, we feel like we're in a really good spot for July and all of our dashboards, all of these metrics just point to kind of normal seasonal deceleration curves both in the third quarter and fourth quarter.

All right. That's helpful. And then as far as LA, you mentioned some of the pricing weakness you're seeing from evictions. So I was wondering when you would expect that impact to sort of make its way through the market? And what type of improvement you would expect to see once that happens?

Yes. I mean I think specific to LA, so first and foremost, right, we were focused on the occupancy build. We mentioned that on the last quarter call that we were doing some concessions. We were able to see a year-over-year lift in occupancy of about 70 basis points. The new lease change in LA was less than what we anticipated and stayed negative in the third quarter. A lot of that was really based on the impact that we saw in new supply in some key submarkets of Hollywood Mid-Wilshire and Downtown. So I think when we think about the LA performance for us and the recovery, we still think for the balance of this year, we're going to continue to feel some of the pressure from the supply in those isolated submarkets. The start numbers are materially down, so that bodes well for future year performance. So in my mind, I think you should just expect as we continue to work through this year and get ourselves into next year for 2025, we're going to have some upside potential on the recovery. But we really like the total revenue story right now because we are filling these units with paying residents. So despite the new lease change stat that you kind of see being a little softer in the third quarter, the total revenue is still producing a pretty strong number for us.

Got it. Thank you.

Your next question comes from the line of Steve Sakwa with Evercore ISI.

Thanks, good morning. Michael, could you maybe just speak a little bit more about the renewals? I know it was 5% in the quarter. How did that trend kind of April, May, June? And then where are you sending out renewal notices today for kind of the July, August and maybe September time frame? Thanks.

Yes. So first, I think the renewal performance through the quarter has been pretty stable for us right around that 5% mark. For the third quarter, like I said, we have a lot of confidence right now. We have quotes out in the marketplace for the next 90 days that range between like 6.5% and 7%. We're negotiating still a little bit more than norm, and we think this kind of slight bias towards occupancy, clearly, in some of the expansion markets and even the LA market that I just discussed, makes sense for us from a total revenue standpoint. So I think we expect, even as we work our way through the third quarter, pretty stable renewal performance results and we'll achieve somewhere right around that 4.5% mark.

Okay. Thanks. On the capital deployment front, either for Alex or Mark, it sounds like everything is around five caps. How are you thinking about IRR hurdles today? Has that changed as the stock price has increased and bond yields have gone down? Are you adjusting your underwriting criteria at all from an IRR perspective?

Hey, Steve, it's Alex. And you're right, we're pricing things that are generally newer or new product in a range around a five cap. And when we filter in some slightly negative rent growth in the first year, offset by some operating platform improvements, flat year two and then a recovery in year three, which may be around 5% for the next couple of years. As you're into half of '27 and half of '28, you're getting to a number that's around an eight. And that's a deal that works for us and fits within our cost of capital.

Great. Thanks.

Your next question comes from the line of Adam Kramer with Morgan Stanley.

Great. Thanks. Maybe just focusing on the expansion markets. I want to kind of hear your view on maybe the potential progression of new lease growth, marketing growth this fall. If you can even kind of compare it to typical seasonality, obviously, more supply there. So I just wanted to know how do you think the Sun Belt will play out this fall relative to typical seasonal patterns?

Yes, Adam, this is Michael. So I think I would just start by saying, as we think about the new lease change performance in the expansion market, so far, there's nothing that's really surprised us. I mean what you're seeing today is that we have a lot of former residents moving out that never received a concession. We're averaging anywhere between, like, 35% to 50% of applications receiving about six weeks. That's what's driving some of that new lease change. And I think as we think about the balance of the year and the seasonality, the interesting thing about these markets is that, one, they definitely demonstrate a little less demand seasonality, meaning that they don't drop off in demand quite as much in the shoulder seasons as some of the coastal markets do. So I think we have this opportunity that we could just kind of stay in the zone that we've been in. But we expect challenging operating conditions in those markets for the balance of the year.

And just to be fair, Adam, it's Mark. These are markets we don't have very large exposures. Meaning Denver now with 10 assets, that's a meaningful portfolio. But some of these markets, we're still building up our portfolio. So we're telling you what we see on the ground. It's certainly not maybe except as to Denver comprehensive. The portfolio will get larger. But I would say we ran in these markets until about 2015. We understand the impact of supply, and I think Michael's comments are generally applicable. But again, our knowledge on the ground is more for Denver and a little bit less for those other markets as we build the portfolio out.

The other thing I guess I would just add besides the read through to a broader market is not our numbers is that a lot of the assets we own are brand new in the areas where a lot of the new supply is being built. So that's why we kind of say we expected those difficult operating conditions. But again, it's playing out kind of like we expected.

Yes. And we bought those assets knowing that. And really depending on less CapEx in the long run, a better resident base. I mean we had a lot of reasons we thought these assets even though they would face that supply. We're better than maybe owning deep suburban assets that add outdated physical plants and outdated unit layouts and just would require a lot more CapEx over time.

Great. That's really helpful. And I thought the blended rate for established market disclosure that you guys added this quarter relative to the kind of whole portfolio. I thought that was really helpful in just kind of showing the impacts of these markets. I want to focus on the supply aspect, and I found your insights about the Seattle supply cycle potentially peaking later this year quite interesting. Among the established markets, is this one that you are monitoring most closely regarding supply? Are there other markets that might also experience a similar timing for deliveries, pacing behind the national peak?

Yes. Adam, this is Michael again. I really do believe that it is the Seattle market. Outside of the expansion markets that we just talked about, it's the Seattle market right now that we're going to have probably the most focus because it was back half loaded. There are a few more deals coming online in Redmond where we have a concentration of newer assets that will go head-to-head. And really, outside of that, when you look at this overall level of competitive supply pressure, which for us, we kind of defined by proximity 1, 2-mile radiuses depending on the market. We have some isolated pockets like in the Korea town area and a little bit of Central D.C. that I mentioned in my prepared remarks, where we know we're going to continue to feel some limited pressure from the supply. But outside of those areas, we really feel like we're in a good spot from a less pressure from the supply coming online in the balance of the year.

Great. Thank you so much for all the color.

Your next question comes from the line of Josh Dennerlein with Bank of America.

Hey guys. Mark, just wanted to follow up on a comment you had in your opening remarks on podding of the Dallas and Atlanta acquisitions. What kind of uplift do you expect from that podding effect versus that I think year 1 underwriting of, call it, 5%? And then does that podding effect assume additional properties in those clusters?

Josh, this is Michael. So I'll just talk in general about how we're approaching podding, which to us is really just sharing resources. Across assets today, we have about 65% of our properties that are already functioning with some level of shared resources. As we think about going into these expansion markets, clearly, we need the acquisitions to create those opportunities to create the density because the proximity of assets to each other really does facilitate the upside. I think what you see is the benefits coming off of podding. Clearly, you see that show up in our payroll growth numbers, and that is what we would expect going forward in those expansion markets.

It depends on the location of the asset. In some instances, we are acquiring assets that are far from what we currently have or own. For instance, if the asset is located in Central Atlanta, we already own properties in Midtown, which makes additional shared services a logical move. Conversely, we have assets in the Northeast quadrant of the suburbs, which are situated further away and present fewer opportunities for shared services. Therefore, it varies depending on the specific asset.

Okay. I appreciate that. Maybe just stepping back, just how should we think about maybe the margin expansion opportunity across your portfolio in the years ahead?

So I'm going to start, and then Bob may elaborate on this. So a little bit right now with inflation tailing off, I really thought about margin expansion more in terms of just blunting the rate of inflation in our expenses. Right now, I think what technology is allowing us to do is really harvest expense savings and not sacrifice on the service side. Michael Manelis has spoken to this, we're really shifting more to our revenue focus. So I think you're going to see us talk more about ways that we can provide additional services to our residents or be more efficient on that revenue line as opposed to just simply continuing to screw down expenses. There will always be opportunities there. But I think we're getting to a point on expenses where there's probably more opportunity on the revenue line for a bit. I don't know, Bob, if there's anything you'd add on the margin side there?

No. And clearly, obviously, the revenue opportunity helps the margin even more so than the expense side, right? So being able to drive that kind of top line revenue opportunity, coupled with expense discipline that we've demonstrated and continue to demonstrate, we think that we can deliver a margin that is approaching 70% or hopefully even better as we kind of layer in these innovations and this technology and just have the team operate at maximum efficiency.

There's just a number of ideas that the group has that we're testing, which is the highest number we've ever seen. So just when you think about both expense and revenue opportunities, there's a lot of open experiments. One of the great things about our platform is we can test it on three or four assets. If it works well for us and for our residents, we can roll it out. And if it doesn't, well, that's fine, we'll go on to the next idea. So I think that's what's exciting about where we sit in our journey.

Your next question comes from the line of Anthony Paolone with JPMorgan.

Yes, thanks. Just to follow up on the OpEx side there. So given all these initiatives, do you think we are back to a 2% to 3% expense growth range for the next couple of years?

Hey Tony, it's Mark. I'll start. Bob will correct me as usual. I think it's going to be hard to say that with property taxes being 45% of our expense load. We've got a little, and we footnoted 421-A burn-off pressure there. So I think that number is easily going to be three-plus and close to four at times in the next couple of years. And so it's going to be a little bit difficult for us to push that number below three consistently, I would think, without seeing some other big innovation occur. We'll continue to challenge Mr. Manelis to do that. But I think the property tax part is pretty uncontrollable. I do see some opportunity in insurance. I hope we get some benefit there, especially if the hurricane season isn't too bad. We don't own in those markets, but it's all very much connected. So I don't know, Bob, if there’s something you'd add on the expense side. But to me, the challenge would be property taxes are tough to manage.

We experienced an increase in 421-A this year, as Mark mentioned, and we expect more increases to come. However, our goal is to manage inflation effectively, aiming to perform better than inflation rates. Those initiatives will help us, and we will continue to encourage Michael to deliver results.

Okay. Thanks. And then just my second one, I know these are not big dollars for EQR. But I noticed that your advocacy costs are up a lot in the quarter versus, say, what you were spending in 2022 and even into 2023. So can you maybe just step back and give us a sense as to how you're thinking about the regulatory landscape and if anything has changed there? And perhaps whether some of the risk there has shifted to the federal level or if it's still just very much a local matter?

Yes. Thanks, Tony. There's a few things in that, so I'll try and go through it. But first, directly, when you have a year like this with the California ballot initiative, you're going to see a lot more spending. This is going to be much more akin to 2018 and 2020 levels of spend on our side when we fought and successfully fought off valid proposals with the rest of the industry on rent control in California. I would expect that number to be $10 million or more this year, and that's what's sort of contemplated in the numbers. And a lot of that spend will occur in the third quarter in contemplation of course, of the election in November in California. So a lot of the regulatory effort right now for the industry and for our company is focused on California. It is something we've beaten off on two prior occasions by more than 20 points. I think voters are very sophisticated in hearing the arguments against rent control. I think it's really interesting in California that the forces of anti-housing, the people who don't want a single unit of housing built in places like Orange County love this measure, know that rent control means less production of housing. And I think people in California see that. So we're optimistic we can again help educate the voters in California and win on this measure again. In terms of federal versus state, I think there's just more activity that's more relevant at the state level. State and local are where most of our focus is. We did think that the President's statement about rent control is not productive. We talk to a lot of people in the administration, and a lot of those conversations are much more constructive than that sort of directly political proposal that came out that we think isn't going anywhere, but it's not helpful. So I do think most of the effort here is on the state and local side. We certainly are working with the two candidates for President, trying to educate staffs and talk to them about the opportunity to encourage supply at the federal level. And that that's something constructive the federal government can do. And so that conversation is ongoing with both the Harris campaigns and the Trump campaigns. But that's a focus on the federal side more is educational. On the states, it's both electoral and educational.

Okay. Thanks. That's really helpful. Appreciate it.

Thanks, Tony.

The next question comes from the line of Michael Goldsmith with UBS.

Good morning. Thanks a lot for taking my questions. With the increase in the occupancy guidance, does that reflect stronger demand or an intent to lean more heavily into occupancy in the back half of the year? And related to that, can you talk about which markets maybe where you're seeing occupancy build versus those where you may be pushing rate? Thanks.

Yes. Hey Michael, so first and foremost, I think recognizing the gains that we've seen in occupancy year-to-date is a lot of the driver to the increase because we are modeling for kind of normal seasonality to occur, which would allow that occupancy to start drifting back down probably towards the later part of Q3 and into Q4. So I think for us, right now, East Coast stands out. I've got all three of our established markets on the East Coast running 97% plus. I don't know that I would say that overall, I have a theme that we're biased towards occupancy. I think we're looking market and submarket. We're really focused on how do we maximize revenue. And in several of our markets and submarkets, we saw really good demand, which meant we were going to put our foot down on the gas with rate and see what we could achieve and hold back some of that occupancy. In other markets like the expansion markets and even L.A., we had demand, but we saw this opportunity, and we know what conditions are going to be like kind of for the next quarter or so, and we thought we would lean towards the occupancy. So I think every market and submarket has a different kind of strategic approach to it. But overall, right now, I would say that the raise is more indicative of what we've seen so far with the ability to achieve outsized occupancy gains and just expect normal seasonal drop-offs to occur for the balance of the year.

Thanks, and as a direct follow-up, you talked about kind of like the expectations for a normal seasonal back half of the year. So if you take the blended spread expectations, it looks like you took it from two to maybe the mid-2% range and assuming a typical seasonal year, like should we be thinking about the earn-in as we sit today for 2025 is 1.25%. And within that, like what are the factors that could change that over the coming months?

Hey Michael, it's Mark. So we're not going to speculate about the earn-in yet. I think it's just too early to have that conversation.

Got it. In that case, can I ask another question in that, right, like the NOI guidance grew by or moved higher by 145 basis points and the FFO guidance grew by 100 basis points. So can you just walk through some of the moving pieces in overhead and other that may have limited the flow through during the period?

Yes, Michael, it's Bob. I believe there's a section in the earnings release that addresses your question. Essentially, the primary driver of NOI growth has been partially offset by an increase in overhead costs, particularly in property management, which is linked to legal expenses related to defense. We operate in an environment where litigation is sometimes a reality, and our defense costs for various cases are reflected in the property management expenses. These costs are included in our normalized FFO. A significant portion of the $0.02 increase you noticed can be attributed to legal costs, while the rest relates to routine compensation accrual adjustments and typical items you would expect in the second quarter. This is how we arrive at the $0.04 increase and the 100 basis points compared to the 145 basis points difference.

Thank you very much. Good luck in the back half.

Thank you.

Your next question comes from the line of an analyst with Green Street Advisors. Please go ahead.

Hi, thank you. I was curious if you could provide your thoughts on the spread between renewal and new lease pricing being several hundred basis points? How sustainable do you feel like that is? And do we think that that may return to a more normalized spread later this year or more of a next year change?

Hey David, this is Michael. So we've looked at the data going all the way back in time between these spreads, and it's not uncommon for the spreads to be 300 to 400 basis points different from each other, clearly, when looking at the second quarter. I do think you're going to see a little bit of tightening in that spread going forward. I think with a little bit of that moderation of the renewals, just based on kind of where pricing is today in the marketplace, you'll see a little bit of that compression. But I don't think they're going to be sitting right on top of each other because it's fairly normal for us to maintain a spread between those two stats.

Great, thank you. And I was curious if you could give the numbers for what the loss to lease was in 2Q? And where does that sit at this point in the summer?

Yes. So I think first, let me just explain that. At the beginning of the year, our portfolio was in a moderate gain to lease position. We were about a 60 basis point gain. Since then, we've seen that pricing trend sequentially tick up and follow kind of a more normal rent seasonality curve, and it's put us back into a loss-to-lease environment. As of the middle of July, our loss-to-lease in the portfolio was negative 3.6%. It's a little bit less than what you would have seen in historical years, but a lot of that is just due to the expansion market pricing as well as kind of what we were seeing in the Los Angeles market. I do think it's important for everyone to remember that gain to lease is just a snapshot like point in time where you mark all leases in place to the market, and they don't directly translate into like a full-year revenue number growth. A lot of that has to do with the timing of who moves out. But again, I'm going to reiterate what I said before, which is when I snapshot the portfolio sitting at the end of July today, we like the position we're at both from a pricing trend, from an occupancy, from an application volume. And even with the loss-to-lease at 3.6%, we feel like we're in a really good spot for late July to deal with the balance of the year.

Amazing. Thank you.

Your next question comes from the line of Nick Yulico with Scotiabank.

Thanks. Just going back to Los Angeles. I know you mentioned some supply impact, but I imagine there could be some demand impact as well from some of the disruption going on in Hollywood TV film industry. Can you just talk a little bit about any trends you are seeing in kind of exposure to that sector within the region?

Yes, Nick, this is Michael. So I haven't seen anything right now in our numbers. For us, when we're looking at kind of where the residents are coming to us from, the industries, I don't have an overly concentrated kind of bucket that says I'm tied to the studio activity. I think there's a lot of peripheral jobs that are all dependent upon that activity of the studios. But right now, the demand actually feels pretty good for us in L.A. What we're dealing with right now is that you have a lot of what I would say is the shadow supply occurring in the market, where units, not only in our own portfolio but in all the properties we compete against getting through the court system, getting through the eviction process. And that's really just bringing additional supply to the market. So you look at demand, you look at the fact that the occupancy is holding strong at 95.5% plus. There's demand in the marketplace. It's just that you've got a lot more units coming into that market through this eviction process. I think you just got to give it another couple of quarters for us to work through the absorption of those units.

Thank you. One other question is about the transaction market. Can you share your insights on how buyers are assessing assets with respect to rent growth over the next few years and how this might influence initial cap rate expectations?

Hey Nick, it's Alex. It really depends where you're underwriting that opportunity. In the expansion markets, as I said, most people are slightly negative and flat the first couple of years and then seeing a pop as supply goes away. In a more urban setting, say, in San Francisco, where there's still some recovery coming, it's a different underwrite, but probably starting at the same cap rate. There haven't been a whole lot of trades, but there are deals on the market right now, and my understanding is they're probably going to trade for around a five. That buyer is expecting better things coming. They're not seeing the supply issues, obviously, that we are in the expansion markets, but they're expecting that the city continues to improve and that rent growth is a little outsized for the next few years.

Appreciate it. Thanks.

Your next question comes from the line of John Kim with BMO Capital Markets.

Thank you. It looks like new lease rent softened a bit in June relative to May. I know it's only 20 basis points. But I was wondering if you can comment on rents peaking earlier than what you've seen historically. And also as part of that question, do you expect new lease pricing in the third quarter to potentially be flat or negative?

Hey John, it's Bob. I'll start with some monthly commentary before passing it to Michael for trends. To be honest, while your inference based on the information you have isn't incorrect, one of the challenges with these monthly numbers, especially interim ones, is that they can differ from the final figures. If you look at the quarter month-by-month, June had the best results for new leases and blends. April and May were slightly lower, which is typical and normal. It can get confusing producing these preliminary monthly numbers that change over time, which is why we don’t find it helpful to provide that level of disclosure when we aren't facing significant inflection points. To reiterate, June was actually the best month for spreads on new leases and blends.

Yes, so in terms of rent peaking, I guess I would tell you going all the way back in time from like 2005, we understand the rent seasonality component. Rents typically would peak somewhere in that July to the second week of August time frame. For the last two years, we've seen what we've described as almost like a double peak, where rents peaked in June, then they softened down a little bit and then they come back up in that August period. Right now, we're in a little bit of that kind of mix where we've decelerated a little bit in the last couple of weeks. But we've got good volume. We've got strong applications. So my guess is we'll see kind of that pricing trend line pick up a little bit. Regardless of whether we pick up and have a double peak or not, I'll tell you, our rents today are up 7% from where they were at the beginning of January. That's about 40 basis points stronger than a normal rent seasonality curve and definitely stronger than kind of the muted expectations that we started the year. So I think we like the rent level position that we're at right now. Whether we get a little more acceleration for the next couple of weeks really doesn't impact kind of our full-year outlook.

Okay. And then if I could ask about turnover, it went up a little bit, but still relatively low compared to where it's been historically at 11.7%. But can you discuss any differences between your established and expansion markets on turnover?

John, this is Michael. The turnover in the expansion markets is currently higher than in the established markets. The renewal process shows that residents have many choices available. We're making a significant effort to improve this, but the renewal rate is around the mid- to high-40s, which is lower than the 55% to 60% we see in the established markets. Overall, the turnover rates in those established markets are still quite low, reflecting our historical trends. We are currently experiencing historical lows for turnover across all markets, which puts us in a favorable position.

Great, thank you.

Your next question comes from the line of Jamie Feldman with Wells Fargo.

Great, thank you. I guess sticking with the turnover topic, I mean, are there any markets where you're actually seeing an inflection point of turnover rising? And similarly, any markets where you can flag price sensitivity more than others or an inflection point in price sensitivity more than others, kind of tying into some of the comments INVH made on their call that there are some markets where they're seeing a change.

Yes, I mentioned in my prepared remarks that we observed some willingness to relocate further out for lower prices in Southern California, specifically in Orange County and San Diego. The reasons for moving out in those areas reflect this trend. However, when we analyze the overall numbers, the leading reason for move-outs remains too expensive, accounting for about 16% of our move-outs. This figure has slightly increased since the first quarter but is still below our historical average of around 20%. This indicates that our residents are generally in good financial condition and are not feeling significant pressure. As noted in my previous remarks, we did see some signs of this trend in Southern California, which we will continue to monitor. The rent-to-income ratios for new residents in the portfolio stand at 20%, further reinforcing the idea that they are financially stable.

Okay. Thanks for that. And I appreciate your comments on the political environment. But I guess just sticking with D.C. specifically, and it sounds like either way, we're going to have a change in administration. Just historically, how does that market tend to trend around a Presidential election around a change in administration just in terms of demand? And what should we expect to see on the occupancy side?

Ins and outs and very stable, actually. We've looked at this, trying to see if the actual administration completely changes out what happens. Right now, we can't see anything in the data to suggest that there's a material impact to our overall demand drivers there.

So you think it's pretty smooth, just through '25? Barring just normal...

Yes, I think it's just stable.

I think the federal government is a bit of a monolith. Keeps going.

Okay, thank you.

Your next question comes from the line of Haendel St. Juste with Mizuho.

Hey, good morning out there. Thanks for taking my questions. Mike, I was hoping you can provide a little bit more color on the West Coast portfolio. What you're seeing concession-wise across L.A., San Fran and Seattle. And what's your expectations are for blended rate growth for those markets in the second half versus the mid-2% portfolio? Thanks.

Yes. So first, concessions for us in the portfolio do remain concentrated in the West Coast, and it's really Downtown San Francisco, the City of Seattle and Los Angeles. For us right now, the volume of concessions in those markets is really ranging about 15% in Los Angeles, just receiving under a month, and in Seattle and San Francisco they're more like 30% to 40% right around a month in those downtown areas. So I think for us, we expect that the concessions are going to be stable here for the next couple of months. And then we do anticipate a little bit of an acceleration in the back half of the third quarter and in through the fourth quarter. That's just kind of looking at what we've seen from a demand seasonality standpoint, where our expectations are. Our overall concession use did come in a little better than we expected. It was 25% lower sequentially from the first quarter and about 7.5% lower than the second quarter of '23. In terms of like the stats as to how to think about the third quarter there, we do have a little bit of an easier comp coming at us in Seattle and San Francisco. So my guess is the new lease stack could hold up a little bit better. Not a lot of impact on the renewals. We expect the stability there. And I think in Los Angeles, I don't anticipate a material change because like I said, the pockets that were feeling supply pressure, we don't anticipate that abating. I think we're going to continue to work through some of the excess inventory from the eviction process, and that's going to take us through the year. So I just don't have a specific number I would give you for the quarter. I just think we've got different scenarios playing out across those markets.

Got it. Got it. That's very helpful. And Mark, maybe one for you. I guess I'm curious if any of the assets you bought here in early third quarter, Atlanta and Dallas, were from Lennar as they monetized their Quarterra portfolio. And I'm curious on your view overall of the portfolio trade that they had with KKR. It seems like a lot of that portfolio could fit your wheelhouse: newer assets, some coastal, some Sun Belt exposure. So I'm curious if you took a run at it? And any interest in the remaining assets that they may not have sold yet? Thanks.

Hi, Haendel, it's Alex. Yes, we did take a look at that portfolio. And no, we didn't end up with any of those assets. We were interested in a subset of the assets that KKR ended up taking down. They included things that KKR wanted that we didn't want, frankly. So unfortunately, of the 38 assets, there were about nine that were a good fit for us, and that wasn't a big enough chunk for us to prevail relative to KKR as a much bigger offer.

Okay, okay. So the ones here in early third quarter had nothing to do with Lennar. Okay, thank you.

Your next question comes from the line of Alexander Goldfarb with Piper Sandler.

Hey, good morning out there. Thanks. And Mark, hopefully, that apartment education extends to Albany here in New York, definitely could use it. So two questions here. The first is in the second quarter, you guys took a sizable, I guess, it's called commercial dispute and construction defects charge. So maybe if you could just walk a little bit more through that and maybe just a little background and if there are any other projects that could fit this or this is just something that had been growing for a while and finally came to fruition?

Hey, Alex, it's Bob. We recorded a charge of approximately $9 million, which you can find detailed on Page 27. A part of this charge stemmed from a commercial dispute related to a specific lease agreement, which is an unusual situation and not something we expect to happen again. Additionally, we identified a construction defect at a separate property and took a reserve for that issue. We are actively pursuing the parties involved in the construction, and there is potential for recovery in the future. It's not uncommon to encounter small construction defects like this, and sometimes we recover funds from the contractor's insurance or directly from them, but this is not a systemic issue. There are just two unique situations here.

Okay. And then the second question is, as you guys look at the landscape and everyone sort of has the same playbook, right? Supply is plummeting. Late '25 to early '28 is going to be these great years for multifamily. Given your degree of existing assets, are you guys thinking more about buying more existing assets to benefit as presumably rents really improve during this time period? Or your view is you'd rather invest more in joint developments, whether it's presales or JV developments, what have you, to have product that may come up and deliver sometime during this period? Just trying to figure out what you guys view as more advantageous, to buy existing assets or to invest in development, given what looks to be a healthy two to three years that are coming after the supply wave currently delivers.

Alex, it's Mark. Thanks for that question. We're open to buying existing streams of income or open to developing assets. We'll do either, and we're doing both. But right now, our lean is towards the existing assets. We think there's still going to be quite a bit sold. You saw the comment I made about transaction volumes going up, a lot of non-natural owners, just people that are developers that are in assets with shorter-term bank debt that we think are going to sell. They may not quite be at the fire sale price as people expected a couple of years ago, but there's still going to be good values compared to replacement cost, and we like that basis. There may be a play on development later. You may see more opportunities there. But you've got construction cost issues. You've got execution issues all across the industry still. And you've got funding issues. I think development in a REIT is just very challenging at scale because you either have to prefund yourself and carry that cash to the detriment of shareholders, or you have to go naked and hope that at the time you need the money, the capital markets are hospitable and you're able to raise it in an accretive fashion. So we like development. We like it up to a limit. And that limit usually is about what our free cash flow is, which is about $250 million a year. Because then we can sort of self-fund it and not worry too much about the external capital markets. So right now, again, the lean is towards the existing assets.

Thank you.

Thank you.

This does conclude today's question-and-answer session. I will now turn the call back to Mark Parrell for any additional and closing remarks.

Well, thank you all for your time and interest on the call today. We appreciate it. Good day.

This does conclude today's call. Thank you for your participation. You may now disconnect.