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 in a blender, 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…

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 gave bought 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…

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 and attribute to our capable team. With these revenue expense 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. [Operator Instructions]. Your first question comes from the line of 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 did of 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 tubes. And 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, I mean, 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. And the new lease change in LA, it was less than what we anticipated by staying negative in the third quarter. And a lot of that was really based on the impact that we saw in new supply in some key submarkets of Hollywood Mid-Wilshire in Downtown. So I think when we think about the LA performance for us and like the recovery, clearly, we have upside built in for us. I 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. And I think as we look at 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 like the expansion markets and even like 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. And then maybe on the capital deployment front, either for Alex or Mark, you sort of -- it sounds like everything is somewhere in and around five caps. I guess, how are you thinking about IRR hurdles today? And has that really changed as kind of the stock price has gone up and bond pricing, bond yields have certainly come down. So I guess, are you changing 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 say, newer -- or new product in say an $80 million to $120 million price range, typically in the suburbs and what we've been buying has been our expansion mark that around a five cap. And when we filter in relatively -- 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 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 kind of typical seasonality, obviously, more supply there. So I just wanted to know kind of 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 as some of the shoulder -- 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. You can look at the new supply that's coming in. You look at kind of how we're balancing the trade-offs between occupancy and rate. And I think we just expect that we're going to be in this place for the next couple of quarters. I don't necessarily forecast that we're going to see marked deceleration from this point forward. But I think we would clearly expect to have difficult operating conditions 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.

Yes. 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. Maybe just -- and sort of to be fixated on supply here, but I think you guys had some interesting color on kind of the Seattle supply cycle maybe hitting a little bit later this year. Just wondering kind of among the established markets. Is this the market that you kind of have -- you're watching most closely in terms of supply? Are there others that maybe have a similar cadence in terms of deliveries maybe later than later peak than the national peak in terms of deliveries?

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 focused 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 the 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 some of 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 like 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. And 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. But there's also opportunities in the service side of the business as we think about leveraging resources differently that take our dependency off of third-party contractors off. That kind of keeps that R&M number down as well.

And just to elaborate -- it's Mark on that. It depends on where the asset is. In some cases, we're buying assets that are a ways out from what we have in contemplation or own already. So if it's an asset that's nearby, for example, in Central Atlanta, we own assets in Midtown already. And so owning more of their shared services are an obvious play. We bought assets in the Northeast quadrant of the suburbs. That asset is a little further out. There isn't as much shared service opportunity there. So it's a little bit asset by asset as well.

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 innovation and this technology and just -- the team operates at maximum efficiency.

There's just a number of ideas that the group has that we're testing 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. And 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 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.

And we do have some -- like Mark mentioned, this year, we had some step-up in 421-A. We will continue to have some more step up. But I think what we can kind of endeavor or what we do endeavor to promise is depending on the context is if inflation is X, we endeavor to perform the best we can at X minus, right? And so that's what those initiatives will do, and we continue to pressure Michael to deliver.

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. So this is going to be much more akin to 2018, 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. So I would expect that number to be $10 million or more this year, and that's what's sort of contemplated in the numbers. There's a Reg G sort of reconciliation towards the back, but that's in there and that's something we would expect. 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 two prior occasions by more than 20 points. So voters, I think 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 is 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, right? 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. And 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 it -- 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. And I think there's a forward rec in the earnings release that can help you. But it is basically the main contribution to NOI growth offset in part by overhead growth that -- a good portion of that overhead growth is actually coming from property management and is related to legal costs associated with defense. Unfortunately, we do live in an environment where we are sometimes facing litigation -- regulation by litigation or attempts at regulation by litigation and our regular way kind of defense costs for various cases go through that property management line item, and we include those in normalized FFO. And so a good portion of the increase or the $0.02 production that you saw in that rec is associated with legal costs and the remaining is just kind of your regular way compensation accrual adjustments and the typical stuff you see in the second quarter. But that's basically getting you down to the -- reconciling you down to the $0.04 increase and the 100 basis points versus 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 [indiscernible] 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 100 bps? 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, 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're about 60 basis points gain. And 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 kind of what you would have saw 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, it's 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 kind of 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 36, we feel like we're in a really good spot for late July to deal with kind of 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 where the residents are coming to us from, the industries, I don't have an overly heavily concentrated kind of bucket that says I'm tied to like 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, 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. And I think you just got to give it another couple of quarters for us to work through the absorption of those units.

Okay. Great. Thanks. And then just -- one other question is on the transaction market. If you could talk a little bit more about maybe what you're seeing out there in terms of how buyers are underwriting assets in terms of rent growth for the next several years, how much that could be impacting like an initial sort of cap rate expectation?

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 a round of five. And 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. So -- however you slice it, it does seem like the magic number is a five right now. And that number works well for us. We're going to be active both on the acquisitions and disposition side.

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, 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 kind of the monthly commentary, and then I'll pass it off to Michael to give trends. And to be honest with you, while your inference is not incorrect based on the information you have, one of the challenges of producing these monthly numbers, particularly when they are interim numbers, which is where you would have gotten those or that inference for June is that they were interim and the final was different. So if you actually peel back the onion and looked at the quarter monthly-by-monthly, June was our best number on new lease and on blend. April and May were slightly lower, which is very typical and very normal. But it is -- it gets confusing when you're producing these monthly numbers that are preliminary that change over time, which is one of the reasons why we don't think it's helpful to provide that degree of disclosure when you're not in meaningful inflection points. So -- and that's why we're moving away from those. But to reiterate and answer specifically, June was actually the best month in terms of spreads on new lease and blend, and I'll pass it over to Michael on the outlook.

Yes, so in terms of rent peaking, I guess I would tell you going all the way back in time from like 2005, we kind of understand the rent seasonality component. And 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 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 bit 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. So turnover clearly in the expansion markets is higher right now than the established markets. The renewal process, the residents have a lot of choices in the market. We're working really hard to do it, but the percent of residents renewing is more like in the mid- to high-40s, not the 55% to 60% that we see across the established markets. And I guess I would look at that overall turnover number and even in those established markets, I tell you, it's still pretty low. Right? And you could see that kind of versus all of our historical trends right now that we are at kind of historical lows for turnover across all of these markets. And that's just -- it's a good position for us to be in right now.

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 mean, I think I said in my prepared remarks, we saw in Southern California, clearly in the Orange County and San Diego just a little bit of a willingness to move further out for a lower price point. You could see that in the reasons for move-out kind of showing up in those markets. The overall numbers, though, when you look at the move-out reasons, our increase is too expensive, which is one of those areas that residents could denote when they're moving out. Actually, it was about 16% of our move-outs. And that actually ticked up a little bit from the first quarter, but remained well below what our historical norms were for that stat, which was more like 20%. And that really just continues to support this notion that our residents remain in really good financial shape and aren't really kind of feeling that immediate pressure. But as I said in the prepared remarks, I did -- this last quarter, we saw a little bit of that in Southern California kind of play out and it's something we're just going to continue to watch. But the overall rent to income ratios in the portfolio for new residents coming in is right at 20%, which continues to support this notion that they're in good financial shape.

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 change 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. And for us right now, the volume of concessions in those markets it's really ranging about 15% in Los Angeles, just receiving under a month and in Seattle and San Francisco were 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. And 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. And 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 [ph] 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. So they included things that KKR wanted that we didn't want, frankly. So unfortunately, of, say, 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 fitness or this is just something that had been growing for a while and finally came to fruition?

Hey, Alex, it's Bob. So we did take a charge that you can see on Page 27, it's about $9 million. A portion of it was from a commercial dispute, which was basically a dispute related to a brown lease. So a very unique bespoke situation that is not recurring in any regard. So that was a portion of it. And unrelated to that, on a separate asset, there was a construction defect that was identified at a property, and we took a reserve around that construction defect. We are pursuing the parties involved in the construction of the assets. So there is an opportunity in the future to potentially recover some of that. This isn't that uncommon to have these kind of small construction defect issues where you have a situation and then a few quarters later, sometimes years later, you recover that amount from the insurance company of the contractor or a builder or from them themselves. So -- but it's nothing systemic or nothing that is recurring in nature. There's just two unique situations.

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, in getting more into development activity 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 nonnatural owners, just people that are developers that are in assets with shorter-term bank debt that we think are going to sell. And 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. 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 -- everyone else has left the call. Thank you for your participation. You may now disconnect.