Jul 28, 2017
Executives
Michael Schall - President and Chief Executive Officer John Burkart - Senior Executive Vice President of Asset Management Angela Kleiman - Chief Financial Officer John Eudy - Co Chief Investment Officer
Analysts
Juan Sanabria - Bank of America Merrill Lynch Nick Joseph - Citigroup Gaurav Mehta - Cantor Fitzgerald & Co., Trent Trujillo - UBS Investment Bank Austin Wurschmidt - KeyBanc Capital Markets Inc. Richard Hill - Morgan Stanley John Kim - BMO Capital Markets Alexander Goldfarb - Sandler O'Neill & Partners Wesley Golladay - RBC Capital Markets, LLC Drew Babin - Robert W.
Baird & Co., Michael Kodesch - Canaccord Genuity Inc., Conor Wagner - Green Street Advisors
Operator
Good day and welcome to the Essex Property Trust Second Quarter 2017 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 that could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the Company's filings with the SEC.
When we get to the question-and-answer portion, Management asks that you be respectful of everyone's time and limit yourself to one question and one follow-up question. It is now my pleasure to introduce your host Mr.
Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr.
Schall, you may begin.
Michael Schall
Thank you for joining us today and welcome to our second quarter earnings conference call. John Burkart and Angela Kleiman will follow me with comments and John Eudy is here for Q&A.
This morning, I will comment on our quarterly results, market conditions, changes to our market outlook and investment activity. On to the first topic.
We are pleased with our second quarter results which benefited from outperformance in Seattle along with continued improvement in Northern California. Results in Southern California were mixed, impacted to varying degrees by supply-related disruption and slowing job growth.
John Burkart will comment on each Essex market in a moment. Overall, the West Coast continues to outpace the slow-growth national economy, although the level of outperformance has narrowed.
As noted previously, pricing power is disrupted when large rental concessions are introduced to the market, usually occurring when several lease-up communities compete directly with aggressive absorption target. In our experience six to eight weeks of free rent, equivalent to 12%, 16% of annual rents, provides sufficient incentive to draw residents out of stabilized communities.
Fortunately, these large concessions generally represent only a short-term disruption and pricing power. While long-term fundamentals remain intact and California's persistent housing shortage continues.
This year’s strong recovery in Northern California confirms that the pricing destruction we experienced in 2016 was directly attributable to levels of rental concession. As soon as these concessions abated in early 2017, market rents recovered and pricing firmed.
Accordingly, we have experienced recent concession-related pricing power erosion at certain of our properties in Downtown Los Angeles, West L.A. and the Tri-Cities.
We expect pricing power to rebound when concessions abate. I would like to recognize the operations team for reacting quickly and thoughtfully to changing market conditions.
Noted on our last call, an important part of our expectations are that tight labor markets in California push incomes higher, high net workers from other parts of the U.S. and world.
The Essex markets, 2017 personal incomes are expected to grow 4.9% led by San Francisco at 5.9% and compared to the U.S. average of 3.2%.
Further, over the past year the ratio of rental income has declined in both San Francisco and San Jose two areas most affected by affordability constraints. Median home prices are also growing faster than rent, Seattle leading the way 14.8% year-over-year, and California up 7.2% both outpacing rent growth over the past year.
This is important for two reasons; first, higher home prices make the transition from a renter to a homeowner more difficult; and second, a significant part of the Essex portfolio is convertible into condos. On to our revised 2017 outlook.
We made a number of changes to our MSA level forecast on Page S-16 supplement. First, we've reduced our job growth forecast for several metros including Orange County, San Jose and San Diego.
Across the Essex portfolio, job growth peaked in 2015 and has slowed since. Tech markets continue to report strong yet decelerating job growth that has consistently outperformed the U.S.
average. Southern California, however, is a more diversified economy and therefore performing more in line with the broader U.S.
average. Additionally, several factors have impacted our forecast as follows; first, and most notably is the shortage of skilled workers and low unemployment rate, which are more acute on the West Coast.
Unemployment rates in the Essex markets are now at or below the U.S. average of 4.5% with San Francisco, the lowest at 2.6%.
Overall, the unemployment rate in the Essex portfolio has declined 50 basis points over the past year with nearly 20,000 open positions at the large companies in California and Washington. Second, demographic factors are also contributing to slower job growth.
According to one study, there are now 8,000 baby boomers turning 65 each day and that rate will continue to accelerate. At the same time, the number of millennials entering the workforce is now declining.
Growth should continue to slow number of baby boomers reaching retirement age is expected to exceed number of millennials entering the workforce. Fortunately, longer life spans and healthier senior workers will slow this impact because they often remain in the workforce past the age.
Third, is the housing or location preference of retirees. It is estimated that more than 70% of retirees want to “age in place” referring to the fact that they strongly prefer to remain in the same house and/or community, friends and family.
Given longer life spans and the preference to age in place many look to consume homes without requiring a job, thus creating housing demand, it is not appropriately represented in the normal relationship where two jobs are needed to create one household. Finally, the limited supply of skilled construction labor also appears to be an influence.
The demanding physical requirements of construction result in earlier retirement compared to other industries and studies indicate that many more construction workers are at the end of their career or to those new workers entering the trade. This leads us to believe the construction labor were remain in short supply, which will help keep construction costs near current levels for that significant increases in housing buy.
These forces should remain in place as we head into 2018, tight labor and market conditions, pushing incomes higher and hopefully attracting people from other areas. While higher wages will impact operating expenses also make apartments more affordable and are necessary to push rents higher.
Summing this up, as long as the economy continues to expand, we see apartment rents growing at near their long-term averages for the foreseeable future. Turning to investment activities, we modified our investment strategy during the quarter driven by lower capital costs for both long-term debt and equity as well as improved expectations from rent growth in some areas.
Previously, our 2017 plan rely primarily on dispositions to fund new investment. We now anticipate fewer dispositions reliant instead on stock issuance and long-term debt.
As to dispositions our strategy will focus on portfolio culling activities whereas previously we targeted partial sales of wholly-owned properties to institutional co-investment entity. Thus, we are now targeting a range of $300 million to $350 million per property sales in 2017, down from a range of $400 million to $700 million previously of which one $132 million has been completed year-to-date.
With respect to acquisitions investment conditions remain highly competitive with strong investor demand relative to a limited number of quality properties hitting the market. Thus prices are being driven above our expectations and we are often out bid.
We have closed $270 million year-to-date, currently we have two properties in contract getting approximately $230 million. If these transactions close cumulative 2017 acquisitions should be approximately $500 million, which is within our targeted $400 million to $600 million range.
Please note that the foregoing comments about acquisitions and dispositions should refer to total property values as many of these transactions will involve institutional co-investment. Angela, will discuss the net impact on Essex's balance sheet in a moment.
Additionally, given the strong investor interest in apartments especially for value-added opportunities and high quality properties in the best locations, we have lowered our internal cap rate assumption for the Essex portfolio by 10 basis points. Across our market A quality property in the best locations are trading around 4% cap rate using the Essex methodology and sometimes more aggressive buyers will pay sub 4% cap rates.
Cap rates for B quality property and location are generally 40 basis points to 60 basis points higher than A quality property with upgrade costs and related rents assumed for value-add opportunities. Switching over to our preferred equity and subordinated debt program, we've made good progress during the quarter.
Significant transactions were detailed in the press release and at quarters end we had a total outstanding of approximately $276 million, up about $26 million from last quarter. Through Q2, we have funded approximately $34 million in new deals in 2017 against our guidance for the year of $100 million.
On the repayment side, we received $13 million in repayments during the quarter and converted one preferred equity investment into common ownership position earlier this year. We have also approved five additional preferred equity deals involving around $100 million most of which are expected to close by year-end.
Going forward, we remain on track to equal or exceed our original guidance. Finally, on the development front, we remain on schedule to commence construction on two new projects and the next phase of our Station Park Green project in 2017.
In general, we continue to see headwinds to new development deals and we believe that the overall trend for apartment supply is downward in 2018. That concludes my comments.
Thank you for joining the call today. I’ll now turn the call over to John Burkart.
John Burkart
Thank you, Mike. Q2 was another solid quarter for Essex with year-over-year same-store revenue growth of 3.9% and NOI growth of 4.7%.
Overall, the market performed at or slightly above our expectation. However, the market was stronger in April and May and a little weaker in June.
Typically in L.A. and Orange County, net effective rent were flat and/or declined in June.
L.A. is negatively impacted by very competitive lease up environment and Orange County is impacted by the combination of lower employment growth and increased supply.
The Bay Area in Seattle, market rents grew significantly during the quarter. However, occupancy declined in those markets.
Specialty and occupancy in the Bay Area in Seattle was mostly due to higher turnover, which is consistent with seasonal norms. However, in Seattle we also saw slight slowdown in the market in June.
We adjusted rental rates to meet the market in July and we picked up 20 basis points of physical occupancy during the month of July, bringing occupancy this week to 96.4% and decreasing availability 30 days out from 5.3% at the end of June to 4.9% this week. Lower rents appears to have peaked in June, a month earlier than historical seasonal pattern with strong leasing activity that we experienced in July gives us confidence that the markets are healthy.
It is our expectations the markets will follow a normal seasonal pattern in the second half of the year. Our loss to lease for the portfolio in June 2017 declined to 3.4% compared to 3.8% in May, 2017.
In our market rent for the portfolio increased in June over May. Scheduled rent increased more 57 basis points, which is a good thing due to leases being renewed or units being released their rents and therefore loss to lease is declining.
We are spinning out renewals for the third quarter at an average of 4.8% for the portfolio. However, renewals rates maybe negotiated down as rents appear to have peaked for the portfolio.
In the third quarter, we expect that our occupancy will be roughly the same as the prior year’s quarter or about 96.5%. And therefore, we will not receive the benefit of increased year-over-year revenue growth related to the increased occupancy that we have had in each of the last four quarters.
It is our continued expectation that the third quarter will be the low point for the year-over-year revenue growth between 2.5% and 3% over the prior year’s quarter in part due to a tougher occupancy comp from last year. Turning to expenses, we continue to face strong headwinds both from utilities and wage pressures that I have noted on prior calls.
However, we have been successful in partially offsetting the increases by strategically bidding out asset collections to service vendors. For example, our pool and landscape contract expenses are down 1% in the prior year’s period despite the 10% increase in minimum wage, which directly impacts both services.
Moving on to update our market. In Seattle, job growth has slowed relative to prior quarters, but remain the strongest job market within the Essex portfolio with year-over-year growth of 2.6% for the second quarter.
Amazon continues to expand with their purchased of Austin-based Whole Foods for $13.7 billion currently in the State of Washington Amazon has 8,600 openings. Microsoft announced a reorganization earlier this month that will result in thousands of worldwide company job cuts.
However, only 400 to 500 layoffs are expected in the Seattle region. Multi-family supply remains high at the MD and concessions are generally one-month free for properties and lease-up.
Interestingly some of the lease-ups in the Seattle CBD have little to no concession. We have seen move outs buy a home remain elevated in the Seattle market at approximately 20% compared to historical average of around 14% to 16% for this market.
In office activity Seattle as recorded the strongest year-to-date office absorption of any major metro in the U.S. at 2.9% of existing stock.
Additionally, CMD has nearly 6 million square feet of office under construction almost half of which is pre-leased by Amazon, Facebook and Google. On the east side, [Vulcan] was developed a substantial amount of office space for Amazon in Downtown Seattle purchased two development site in Downtown Bellevue both of which are zoned for 450 foot tall towers.
Our same-store revenues in the Seattle MD grew by 6.6% year-over-year for this quarter, with the CBD at 6.7%, the east and submarket achieving – around 6.3% and [indiscernible] submarket achieving 7.8%. In Northern California, job growth in the Bay Area averaged 1.8% year-over-year in the second quarter of 2017 was roughly 63,000 jobs added over the prior year’s quarter.
San Francisco continued to lead the way, posting year-over-year job growth of 2.3% of Oakland and San Jose were up 1.9% and $1.5 respectively. There was almost 19 million square feet of office space under construction in the Bay Area roughly 44% of which is pre-leased.
In San Francisco, Salesforce and Amazon expanded their combined footprint by an additional 330,000 square feet. Across the Bay we were plans to open its first office of 75,000 square feet in the open CBD by the end of the year and in Pleasanton construction has began workday’s 400,000 square foot office building.
Finally, in Downtown San Jose, Adobe is in contract to purchase the site adjacent to their headquarters where they're planning on expansion that could house an additional 3,000 employee. Additionally, Google has started negotiations with the city of San Jose on the formation of a new campus in Downtown which could ultimately house up to 20,000 employee.
During the quarter we continued our lease-up of Century Towers in Downtown San Jose and Galloway located at Pleasanton using four to six weeks of concessions of selected units for both lease-up we've averaged over 30 leases per month at each 5. Shifting to Southern California, in Los Angeles County, job growth is average 1.4% year-over-year for the second quarter of 2017 and is generally in line with the U.S.
at 1.5%. Essex continues to perform well in this market led by Long Beach and Tri-Cities submarket was 6.9% and 6.2% year-over-year growth respectively in the second quarter, trailed by Woodland Hills submarket 3.9% and the West L.A.
and L.A. CBD submarket at 2% and 0.4% respectively.
The revenue in our L.A. region was negatively impacted in the second quarter by a dispute with a corporate tenet which was resolved after the close of the quarter.
Concessions are still high in Downtown L.A. often two months free at new assets and lease-up encourage prospects to break their existing leases and move into the new building.
Commonly in California leases allowed tenets to move out prior to the end of the term by paying a one-month lease break fee. As a result of their aggressive Downtown lease-ups we are now starting to see some stabilize assets offering $500 to one-month free on new lease which is similar to our experience last year in the Bay Area.
Additionally, the new lease-ups in Glendale and Hollywood are now commonly offering two months free. Looking at office activity in the market, television and entertainment industry continues to drive office demand in the West L.A.
submarket, Amazon Studios, HBO and Netflix expanded their footprints with the combined total of over 170,000 square feet of new leases. In Orange County, job growth continues to show signs of weakness with 0.7% year-over-year growth for the second quarter of 2017.
We achieved sold rents – solid results in this market despite the weak job growth and supply. South and North Orange submarket grew at 5.2% and 4.6% year-over-year respectively in the second quarter of 2017.
We are watching Orange County closely as market rents are being negatively impacted by the supply demand imbalance at this time. Finally in San Diego, job growth was 1.6% year-over-year as a quarter.
Our North City and Oceanside submarkets achieved 4.5% and 4.1% year-over-year growth in the second quarter of 2017 while our Chula Vista submarket achieved 2.5% over the same period. Despite the lower job growth, the rental market in San Diego has remained strong.
Currently, our entire same-store portfolio is 96.4% occupied and our availability 30 days out is 4.9%. Thank you.
And I will now turn the call over to our CFO, Angela Kleiman.
Angela Kleiman
Thank you, John. I will start with a review of our second quarter results, followed by the full-year guidance revision and conclude with an update on the balance sheet.
In the second quarter, core FFO grew 8.4% and exceeded the midpoint of guidance by $0.10, of which $0.03 is related to timing of expenses and expected to occur in the second half of the year. The remaining $0.07 outperformance were driven by the following.
$0.02 from revenue exceeding expectation, $0.02 from operating expense savings and $0.03 from lower property taxes as we received final bills from several legacy BRE properties, which primarily relates to prior year period. Therefore this is a non-same store item.
As a result of the second quarter performance, we have tightened the range of our same property revenue growth, thereby raising the midpoint to 3.6%. Year-to-date, we have raised this midpoint by a total of 35 basis points, compared to our original guidance of 3.25%.
Moving on to expenses, we are pleased to be able to decrease the midpoint of our same property expense growth guidance by 30 basis points to 2.7%. This reduction is due to a combination of property tax refund and savings realized from various initiatives implemented in operation, as described earlier by John Burkart.
The resulting impact to same-property NOI growth is a 30 basis points increase to 4% at the midpoint. And year-to-date, the midpoint of our same property NOI growth has been increased by a total of 62 basis points, as our original guidance was 3.38%.
On to FFO guidance, we’ve raised our full-year core FFO per share by $0.07 to $11.83 at the midpoint, which reflects a 7.2 year-over-year increase. We continue to drive our operating results to bottom line as our core FFO per share growth is 315 basis points above the same property NOI growth rate at the midpoint.
As for the third quarter, we are projecting core FFO per share of $2.93 at the midpoint. The $0.04 sequential decline is primarily due to the one-time property tax benefit mentioned earlier.
Lastly on the balance sheet, at the end of the quarter, our net debt-to-EBITDA improved to 5.6 times from 5.7 times since the last quarter. This is consistent with our expectations for this ratio to decrease from growth and EBITDA.
The continued downward trend in this metric over the past several years has enabled us to reduce the low end of our target range from 6 times, down to 5.5 times. During the second quarter, we issued $81 million of common stock through our ATM program, which substantially meets our equity needs to match fund our investment activities.
Since much of our acquisitions and the dispositions will involve the co-investment program. The net effect is de minimus on our funding plan as it relates future equity issuance.
We remain disciplined and well positioned to be opportunistic relative to our cost of capital in order to optimize opportunity in the marketplace. With full availability on our $1 billion line of credit, a variety of capital forces and zero debt maturities for the remainder of the year balance sheet remains flexible and strong.
That concludes my comment and I will now turn the call back to the operator for questions.
Operator
Thank you. At this time, we will be conducting a question-and-answer session.
[Operator Instructions] And our first question comes from Juan Sanabria from Bank of America. Please go ahead.
Juan Sanabria
I was just hopping you could speak to the new and renewal trends achieved in the second quarter by the major markets if you would imagine?
John Burkart
Sure. This is John.
So new in SoCal was about 3.1%, renewals were about 4.6%, in NorCal new was about 1.8% in the second quarter and renewals were about 2.7%, and then in Seattle new was about 8.7% and renewals were about 5.9%, so overall for the portfolio new coming in about 3.6% and renewals at about 4.1%. And to be clear, the way we're looking at that that is versus comparable term, so roughly 12-month lease compared to a 12-month lease because as soon as you start changing the terms because of revenue management pricing it'll change the – move the numbers around a little.
Juan Sanabria
And then I was just hoping you could talk to Southern California and you kind of mentioned some supply pressures kind of how you see that playing out in the second half of the year, and if supply is skewed to the second half of the year in Southern California, and thoughts into 2018. And how should we think about the duration of this supply pressure, maybe comparing it to what we saw in Northern California last year.
And have you seen any improvement in the jobs or kind of should we expect the same level to continue?
Michael Schall
Hey Juan, it’s Mike. Going to try and attack that question and maybe John will want to add on to that.
We see supply continuing in L.A. actually increasing a little bit in 2018 relative to 2017.
Orange County however seems to drop off pretty significantly in 2018 relative to 2017, but we’ll remain pretty consistent for the rest of the year. And we have actually a pretty large increase expected in San Diego for 2018 over 2017, so that's how that plays out and that compares to reductions, pretty big reductions in Northern California in 2018 around 40% and around 10% in the Seattle marketplace.
So that is one factor. And then as you noted the other factor is what's going on with jobs and so we brought those numbers down pretty substantially from last quarter to this quarter in terms of the Southern California job growth, but do a couple of months make the year or the quarter really fundamentally change?
I’m not sure we can answer that question. We try to highlight some of the factors that are influencing or we think reducing job growth which includes this issue of the shortage of skilled workers and overall low unemployment rate, so the availability of workers is not there and I think that's probably the key factor that is limiting job growth.
The answer to that would probably be that wages go up and people in other parts of the country relocate to the West Coast and take those open jobs. I'm not sure how we track that, but I think that is the key and those forces which will put pressure on wages and hopefully push them up and make it more attractive to make a move from the East Coast or the Midwest to the West Coast.
We think that's ultimately the answer.
John Burkart
I’m going to add just a couple of comments, as Mike said. For jobs overall, our April and May, really reflected the nation as far as a level of weakness and then June it came back stronger, so just like the U.S., so it’s a little bit of a mixed messages there.
Then just a little bit more commentary on the marketplace. In NorCal, I referenced earlier the – what we're seeing in L.A.
with the concessions and now some of the stabilized assets giving concessions because of the eight weeks free or two months free at the lease-ups. That is The one difference is in NorCal and Seattle the markets are more seasonal towards the second half of the year they just seasonally drop pretty significantly.
Whereas in Southern Cal, that tends to not happen it comes down a little bit but not very much. So how this thing plays out?
I suspect it plays out a little bit stronger than NorCal did last year.
Juan Sanabria
Thank you very much. It’s very helpful.
Operator
Our next question comes from Nick Joseph from Citigroup. Please go ahead.
Nick Joseph
Thanks. In terms of the preferred equity and nice debt opportunities, it sort of competition are you seeing in the market today?
Michael Schall
This is Mike, I’ll take that one again Nick. We're seeing more competition generally speaking and at the same time I think that we're seeing somewhat of a lower deal flow.
So we're seeing both of those occurring and that's pretty consistent with what we see on the development side and John Eudy’s here may want to add to this, but overall we think fewer development deals are penciling primarily because costs are growing faster construction costs are growing faster of that NOI which is pretty pressure on development deals and so I think generally speaking the number of deals that make sense and that pencil are fewer than they were a year-ago let's say and so that obviously cuts into be preferred equity and debt program as well.
Nick Joseph
Thanks and just in terms of rent control initiatives. Do you have any update on those recognizing the market has been in a stop in and started in terms of rent growth, but any update there would be great.
Michael Schall
Yes, it’s Mike again. There are 100 plus bills that are in the state legislature right now and many of them deal with housing and actually I was going note that there's a really good summary of a lot of the activity in the L.A.
Times article dated June 1st of this year. I guess the big question is what if anything hits the ballot in 2018 there have been discussions about Costa-Hawkins which is state wide rank control measure that basically limits the extent to which local governments can enact rent control that is the big discussion here.
But there's a lot of activity out there I don't think at this point in time and the reason why I didn't include it in my script. I don't think at this point time we can conclude much from all the activity give you some of the maybe the areas that some of these bills are dealing with certainly affordable housing production is one of the key areas.
One for example allowing smaller units, slows the small 150 units - 150 square feet per unit more housing of all types a bill for example that will expand the area around a BART station that can be developed of housing from half mile radius to a mile radius. Raising money for housing of all different types from bonds and other types of things transaction fees on real estate, eliminating the mortgage interest reduction on second homes and doubling the tax credit for low and mid income renters.
So there's lots of activity. That's at the state level, the local level there is activity as well.
So there's a lot of things happening in California and a lot of discussion, but it's probably not the right time to conclude anything from all of this.
Nick Joseph
Thanks.
Operator
Our next question comes from Gaurav Mehta from Cantor Fitzgerald. Please go ahead.
Gaurav Mehta
Yes, hi, thank. Earlier in the call you talked about median home prices going up in Seattle and Northern California and you also mention that significant [indiscernible] portfolio and convertible into condos.
Provide a little more color on that is that something on your radar?
Michael Schall
Yes, it's my this is definitely on our radar and we have somewhere around 8,000 or 9,000 apartments that can be converted into condominiums some require some additional work in order to perfect that that process. Virtually everything we build we have some kind of condo map happens in some stage.
And so including a couple of the deals that we have recently started or can start in the near future and so I know John Eudy is spend a fair amount of time looking at that. But just to remind you what our overall metric is there.
We need to see a substantial premium of condo values or the value of our property as a condo considering all the costs involved relative to its value as an apartment building. And so obviously apartment values have done really well over the last several years and so we are starting to see some of those premiums for sale housing relative to apartments.
But I think we have a ways to go. It certainly helps for example in San Francisco, we had 9.2% increase in the median home price and we didn't see anywhere near 9.2% rent growth in the last year.
Therefore that is starting to build this premium, but I’d say the general statement is not quite there. But we're definitely monitoring it, focusing on it.
Gaurav Mehta
Okay, great. And as a follow-up, I think you talked about how difficult it's getting to develop more assets because of higher cost.
I was wondering when you think about your pipeline over the next few years, should we expect you to do any more development outside of the starts that you mentioned earlier in the call?
Michael Schall
Yes, John do you want to give that?
John Eudy
Yes, this is John Eudy. I think we've mentioned in our previous call, we’ve got up to three deals that we anticipated starting between now and year-end.
All three have legacy over land costs and don't have some of the exactions that are being asked for and approvals are being granted today. So you could expect those three to occur late Q3 to early Q4.
Beyond that the pipeline is very, very skinny. We are looking at a couple of other opportunities in front of the opportunist were we can, but clearly a year from now if you look at our pipeline in process, it will be significantly less than it is now.
Gaurav Mehta
Okay, thank you. That's all from me.
Michael Schall
Thank you.
Operator
Our next question is from Nick Yulico from UBS. Please go ahead.
Trent Trujillo
This is Trent Trujillo on with Nick and thanks for all the color and taking a question. Just wanted to follow-up on in detail on your guidance range, you tightened an increase the same-store revenue guide for the year.
So can you maybe talk about your forecasted second half San Francisco rent growth expectations? And along similar lines earlier in the year, you provided some additional detail on the same-store rev expectations by region.
Do you happen to have an update on those underlying ranges and if you amended the aggregate range?
Angela Kleiman
I would point you to as far as the region-by-region basis. I would point you to our region I would point you to our F-16 that has outline for – our expectation is for the year specifically.
And before the year, for the portfolio total, the second half of the year, our range would imply the low end. Second half at about 2% and on the high end, we achieved the high end, its closer to say 4% to get us to the average of the 3.6% average.
Trent Trujillo
Okay, that’s helpful. And just maybe to get into the same-store expense side, you provided some – a lot of color in your prepared comments.
Just wanted to go back to something that you had mentioned earlier in the year about second quarter expenses projecting to about 4.5% and they ended up well below those expectations. So just a little bit more color on what you did to improve expenses and if there is anything that we can expect going forward as additional expense saving.
Angela Kleiman
Sure, happy to – as far as our first quarter call, we announce the 4.5% expense growth, and at that point we had now contemplated the property tax benefit. But also we had expected that in Q1 due to the storm activities in Q1.
We had expected to incur the normal painting, tree trimming, et cetera. Those activities occurred in second quarter, but it may sense to not do that during peak leasing season and so that’s $0.03 that still we will occur in the second half of the year.
And then of course the combination of the various operation initiative that John Burkart mentioned earlier that led us to make our confidence to lower the overall expense guidance. So we're not expecting more than what we had talked about earlier?
Trent Trujillo
Okay, very helpful. Thank you very much.
Michael Schall
Thank you.
Operator
Our next question is from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead.
Austin Wurschmidt
Hi, good morning. Thanks for taking the question.
Just a quick one, you talked about you lowered your internal cap rate about 10 basis points. And I was just curious if you could talk about what you're seeing in the transaction market in terms of volume as well as the number of bidders and who the bidders are?
Michael Schall
Yes. Austin, it’s Mike.
Thanks for the call. Yes, we lowered our portfolio NAV as noted by about 10 basis points and really that was the culmination of looking at all the transactions that we've done over the last let's say six months or so and realizing that we basically outperformed what we expected per NAV model.
And so we lowered it. I think that was probably done back in June – May, June timeframe, something like that.
So it was just simply outperforming what our NAV model said, and so we need to tighten it. In terms of the things the properties that are most attractive in the types of bidders, generally the REITs are not in the market.
Obviously, you saw the Monogram take private transaction and a name co-JV buyout and that type of thing, but for the most part, we're not seeing a big rebid, but we are seeing many institutions that like apartments and want to invest in apartments, and so I’d say the institutional side has been very, very strong. And they are most focused on one or two things, very well located and high quality properties, generally within – not necessarily just CBD, but I’ll say that top areas high quality properties and then the value-add component with a partner that can execute that.
So those two specific types of things are seeing multiple bidders. They're seeing few rounds of best in finals and that type of thing that are normally go along with those and prices that are generally once again exceeding our expectation, hence my comment in my prepared remarks that we are off on our bid.
Austin Wurschmidt
Thanks for the detail there. And then just curious when you think about same-store revenue growth expected to bottom in the third quarter and occupancy again be flattish in the back half of the year, should we expect that blended lease rates for the portfolio to turn positive on a year-over-year basis sometime in the back half the year?
Or is any of that change given some of the supply dynamic getting pushed out?
John Burkart
Yes. So you're saying blended new lease rates, we do expect that our rates right now are above the year ago and we expect that to continue.
Last year we had quite a falloff in the second half. Our expectations are more this year to be more consistent with the normal year and so that will ultimately create a greater spread.
So at the end of the year, if you look at year-over-year lease rates, the December over prior year's December, that would mean closer to 4% year-over-year rate that we would end on is what we're looking at.
Austin Wurschmidt
Great. And then just last one for me, just with all the moving pieces within the Northern California portfolio in terms of jobs being out in San Jose, you talked about Adobe and Google.
Any plans or thoughts on changing any sub market exposure within the Northern California region?
Michael Schall
Hi, this is Mike. I think that within the Northern California region, we still like San Jose a lot and it has we think some of the better parts – the rent-to-income ratio makes more sense.
And it seems like if the area that’s receiving the most activity. It's also the jobs and locating apartments near the jobs it seems like that is a logical place to be.
So we're certainly interested there, but I would say that we would consider properties in other parts of that Bay Area, part of this is a function of cap rate and a function of what it is and what kind of value we can add. So I'd say we're not going to rule out different parts of the Bay Area, but San Jose would be one of the areas that we would like a lot.
Austin Wurschmidt
Thanks for taking the questions.
Michael Schall
Thank you.
Operator
Our next question is from Rich Hill from Morgan Stanley. Please go ahead.
Richard Hill
Hey guys. Thanks for taking the phone call.
Your discussed this in various different parts throughout the call and maybe I want to just take a step back and think about guidance in terms of supply versus demand. So obviously, you're taking guidance up at midpoint.
From a high-level standpoint, maybe you’ve been drilling down to some of the individual MSAs, what's driving that higher guidance at midpoint? Is it supply getting pushed out in some of your markets or is it maybe stronger demand than you would have thought?
How you are thinking about the supply versus the demand balance?
Michael Schall
Yes, this is Mike. Honestly we don't know exactly what it is.
I mean the enemy here is six weeks to two months free of land which draws people out of the stabilized community and softens pricing power throughout the portfolio wherever it occurs. And so I think the essence of what you're asking is where are we going to see six weeks to two months of concessions within the markets up and down from Seattle to San Diego because that will be the place the pricing is impacted to the greatest extent.
Because typically in California, we offer a lease break fee given the way the laws work out here. That’s equal to one-month free, so if you get two months free basically lease-up is going to pay the lease break free and they're going to pocket, the residence going to pocket at the other month.
And so that's a lot of incentive really to move out of the building. So I guess anecdotally when we say some of the supplies being pushed out what we mean is when we start seeing that six to eight weeks that means that there's two or three or more lease-ups competing directly against one another in a local marketplace and that is causing the pricing disruption within that location.
Generally that will always clear the market at some point in time and when that clears we will start seeing much greater pricing power. And again, it’s exactly what happened in Northern California and we suspect it will happen in other parts.
But there isn't like we go out and count every quarter the number of lease-ups that are coming into the market because candidly we can't because you can't see within a building contains 200 units we can go within that 200 units and figure out exactly how many units are going to come to market they’re going to be completed. So you have to use the anecdotal process of what or lease concessions in the market and how is that affecting price within the local market.
So that is the way we do it we look to overall supply and demand for a pretty good indication of where we think the biggest risks of that are and you know anywhere that has very significant supplies. So Seattle we're concerned about Downtown L.A.
concerned about supply goes up a little bit projected in Downtown L.A. Downtown San Diego supply goes up, but pretty much everywhere else supply is expected to go down.
And actually let me correct Seattle, Seattle actually is expected to go down in 2018 by a little bit, but still remain it a pretty high level.
Richard Hill
Got it. And then just I want to ask quickly about San Francisco only because we I think heard some different data points asked whether or not supply getting pushed out or it’s quite not I know you’re not explicitly focused on that.
What do you see in San Francisco is it supply going down near-term how do you thinking about that?
Michael Schall
Yes, San Francisco is interesting, we have San Francisco at five weeks free right now, but that's down from six weeks free recently. So again back to my anecdotal evidence we say that - it's concerning but it's bouncing along at that acceptable range generally at you know four to five weeks for a not enough incentive to drop people out of these pay for example into San Francisco.
You get up to eight weeks free guess what people that are living in [indiscernible] are going to now live in San Francisco. And so the other point I guess I'd make as a relates to the Bay Area in general is that there were 25 active lease-up in the Bay Area and some of them in San Francisco and 10 of those 25 are in the at the final lease-up phase.
So and that involves a couple thousand units and when they're gone I think it will continue to be tighter. So again we see the projection for the Bay Area to become a tighter market with left at lease-up philosophy which should help us with price.
Richard Hill
Got it. And then just I am sorry for being redundant here.
The way you look at it difficult are you don't want state whether that’s demand or supply what you do know it’s the better market for you?
Michael Schall
Well, San Francisco is again to mention the unemployment rate which 2.6% a pretty good indicator that demand is very strong there and that’s - I don't think that's the issue I think on the pricing issue I think plenty of people want to live in San Francisco the reason why they don't is because of price that is just been true of San Francisco for a long period of time. So yes, I mean it's kind of again let's take Manhattan as the ultimate example.
If Manhattan prices go down, you're going to have a flood of people that move into Manhattan. Well, San Francisco is the same way out here.
So demand is generally not the problem. It's a matter of price, and that's why I focus on the concession that's been the critical key element of this.
Richard Hill
T
Michael Schall
That’s okay.
Operator
Our next question comes from John Kim from BMO Capital Markets. Please go ahead.
John Kim
Thanks, good morning. It sounds like in Seattle despite the increase in vacancy this quarter for you, the characteristics are overwhelmingly positive.
I'm wondering where you think we are in the cycle in Seattle, and if that changed at all in the last few months?
Michael Schall
Yes, it’s Mike. John, it looks like he was dying to take that question, so a chance to chime in.
Again Seattle's a little bit of you have a little bit of an enigma for us. We expect it to be a little more muted over the last couple of years and we've been wrong it's turned out to lead the portfolio, and the thing that obviously concerns us is the supply.
Although you have got a point to Amazon here and look what they've done in Seattle and hate to focus on any single entity that has such a dramatic impact, but certainly that one does. And so we view Seattle given the amount of supply produces as a little bit riskier market, which means we would seek a little bit higher cap rate if we were investing there and we don't want to continue to add to the portfolio in Northern and Southern California, not sort of keep that pro-rata share up.
So we will look at acquisitions in Seattle, but we would like to be pretty careful about buying in that market. Going forward I guess we're more or less jumping on board with the Seattle train and saying and it looks pretty darn good and it looks like it's not going to end anytime soon, so I think that as we go into 2018, we're going to do it as one of our best markets.
John?
John Burkart
Yes I would just add, I remember these calls years ago when people would ask us about Boeing and you look at the changes that have gone on in Seattle really fundamental changes and they continue to this day, yet Seattle still has a rent to median income of 25% compared to many of our markets in the mid 20's and so there's still room to go. So it's a market that's under change, undergoing change, very positive change, and I think it still has legs.
John Kim
But as far as waiting for your company, it's still going to remain around 18% or so?
Michael Schall
We target 20%, but that can ebb and flow again, cap rates and deal flow, and opportunity becomes part of that equation. We’re not developing in Seattle right now, because we don't want to be the one that is half completed when the cycle ends.
And so again we like Seattle, we're believer and more optimistic about it, today than we were a year-ago, but an area to be cautioned everywhere.
John Kim
Okay. And then on your balance sheet, marketable securities went up $30 million this quarter $152 million.
Can you just remind us what this is mostly comprised of and if you own any shares in any public company?
Angela Kleiman
Let's see. Marketable securities that is primarily our insurance captive activities, and so there is not a meaningful change investment activities there.
And so we don’t have any meaningful ownership of any of our peers.
John Kim
Okay, thank you.
Operator
Our next question is from Alexander Goldfarb from Sandler O'Neill. Please go ahead.
Alexander Goldfarb
Hi, good day out there. Just two questions here.
The first one is on Downtown L.A., just that market has been transforming for over a decade and there's always a lot of supply there. Do you have a concern that that market just because it seems like a lot of – there is a lot of push to have development there that that will remain a market of imbalance where developers will never pullback just because of the political pushing to do development there or do you think that it really will hold back and finally allow, now the landlords gets pricing power there?
Michael Schall
Alex, it’s Mike. It’s a good question.
And obviously, we don't have a perfect answer to this one. We entered Downtown L.A.
in the late 90s and we had a kind of two scenarios; one was it continues to be the place that everyone leaves at six o'clock at night, no one's there for dinner or no one lives there. And the other one was that changes to be more like a 24-hour city.
And I think that we now know where that's going. And I think the California Global Warming Solutions Act of 2006 helped it where California is trying to get people out of the suburban sprawl type of program and into high density residential in urban areas.
And if there is a shining example of that occurring is probably Downtown Los Angeles. The amount of transit dollars that are going into that area and the amount of just development in general is really I think transforming Downtown LA.
And I think that our thought is that it will be choppy over a period of time, but remember there is a constraint – financial constraint on new development and so if rents disconnect too much from construction costs and construction costs, there's no evidence are going up at a different rate in L.A. than they are in Northern California maybe it's a little bit of an advantage down there, but I think the rate is still the same.
And therefore, there's an economic reason why you can't have unfettered development forever in Downtown LA. So to sum this up, I would say we’re believer in Downtown LA.
We're not going to all in. However, we think it's a market that can take some period of time to get to what it's ultimately going to be.
Remember all the jobs are already there. It has a huge downtown.
So what we're really saying is at what point in time will people choose Downtown L.A. over a commute from, let's say, Pasadena, Glendale, Burbank, Westside L.A., et cetera.
The other phenomenon in what really drive California, again emanating from Global Warming Solutions Act is the investment in cars and highways is very small relative to the demand. So I say traffic getting worse.
I think that that puts pressure on these commutes that gets people out of their cars and again, I think Downtown L.A. is a winner in that scenario.
Alexander Goldfarb
Okay. And then the second question is just going to John.
John you mentioned that there is, I think, some softness in June versus earlier in the year. And then you sort of talked about the occupancy in the back of the year.
Was that a comment portfolio wide or that was more in talking about like Orange County and LA?
John Burkart
Sure. I mean over the whole portfolio, our occupancy dipped a little bit in June and if we go back to [indiscernible], as I was saying, we had a really strong January through May and we were not going to miss the market.
So we pushed pretty hard on rent. And I think we found basically the top, but that's why I went into a little bit more depth in the comment to say that in July we then turned around and gained occupancy by just making a few adjustments with rent.
So I don't see there's a market problem, but it really was across the whole market with most pronounced really in Seattle. And part of Seattle relates to turn and as I mentioned and part of it relates to us really hitting the peak of the market as well as Orange County and LA.
Alexander Goldfarb
Okay. That’s helpful.
Thanks John.
John Burkart
Thank you.
Operator
Our next question is from Wes Golladay from RBC Capital Markets. Please go ahead.
Wesley Golladay
Hi, everyone. Looking at the supply next year in Seattle, are you more concerned about the CBD where you don’t have exposure or more of the submarkets such as Bellevue which is going to have an uptick?
Michael Schall
Hi Wes, it’s Mike. Well, I have a chart somewhere that has the breakdown.
But I think that we still see more supply in the Downtown. And obviously, our portfolio is largely on the East side and so we think we have a little bit of protection relative to that.
Does anyone have that other chart? Because I don’t have the exact breakdown of the supply in Seattle.
Yes, so it looks like next year's – the breakdown this year versus next year there is a slight increase in supply in the Downtown that's roughly let say 4,500 units. The East side very similar to this year at somewhere around 2,700 units and to the North and the South, about 1,500 units.
So Downtown gets a little bit more and east side and the north and south get a little bit last and overall supply is down a little bit in Seattle.
Wesley Golladay
Okay. And then looking at your cap rate and that you cited the 4% for the A’s.
Is that a nominal or economic?
Michael Schall
Well, that's why I say that it's using Essex definition because I think our definition is a little bit different than the way the market looks at it and let me just summarize because I can't translate it immediately in my head. Our definition of a cap rate is using market rents today in the marketplace today with a market management fee or management cost and marking property taxes to market and assuming a 95% occupancy - financial occupancy rate.
Wesley Golladay
Okay. Thanks a lot.
Michael Schall
Free capital. No CapEx in that number.
Operator
Our next question is from Drew Babin from Robert W. Baird.
Please go ahead.
Drew Babin
Hey, good afternoon. Just on the macro comments Mike you made in the prepared remarks about less millennials entering in the workforce, Well, that might be the case are you seeing more millennials kind of fitting or any range maybe closer to where your average tenant is?
I seen your average tenants not 22, 23 years old? Any comments on that.
Michael Schall
Well, I think the markets we're talking about the market in general and so we will not necessarily reflect the market because A product versus B product you know you have say you know the millennials are more likely to rent the Bs. However, puts pressure on the pool have moved people around within the pools.
So I'm not sure that our actual performance is going to be reflective of exactly this. I think what we're saying but respect to that just to put this into make sense out of it.
We're starting to look at demographics as part of the overall supply and demand relationship and I look back and think that I had a relatively easy time over the last 30 years because this business came down to a few factors supply demand the affordability between apartments and for sale housing. And maybe commute patterns and now we have to deal with rent income demographics and maybe regulatory issues.
So it's a little bit more complicated, but I'll go back to John. John within our portfolio do we see any notable changes and who our renters are?
John Burkart
No and we - I think it was a surprise people I think people tend to think that that our portfolio is going to be full of millenniums or something that age and we really have the diverse group of people across our portfolio. Some people tend to be renters for the long-term and they're phenomenal people and others kind of come and go and that’s more or less the millennial group.
Drew Babin
Okay. That’s helpful.
And John one last question, could you provide loss to lease by region?
John Burkart
Sure. So as we go to SoCal our last release for June was 2.3%, in NorCal 2.8%, in Seattle 7.2% and then as I said in the opening that that brings the average to 3.4%.
Drew Babin
All right. Great.
That’s very helpful. Thank you.
Operator
Our next question is from Michael Kodesch from Canaccord Genuity. Please go ahead.
Michael Kodesch
Yes, thanks for taking my questions. Actually just a follow-up on Drew’s question there for Seattle.
What was that trending at on the loss to lease. What’s that trending that for the past few quarters that elevated from some point to?
Michael Schall
Sure. So if we go back a year-ago, its probably the easiest.
If you go back to June 16, it was 9.5% and then if we go to December 16, this is the wild ride so December 16 it goes do it gain to lease of 1.6. So a very big reversal the market is very seasonal and then we come back to May 17 it was 7.4% and now in June 17 as I said it’s 7.2%.
So Seattle has a huge level of seasonality in the market it’s our most seasonal market in the Bay Area loss and then SoCal much less.
Michael Kodesch
Great. That’s really helpful.
And then most of my questions have been answered, but just kind of one more general one. In terms of move outs are you guys hearing at all any more move out due to moving to single family rentals by any change?
And how do you guys kind of factored that into your supply outlook? Do you guys include the single-family rental market in there at all?
Michael Schall
Yes, actually – this is Mike. We do, but indirectly.
We do supply and demand as a – look at all housing. So if someone goes from – if someone moves out of their house and rents it out, we track that per se because what we try to – look at the entire housing stock.
What’s the net change in the housing stock? What’s that net change in demand represented by job growth and maybe now demographic factors?
And how do those two relate to the markets, and so market becoming – is there an excess of demand over supply or not as to the market. In terms of what people actually choose to do, it's a function of again price point affordability et cetera.
But again we try to look at supplying demand very much for the whole organization. Actually one of the interesting – I’m going to segue to something else interesting numbers is someone may ask or be concerned about the level of multifamily permits, which remain pretty high in our markets.
And so we looked at that recently and we would agree that if you look at trailing 12-month multifamily permit, say they hung in there pretty well. However, if you look at total permits, so part of this is that the single family permitting is way down and therefore if you look at total permits for housing, it's either near or well below all of our markets, near are well below the long-term average and again the long-term after is not a huge number.
So the fact that permitting is somewhere near the long-term average and we continue to do a little bit better on the job growth side, should mean that we will continue to have a little bit of a wind to our back as a release of supply and demand. By the way, there are very few single family rentals in the City of Palo Alto, because their cap rate would be like 3% or something like that.
So the single family rentals tend to be on the periphery of the Bay Area and where you know the cost for housing is much lower and so that's why we love this place.
Michael Kodesch
Yes, maybe just a little bit more anecdotally, I mean are you hearing about any more – with the single family rental, pool becoming a little bit more institutionalized. So are you hearing more move out as a result of that or heading towards that?
Are you see a trend that way?
John Burkart
No, not at all. Again is Mike said that the single families as it related to the institutional ownership, those are really outside our market.
They may have literally one house in our Bay Area market type thing in positive. They just don't have penetration in our market there outside and they're going to be Fairfield, there are other market that are considered to be area, but when you map it out, it's not reflective of our locations in our tenant base.
Michael Kodesch
Too probable, that’s all from me. Thanks guys.
John Burkart
Sure.
Operator
Our next question is from [indiscernible] from Zelman & Associates. Please go ahead.
Unidentified Analyst
Hey guys. How are you?
John Burkart
Doing well.
Michael Schall
Thanks for joining.
Unidentified Analyst
Always on – just wondering about Seattle here, if I look at your June deck, right, you guys were doing 7% in Seattle in April and May, and then you’ve reported 6.6% for the quarter, which kind of tells me that June with a lot weaker around the 5.86% range. Is there something specific that happened in Seattle in June?
I know you guys mentioned seasonal, but what's pricing like there today versus earlier in the quarter?
John Burkart
Sure. This is John.
So yes, June for – Seattle was a 5.5% and that is really again a combination of as I mentioned are occupancy declining. So the occupancy in Seattle declined 90 basis points from where it was at the start of the month.
And that is a function of the number of units turned, again Seattle being highly seasonal. So a lot of units turned, and that's a big part of it as well as just pushing rents very hard.
But I wouldn't say it's reflective of the market having trouble and as we've said all along, we expect the trajectory of our year-over-year to continue to decline and the third quarter to be our low point. So it was not a surprise to us that the year-over-years continue to decline like this.
This is as expected though as we said from the end of last year. But we've since picked up some occupancy in Seattle again as expected as we've planned management and we'll finish up the quarter with solid occupancy looking into the fourth quarter.
So that's kind of our management plan there, but that helps?
Unidentified Analyst
Sure. Perfect.
That’s all for me.
Michael Schall
Thank you.
Operator
And our next question comes from Conor Wagner from Green Street Advisors. Please go ahead.
Conor Wagner
Good afternoon.
Michael Schall
Hey Conor.
Conor Wagner
John, what was new lease growth for July, thus far into July?
John Burkart
Yes. So new lease growth for July is – I don't actually have it directly in front of me, but it’s less year-over-year, it's going to be about say 2.5% versus the 3.6% in June, because we pulled rents down and gained occupancy.
I mean overall, we moved rents down in July about 1% and then to 40 basis points or decreased availability by 40 basis points which is huge, so we're sitting now at 95.1%. So where I'm going with that is, we've pulled it down a little bit more than.
It's not really reflective of the market. It's more strategic in management.
We pulled it down a little bit more and filled up the portfolio and now pushing the numbers back up. So does that help?
Conor Wagner
Okay. Yes, just to be clear.
You said 96.1% or is it 96.5% for the quarter you are expecting?
John Burkart
Right now, where we sit, occupancy is 96.4% and our availability is actually 4.9%.
Conor Wagner
Okay, great. Thank you.
And then what's the opportunity on the BRE portfolio and continued redevelopment there even just not full scale, but even just kind of lighter CapEx and upgrade and getting that up to speed with the rest of the portfolio. How has that played out this year?
And is there any further opportunity there next year?
John Burkart
We don't even separate out the assets like that anymore. I would say across the board in our portfolio, it's like all of us in this room here, every year we get a year older.
And so we're on a pretty steady path right now, so if you look at renovation and say if we renovate 5% of our unit that would imply a 20-year life for the, say, kitchen and bath. That’s kind of where we tend to be at and I think that will continue that way and the BRE portfolio is largely getting rolled in or it has been rolled in as it relates to most of those things.
But what I mentioned of the call also earlier was we are now taking a little bit more advantage of some of the strategic location and finding some opportunities on expenses in other areas there that are out or opportunities at this point in time.
Conor Wagner
Great. Thank you.
The last one, so San Francisco showed a slight acceleration versus last year. I mean it's obviously very small for you guys, but it's big in terms of how it impacts the East Bay.
When do you expect – I mean, you said – I think Mike earlier you said that people aren't being drawn back into the city from the East Bay yet, but at what point do you think San Francisco starts to begin to push people back out into Alameda?
Michael Schall
It’s Mike. I think it's happening.
This has been an ebb and flow and interesting ebb and flow. When San Francisco has six to eight weeks of concessions, again people start flowing from the East Bay into San Francisco.
And then when those concessions abate, it actually goes the other way because people are very price sensitive and let's face it, somewhere between 12% and 16% of annual rents, it's a big incentive. And I think that’s the key to what we're trying to communicate.
And so that flow will I think directly relate to the amount of concessions and the overall relationship between Oakland rents and San Francisco rents. So Oakland underperformed last year.
It’s doing a little bit better this year. And I would expect that back and forth activity to continue depending upon the concessionary environment.
Conor Wagner
But just again with the direction of San Francisco that as the concession stay low, that should begin to reflect more in your Oakland portfolio in the second half of the year or early next year?
Michael Schall
But that's what I think is happening. Yes, I think people now can afford San Francisco and so they are staying in the East Bay.
Conor Wagner
Thank you very much.
Michael Schall
Thank you. End of Q&A
Operator
Thank you. This concludes the question-and-answer session.
I'd like to turn the floor back over to Mr. Schall for any closing comments.
Michael Schall
Yes. Thank you, operator.
Hey, we really greatly appreciate your participation on the call. And we hope to see many of you at the BofA Merrill Lynch conference next month.
Have a good day. Thank you.
Operator
This concludes today's teleconference. Thank you for your participation.
You may disconnect your lines at this time.