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 risk 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. A 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's 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 the 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 regions. While we've traditionally relied on the BLS to assess housing demand, the reported data has 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 insights into the key drivers supporting housing demand. The first of these is job openings at the top 20 technology companies. In June, openings in the Essex markets totaled over 17,000 jobs, which represent 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 incremental demand in our markets and is a good precursor of the recovery, particularly in Northern California and Seattle. Another factor contributing to West Coast housing demand is migration. Real-time data using Placer 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 shadow demand similar to a new job being added. Additionally, this year, Northern California has positive net domestic migration for the first time since pre-COVID. As for 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 if mortgage rates were to revert back to the 2019 level, homeownership 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 the 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 to date, achieving a 4.9% blended rent growth while maintaining a 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 this strong performance. First, relative to our other regions, Seattle has the strongest 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 peak, 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 a 3.3% blended rent growth in the second quarter, an occupancy of 96.3%. San Mateo and San Jose were the 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 peaked around early July, 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 LA. 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 an average concession of less than two days, and occupancy is healthy at 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, Essex has selectively procured 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 that 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 raise, 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 effect of 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 the 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 a 170 basis points improvement from our initial outlook. Based on our strong second-quarter results and the revision to 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 a 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 is driven by elevated operating expenses given the typical seasonality and spending for repairs and maintenance, taxes and utilities. And second, we had $0.02 of 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. Two of 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. 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.

Hi, and good morning, everybody. Angela, you mentioned that you're prepared to shift to an occupancy strategy, so just curious if we should view kind of the pullback and renewal rate growth in recent months as a tactical move to drive occupancy, or are you getting some pushback on the increases and kind of seeing retention moderate? What's 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, you know, slower time of demand, we start to migrate toward occupancy, ultimately, the goal is to maximize revenues. So it's not so much of anything we're seeing that is, you know, 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 break out how new lease growth 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 effect new lease rates, we are seeing Southern California holding steady, slight deceleration, but, you know, nothing material like 10, 20 basis points. Northern California is the more deceleration, about 200 basis points, and then Seattle about 50 to 60 basis points of deceleration. And once again, on the new lease, you know, activity here, it's pretty much what we had expected. There's nothing here that's giving us any alarm. This is normal business, you know, with us. Normally, Northern California peaks earlier than Southern California, and so this is on plan.

Thank you. Our next question comes from the line of Eric Wolfe with Citi. Please proceed with your question.

Thanks. It's Nick Joseph here with Eric. Maybe just following up on that pricing strategy, but more specific to LA and Alameda, you know, 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, Eric. We are not quite there on LA Alameda in terms of our operating strategy. We pretty much ran an occupancy-focused strategy starting late last year that has continued throughout the year. We've been able to kind of switch back and forth a little bit, but it really didn't last long. At this point, we made really good progress on delinquency, and essentially, it improved by almost 50%. We reduced by another 50% from the beginning of the year, so 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 debt, it looks like it came down to 80 basis points in July. Is your expectation that it 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 month to month, but we're pleased with the 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 of the guidance range.

Makes sense. Thank you very much.

Thank you. Our next question comes from the line of Josh Dennerlein with Bank of America. Please proceed with your question.

Hi, this is Steven Song on for Josh. Thanks for the time. And then 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.

Yes, this is Barb. It is challenging to predict because it fluctuates from month to month, but we are happy with the progress. It's important to note that we increased our guidance in the first quarter by 40 basis points due to reducing bad debt to 1.1% for the full year. As of July, we remain on track at 1.1% year-to-date. We're making efforts to improve, but it largely depends on when tenants vacate and how quickly the courts handle evictions, which is somewhat beyond our control. Therefore, we have budgeted for 1% in the latter half of the year.

Okay, understood. That's very helpful. My second question is about the concession. If I understood correctly, you mentioned it's less than two days across the markets. Could you provide details on how this varies by region and how it's trending so far?

Yes, we have the details on concessions. Generally, Southern California has a higher concession level in Los Angeles, which is expected. In Northern California, the concession situation is primarily influenced by Oakland due to the increased supply. Therefore, concessions in Southern California are mainly associated with Los Angeles, while in Northern California, they relate to Oakland's supply, making these the two main factors for higher concession levels. Ultimately, in these areas, we're looking at an average of about five days, compared to the rest of the region where Seattle has nearly zero days and other areas average around one to two days. This leads to an overall average of about two days in July.

Okay, got it. Thank you so much.

Our next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Hi. This is Sanket for Steve. We noticed the same-store revenue guidance that you updated and were surprised that you didn't raise the lower end of the range, especially since you are trending at 3.5% year-to-date. We are curious about how you arrived at the lower end of the guidance for same-store revenue.

Yes. This is Barb. Yes, there's a lot of factors that go into it. And at 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, and that could impact occupancy and concessions. And then delinquency has been a wild card. It feels like it's less of a wild card 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 at this point.

Okay. As a follow-up, are you sending out renewals for August and September?

Yes, for sending out renewals at around low 4% portfolio-wide. And based on the negotiations that we're seeing, we'll probably land somewhere between mid-3s to high 3s on the renewal side.

Our next question comes from the line of Nicholas Yulico with Scotiabank. Please proceed with your question.

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. We expect that for the full year, our blended rents will be approximately 2.7%. In the first half, we achieved 2.9%, which suggests a deceleration of about 35 to 40 basis points, but this is quite moderate and not a cause for concern. Besides the current political climate, the main reason for our outlook is that we are facing tougher year-over-year comparisons. Last year, our peak seasonality was delayed by one to two months in Northern California and by one to two months in Southern California. This challenging year-over-year comparison is a key factor. Additionally, renewals will gradually align with market rates over time, which is normal.

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

Yes. 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. The vast majority of development that we underwrite, however, does not meet our return expectations. We're looking for a significant premium to where we can go purchase today given the risk 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 market cap rates?

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

Thanks, Rylan.

Our next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.

Yes. Thanks. Hi, everyone. So for L.A. 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 such low level of supply and which is one of the reasons we've been able to produce solid results, even though we are in a low demand growth environment. But the magnitude, if we'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 number is down slightly from the third quarter. Normally, the seasonal pattern with you guys is that the fourth quarter is the highest FFO quarter. So I'm just curious if there's something that's offsetting that? Or are there something timing-related that's falling into the fourth quarter?

Yes, the timing of the preferred redemption is a significant factor. We've completed $50 million so far, primarily in July. The remainder is expected to occur at the end of the third quarter and the beginning of the fourth quarter. Therefore, we will observe the most considerable effects from those redemptions at that time, which is what is leading to that anomaly.

Okay. Thank you.

Our next question comes from the line of Haendel St. Juste with Mizuho Securities. Please proceed with your question.

Thanks for taking my question. I was intrigued by some of the comments you made about seeing positive migration into Northern California for the first time since I think pre-COVID and hearing more of employees enforcing return to office mandates. So I guess I'm curious, are you seeing that translating at all into more demand or applications, anything tangible that you can point to. And if that's perhaps something that could drive perhaps some rent or any upside over the next couple of quarters?

That's a great question. We're observing pricing power, which is leading to our strong performance, and we've raised our guidance twice mainly due to demand, supported by a low supply environment. It's difficult to predict where this will settle as it depends on return dynamics. To provide some context, during COVID, around 400,000 people left our markets, with the majority moving to tertiary markets in Washington and California. Approximately a third, or 35%, relocated to the Sun Belt and East Coast. Currently, about 1.25 times that number has returned, which means around 100,000 people have come back, closely aligning with the ratio of one-third from Washington and California and two-thirds from tertiary markets. There is still potential for growth here, but we lack clarity on the timing and extent of that growth.

I appreciate that. You mentioned earlier about transaction activity, and you indicated that you've purchased assets with some occupancy or potential for repositioning. I'm curious about the current mindset of sellers in the market. Are more potential sellers open to engaging with the assets you are underwriting? What internal rate of returns are you targeting, and what is your overall interest in investing additional capital? Additionally, what range of cap rates are you observing in the market?

Hi, Haendel, this is Rylan. There are several questions to cover, so please remind me if I miss any. Overall, we've observed an increase in volumes during the second quarter compared to last year and the first quarter. Cap rates remain fairly stable in our markets for high-quality, well-located properties in the mid- to high 4 cap range. We are actively seeking unique opportunities to integrate into our operating platform to enhance our efficiency and increase our yields. We're excited about the investments we've made this quarter, including a notable purchase at the Elan with a high 4 cap that we believe will yield additional benefits from our operating platform. This building is approximately 20% below replacement cost, with rents around 15% under pre-COVID levels. Based on our outlook for certain submarkets, we intend to aggressively pursue similar opportunities while maintaining strong discipline.

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

Yes, I don't want to provide too much detail just for competitive reasons, but back of the envelope math would suggest that these are above 8.

Okay. I appreciate that. And last one, if I could squeeze one in. Just broadly, if you can give us a sense of where the loss or maybe gain to lease is across the major regions of the portfolio?

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

Our next question comes from the line of Adam Kramer with Morgan Stanley. Please proceed with your question.

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

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

Got it. That's helpful. And I just wanted to ask about kind of modeling and puts and takes with regards to the kind of pref equity investments and then kind of buying those assets out. I know you did one in the quarter, maybe on subsequent to the quarter end. So just wondering how to think about kind of the trade-off there, right? You're buying needs a kind of fairly tight cap rates and you're losing yield that's a bunch higher. But just kind of the modeling puts it takes or how to think about kind of the short-term impact in terms of kind of gain of NOI and maybe lost equity income.

Yes, this is Barb. I may need to follow up later regarding the details on that. What I can share is that for the two investments we chose not to acquire, for which we had preferred equity, we initially projected no impact on funds from operations for 2024 in our guidance. By buying them out, we effectively gained about $0.01 this year in core funds from operations since we did not include any preferred equity income in our projections, considering those assets were on the watch list and based on the values at the end of last year, we took a cautious stance on accruing for them. In total, this added approximately $0.01. I can follow up with you later to discuss the net operating income and other relevant metrics.

Great. Thanks for the time.

Our next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.

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 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 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 big election coming up and a lot seems to be on the table.

Jamie, that's a fair question. At a high level, we believe the cost of Hawkins regulations coming up this November will likely be defeated again, as it has been historically. We will consider specific submarkets that have rent control and potential proposals affecting rent growth, but overall, our expectations, based on our economic research model, indicate that we do not anticipate any changes to statewide rent regulation in the near term.

Okay. So you'll underwrite 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 given 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 these market rent growth, we are thinking over the long term. And so they're closer to our 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 where we might be a little bit more aggressive in the near term as a catch-up on rent.

Considering your comments about the urban markets improving, do you think you might become more aggressive in seeking better value in those markets now that they have faced more challenges?

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 product 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.

Our next question comes from the line of Connor Mitchell with Piper Sandler. Please proceed with your question.

Thanks for taking my question. So there's been a lot of discussion on the bidding wars and cover environment and a 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 are you guys kind of weighing more on the acquisition opportunity still.

Yes. As you can see from our activity to date, we've been very focused on acquiring high-quality fee-simple ownership properties and not that's kind of our base case. We are open to the preferred and mezz investments, and we are pursuing several. So it's not that we've shut that off. That's really a large portion historically of our mezz investments have come as a result of development opportunities. So as the development pipeline has slowed considerably in the past year. There's just fewer opportunities for us to deploy in the prep space. So we are open, and I think we're well known within our markets as being 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 in the opening comments, I think it would discuss the strength of Seattle. It's seeing less of an impact from supply and some more return to office. Just wondering if you guys can 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 evolving markets because of supply. And what's interesting here is we originally had expected Seattle to continue to outperform in the second half. But now the supply got pushed it's 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 odd combination of easier year-over-year comp, but now more supply. So it probably often to something neutral and slightly better.

Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Thank you. I wanted to follow up a couple of times rather than mentioned cap rates in mid- to high 4% range and rent growth expectations Rylan, I think you mentioned with a lot the rents were 15% 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 approximately 15% lower than pre-COVID levels, and we don't expect an immediate recovery. However, considering the strong income growth we've observed in this submarket along with anticipated effects from COVID and the slowdown in the tech market, we believe the fundamentals are appealing, and I wouldn't be surprised if we see a recovery in rent growth within several years. That's an important factor. Regarding our peers, we are noticing some assets being traded at levels that we think are unreasonable, as we maintain discipline. Other market participants seem to be underwriting even more ambitious rent growth in various submarkets, making it challenging to determine exactly what our competitors are focusing on. Overall, there seems to be significant demand for capital and enthusiasm about Northern California, given the fundamentals we've discussed for the past couple of years.

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 of the lowest in the country. Should we think about renewal rates exceeding the 5% that you've been getting recently?

John, if we had reached our peak, then that would be more likely. However, currently, we are observing renewal rates trending downward, which has been a gradual change compared to previous months. The good news is that this isn't a significant deceleration. From June to July, renewal rates fell by about 30 basis points, and ultimately, renewal rates will align with market rent. This could happen if there were suddenly a significant increase in job growth and demand, leading to a surge in market rents, but that is not a scenario we anticipate at this time.

Our next question comes from the line of David with Essex Property Trust.

Thank you. I was curious if you could provide some color on what is changing with the multifamily supply forecast and whether some deliveries are being pushed into next year. And to the extent that you can comment on the outlook for 2025 supply growth relative to this year. Thank you.

Yes, this is Barb. Regarding our 2024 forecast for supply, some properties in Southern California faced delays that were more significant than we anticipated, resulting in about 2,700 units being pushed to next year. In Seattle, some of our recent adjustments for delays were more favorable, allowing us to deliver about 2,000 additional units this year. Therefore, there is a slight net decrease in our multifamily supply for this year. Looking ahead, we expect Southern California supply to be somewhat higher due to this year's delays, while Northern California should remain relatively stable, with slight increases in San Jose balanced by decreases in Oakland. Seattle is expected to stay neutral. Overall, our forecast indicates a modest increase, but we anticipate supply to remain muted, reflecting a 50 basis points change in total stock, which is similar to this year; thus, no significant change is expected.

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

That's a good question. We have limited visibility regarding the broader market. One thing we can observe is that when California began its delinquency process, the court faced a significant backlog, taking about 12 months to handle cases, but this has now reduced to less than six months. This improvement has directly impacted our ability to recover delinquent units and has shown related benefits in that area. As we see ongoing improvements, as Barb mentioned, it may fluctuate, but if we look at it over time, such as three-month periods, it has remained fairly consistent. It would be unexpected for delinquency rates to suddenly increase, and the core processing time is critical. As long as that continues, we should be in a strong position.

Our next question comes from Wes Golladay with Baird. Please go ahead with your question.

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

Yes. I think there was news actually just last week of an Atlanta-based developer that's decided to pull out of the West Coast. And given this is not surprise to us given what we've long said is a very challenging environment to develop in. So we're aware of it. And to be honest, we're not that concerned, fewer developers mean less competitive product in the near future and should create additional opportunities for Essex.

Yes, that's what I was thinking. I believe you mentioned you are targeting a 100 basis point spread versus acquisitions, and I thought you might be able to develop more countercyclical at this time. Can you comment on where your spread stands today and how much further it has to go?

That estimate is current today. It's all dependent on our fundamental outlook for the specific submarket where we can acquire land on a regional basis that can drive the numbers. We're also closely monitoring hard costs. I would say we're closer today than we have been in many years. We haven't started a new development in almost four years, and we've been very disciplined. We recognize that it's quite challenging to effectively develop and create value for shareholders through this process. Therefore, we will continue to exercise discipline. The company has a long history of entering the market at the bottom of the cycle, and we are cautiously optimistic that we will be able to rebuild that pipeline in the near future.

That’s helpful. Thank you.

Our next question comes from the line of Ami Probandt with UBS. Please proceed with your question.

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

Yes, this is Barb. The numbers do bounce around month-to-month, that's why 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 flag there. It's just monthly noise.

Great. 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. Our reasons for move-out have remained steady. It's mostly job changes or changes in households and that's remained relatively consistent.

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

Well, thank you all for joining the Essex call and for all your questions, and we look forward to seeing all of you real soon.

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